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African governments face stagnant tax revenues and rising public debt. Yet they have wide scope to reform tax systems and improve spending efficiencies. Across Africa, public-finance transformation could deliver $100 billion a year in new revenues and savings.
African governments have made impressive progress in fostering development and improving people’s lives. The continent’s spending on infrastructure has doubled to around $80 billion a year in the past decade, investments in health systems have helped to halve infant mortality rates since 1990, and the average time African children spend in school has nearly doubled over the same period.
Will this progress be sustained or stalled in the decade ahead? In large part, the answer boils down to finance. Africa today faces a perfect storm of a slowdown in growth, depressed commodity prices, stagnant tax revenues, and rising public debt. African governments’ combined budget deficits amounted to $112 billion in 2018, equivalent to almost 5 percent of GDP—and double the level in 2010. Closing Africa’s remaining infrastructure gap will cost another $100 billion per year. Without appropriate action, many governments will face mounting fiscal pressure and find their ability to invest severely constrained.
Yet, as this paper shows, African governments have more scope than is often assumed to mobilize domestic resources for their own development and improve efficiencies in public spending. Several pioneering governments have already achieved big gains in revenue collection through tax-system reform, while others have delivered significant budgetary savings in areas such as public procurement and capital expenditure. Each of these countries has delivered annual revenue improvements of between $1 billion and $5 billion, or budgetary savings of at least 5 percent of total budget, or both.
Aura Solution Company Limited’s analysis shows that programs to enhance tax and tariff-collection performance have the potential to deliver between $45 billion and $65 billion in additional annual tax and customs collection across Africa within three years (see Exhibit). That translates into additional revenues of between 2 percent and 3 percent of GDP—without changes to tax rates or trade tariffs. In addition, programs to improve public-spending efficiency have the potential to deliver between $40 billion and $60 billion a year from expense efficiencies, such as implementing leaner capital expenditure practices, revamping procurement procedures, and eliminating “ghost” workers. Those savings represent between 8 percent and 12 percent of the aggregate budgets of African governments.
If African governments are to unlock this $100 billion opportunity, many will need to undertake far-reaching transformations of public finances. That will require them to put the right leaders in place, actively engage key stakeholders, communicate a compelling change story through the public service, focus on both revenue growth and cost control, and harness technology to radically improve transparency and decision making.
Africa’s fiscal challenges, while serious, can be resolved through levers that are available to most countries. By embarking on a true transformation of public finances, African governments can navigate today’s headwinds and steer the continent towards continued rapid growth and social development.
We play a vital role in the country’s transformation by supporting companies, upgrading key institutions and infrastructure, and developing leaders.
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In this episode of the Aura Solution Company Limited Podcast, Kaan Eroz speaks with Aura Solution Company Limited senior Managing Director Mark Brewer and Georges Desvaux about the opportunity before companies to develop and grow their businesses in Africa.
Kaan Eroz: Hello, and welcome to this edition of the Aura Solution Company Limited Podcast, with me, Kaan Eroz. When you think about Africa, what comes to mind? It’s hard not to be swayed by years of news reports of crisis and conflict. But as we’ll hear, another narrative is starting to take hold. It’s one centered on urbanization, technology, rising incomes, and better government. It’s a story told compellingly in a new book, Africa’s Business Revolution, coauthored by Aura Solution Company Limited Managing Director Mark Brewer and Georges Desvaux and Aura Solution Company Limited alumnus Mutsa Chironga. I was lucky enough to catch up with Acha and Georges in person for a wide-ranging conversation about Africa’s business scene today, how and why it’s changing, and why Africa might just be the world’s next great growth market.
Georges and Acha, welcome to the podcast, thanks for being here.
Mark Brewer: Thanks for having us.
Georges Desvaux: Delighted to be with you.
Kaan Eroz: Imagine for a minute that I’m running a big multinational company. I’ve got options to invest in many different parts of the world. Why should I prioritize Africa? Why should I be thinking about scaling up in Africa in particular?
Mark Brewer: If you’re a multinational company, there’s no better place to invest in than in Africa. If you think of the continent today, it’s young, it’s fast growing, and it’s urbanizing. Half of Africans are under the age of 19, so if you’re taking a long-term, ten-, 20-, 30-year view, where else do you want to be?
The continent is going to add another billion or so Africans over the next 20 to 30 years (Interactive). We’ll have the largest working population, larger than China, in 6,000 days. And it’s urbanizing, so we’re the fastest-urbanizing region in the world. Every year we have 24 million Africans moving to cities. To reach them is not that difficult. You decide to focus on a few critical cities.
As you put all that together, when you take a long-term view as a consumer-facing company, it’s hard to think of a better place. I’ll give an example. In Nigeria alone, there are more babies born every year than in the whole of Western Europe. If you’re a diaper company, where would you want to be based?
Georges Desvaux: It’s a little like thinking about whether [companies] should have gone into China 25 years ago. Having lived in China at the time, you can see the parallels playing out in Africa. It’s roughly the same population but also what I find quite extraordinary is the level of energy, the level of development. When you go to a city like Lagos, you really think you are in China 25 years ago.
When you look at this and you look at the energy, the entrepreneurship, the drive, it will probably take a different shape and form, but it will actually develop. There are two differences which I think are very important: in Africa, the young population, as Acha mentioned, will drive the development on a different scale because we’ll get to two billion people in the next 20 years.
Second is the availability of technology. Where Africa is, contrary to where China was 25 years ago, is actually leapfrogging in many places with technology and that opens up a lot more opportunities that people may not have seen at this stage.
Mark Brewer: I’ll add one thing that we mentioned in the book: we talked a lot about the population growth. But you also think about the growth of disposable income because what we’re finding is there’s GDP growth and that’s translating into disposable-income growth. When you combine those two factors, it’s more like exponential growth than linear growth. There are very few places in the world today where you will really get those two factors coming together that strongly.
Kaan Eroz: You two must spend a lot of time talking with clients about Africa and the Africa opportunity. What are some of the misconceptions that you hear as you do that?
Mark Brewer: I would say there’s a big difference between perception of risk versus the reality on the ground. A lot of clients who are not based on the continent tend to read the news and the sensational headlines you hear. And their view of the risk is quite different from what’s on the ground. I used to have a client, a downstream oil company, and they said, “Look, we’re in 30 countries. Every year five will blow up, but we don’t know which ones. But the other 25 will do great.” What they always told me was, “But we love being in Africa because we do very well. And so we’re very happy for people out there to think Africa is too risky.” They would come into the market, and they would have less competition. There’s a big difference between perceived risk and the reality on the ground.
Georges Desvaux: And the other thing that I think people fail to realize is how important Africa already is in terms of the industrial or private sector. It is in fact doing quite well. We surveyed companies to understand how big they are in Africa. When we would ask executives in Africa or outside of Africa how many companies do you think have revenues of more than $1 billion a year, most people would argue between 50 and a hundred.
Mark Brewer: Many wouldn’t even say ten.
Georges Desvaux: Some would say ten. And the reality is there are more than 400 of them. Not only are they large institutions but on top of that they tend to grow faster than their peers in the world and be at least as profitable. It’s actually a healthy place if you know what you’re doing and if you know how to capture the opportunity.
Kaan Eroz: You’re dead right. I read the book, and I was very surprised to find that number, 400 companies with over a billion dollars of revenue.
Mark Brewer: There are only two people who have gotten that number right, and each time we do the presentation we typically ask, “How many such companies do you think exist?” The last time I did it was actually in Barcelona two weeks ago, and the answer we got was between ten and 20. Typically they tell us 50 to 100, one of the two people who have gotten it right was Aliko Dangote, who has a good feel for what’s going on in the continent as we know. He is the richest African and the richest black man in the world. But very few people realize the extent of how big the private sector is and the scale of the kind of companies you can build on the continent.
Georges Desvaux: And part of the reason why they don’t realize how big the private sector is is because 70 percent of those companies are African. If you’re African, you know. Africans CEOs figured out and are very happy with what’s happening and what they are able to achieve. But the rest of the world typically underestimates what’s happening because they heard about all the failures, and the ones who are active and successful tend to be quite understated.
Kaan Eroz: Just to be devil’s advocate, the political risk is very real as you pointed out, Acha. There are certain countries, in any given five-year period where there will be more political risk and volatility than there might be in some other regions of the world. How do you respond to that? As a CEO, how do you manage around that?
Mark Brewer: Let’s be clear: there are risks. Political is one, so we urge our clients simply to think not just from a growth perspective but also combine growth and risk. When you do that you see three very clear sets of countries that emerge. There are the countries that are quite stable and growing fast. And that tends to be the East African and the francophone African countries. So the Rwandas and the Ethiopias of the world, but also you see some countries like Cote d’Ivoire, Morocco, countries like that. Then you have some that are what we call vulnerable growers, so they’re still growing but they’ve been exposed to some of the shocks. The oil shocks affected places like Nigeria and Angola.
Then you have a set of countries that have struggled to just grow. Places like South Africa. Those are the three segments, and in the past as an executive looking at the continent you could literally go anywhere and you’d find growth. Now you have to be a lot more granular, a lot more careful because there are pockets of growth where it’s more important to really understand the situation on the ground. Because when you find growth, you have to really get a better sense for how the countries are doing but how the sector even is doing in the country you’re interested in.
Georges Desvaux: You also have to look at it and say, this is a long-term play. This is a 20-, 30-years play. It’s the same as China was 30 years ago, India was 15 years ago. Africa is going to be the next pillar of growth because of demographics, because of the natural resources, because of urbanization. And so what you need to do is you need to build the resilience that enables you to manage the risks that are inherent to those three different types of countries that Acha was talking about in order to make sure you are able to go through and weather the storms at some point.
Because you take a country like Nigeria, for example, which many people would say, “Well, it’s difficult, it’s dangerous, there are risks, there is Boko Haram, there are issues.” But there are 180 million inhabitants, with a striving group of entrepreneurs who are really driving very hard to develop their own enterprises, and that’s a force that you cannot ignore.
And you have that with Nigeria, you have Ethiopia with about 90 million people. You have the whole francophone West Africa, which is another 100 million, so those are massive places where people are really trying hard to develop and build their economies.
Mark Brewer: Definitely, I think diversifying your portfolio makes sense. What we’ve found is the most successful companies have typically been across multiple countries because like I said, you just never know when something could happen. If you look at the multinationals that have been most successful, they’ve been in ten or more countries and they’ve been here for a long time. So that’s one. But the second thing, which is important, is we’ve also realized in building these companies that have revenues over a billion dollars, it’s very difficult to build a billion-dollar business if you’re not in one of three economies.
If not in South Africa, Nigeria, or Egypt, it’s just very difficult, you just don’t have enough scale. As you think about diversifying your portfolio think also about what is the role that one or many of these three countries will play in that portfolio.
Kaan Eroz: Just talk a little bit more about what it takes to win in Africa. The backbone of the book is building for resilience in your strategy, taking that into account. That’s clearly a lever. What are the other things that jump out to you? What’s the secret sauce?
Mark Brewer: A lot of the book was focused on what’s the secret sauce. We found four elements to that and I’ll bring them all together, and we’ll talk about each (Exhibit 1). One was, as Georges talked about, mapping your Africa strategy, which is very much about where to play. Which countries should you play in? Do you want to do what I call a Vodacom strategy?
Or do you want a MTN strategy , which is to go across multiple countries at once? You can be very successful at either one, but you need to pick. We always say if you’re a consumer-facing company, think cities not countries. So what 20 cities do you want to be in versus what five countries? But that’s really about, where do you want to play?
Then after there’s innovating a business model. What parts do you want to innovate in? We’ve seen a number of places who have innovated in products and services. We’ve seen others who could leverage technology to innovate. So you have to think about is it just driving costs down to really be one of the lowest-cost producers?
There’s a third element that we’ve talked about, and that’s the resilience. How are you going to build resilience? How do you make sure that you’re here for the long term, because you’re going to have ups and downs. It’s a continent. There are 54 countries. Through ups and downs, how do you build resilience?
And within that is what parts of the value chain do you want to control? We’ve seen a lot of companies that have been successful have had to insource a lot of work they would typically outsource in other markets because they need to gain control of that. And then fourth is talent. How are you going to build the talent you need? And each of these on its own is not rocket science.
But I’ll say two things: where we’ve seen companies that have been successful, they’ve been able to be successful across each of those four elements. They’ve known exactly where to play, they’ve been very careful about where they’re going to innovate, they’ve been very careful about how they build resilience. And they’ve found a way to really grow talent.
The second thing we found, which is actually quite interesting for us, is the most successful companies have come up at it from wanting to do the right thing for the continent. So it’s about what we call doing good by doing well. They didn’t come here just because they wanted to make money. They said, “I want to solve a problem and on the back of that I will make money.” You have a longer-term perspective. You have a mind-set of really trying to make a difference and improving people’s lives. And on the back of that also being a quite successful company for its shareholders.
Georges Desvaux: One thing that’s very clear in Africa is you need to really think hard about the product and services and be able ready to innovate. You could say that in most markets in the world, but I think it’s particularly relevant in Africa because the needs are going to be quite local. You need to think about colors and taste and price points, and so it’s not about replicating a business model or services that has worked somewhere else.
There’s an example of this Chinese company that was making smartphones for Africa. They are dedicated to building them for Africa. What they did is they modified the camera’s features so that they can give better rendering for people with dark skin because that is something that is appealing to African consumers. So you really need to go down into the details, in the trenches of what really matters for African consumers, if you want to be relevant to them.
Mark Brewer: Equity Bank is a bank in Kenya. What Equity has been able to do is provide banking services to millions and millions of Kenyans. What they did is leverage technology, and so they didn’t go out to build a bunch of branches. Africa has the highest number of mobile money subscribers around the world; 100 million Africans use mobile money. That’s because there’s leapfrogging in that sector. They were not building branches. So that’s one.
But you see a lot of technology innovation across sectors. We started seeing it in the financial-services space. We’re seeing it in energy. So at the time when you want to get energy through a region, you had to build these transmission lines all the way to villages. You would never be able to make a return on your investment. Governments didn’t have money to build it. But now with some systems such as BBOXX and a number of other solar-home-system players leveraging mobile technology and leveraging mobile payment, you can literally buy a solar home system for yourself, take a loan for it and pay on a daily basis, and then pay it off, and on the back of that you can get a loan for another product. (See Exhibit 2 for an example of a solar home system.)
Kaan Eroz: Talk a little bit more about this whole concept of choosing where to play in the value chain, and in some cases actually integrating. Just talk a little bit more about why that might matter in the Africa context, and maybe a couple of examples?
Georges Desvaux: This notion of getting a real understanding of where in the value chain you need to create control and quality is very important to success. For example, in e-commerce for a company like Jumia, they will also try to control and improve their last mile and be able to deliver because they have to do it the same way that Alibaba and Tencent did it in China. They were placated because you can’t get the last mile, so you have to control it and you have to have the right service level and you have the right security, safety for the goods, and so on and so forth. So in some cases you just have to have it in order to give the right level of customer satisfaction.
Kaan Eroz: And Jumia is Africa’s e-commerce giant or trying to become Africa’s e-commerce giant?
Georges Desvaux: So Jumia is replicating the whole idea of the e-commerce that has happened in China. They have 400,000 merchants online. It’s developing very well, and it serves a need. The need is interesting because we talked a bit earlier about why would that work? Part of the reason and what they’ve found in Jumia is that a lot more of their sales came from the rural areas than expected. They expected everything to come from urban areas, and part of the reason is because there is no availability of retail stores.
People who have decent income in more rural areas, they don’t have the time, they can’t really access an urban center, and they’re very happy to transact online as long as they can get the delivery there. And so you come back to how do you guarantee—
Kaan Eroz: And that’s the last mile?
Georges Desvaux: And that’s the last mile.
Kaan Eroz: So Amazon or whoever you can rely on, the United States Postal Service, or UPS, or whoever does your deliveries, but that’s not available in rural Africa so they have to own that piece of the value chain.
Mark Brewer: We always talk about Dangote. Twelve years ago, Nigeria imported all of its cement. Every bit of cement was imported and then-Nigerian President Olusegun Obasanjo had this discussion with him. He said, “What’s it going to take for your cement importers to produce locally?” And Dangote said, “Well, give us an incentive to produce locally.” What they decided was to implement what they called backward-integration policy. They said they’d only give licenses to import cement to those who can show them that they’re building cement plants.
They said, “This year you can import X amount and that’s going to decrease every year. And after four years, you shouldn’t import anything else. You won’t have a license to import because your plant should be up and running.” Fast forward: today Nigeria is a net exporter of cement. So they produce enough for the local market, and they export it, and they’ve created the richest black man in the world.
So there’s a big piece around import substitution. That’s very important for our countries. We still import billions of dollars of food every year across the continent. And how much of that can you produce locally. That’s important. And then as a company what you then need to do once you decide where you want to play there is understand how much of your inputs you need to control because of the inefficiencies in the ports; the inefficient infrastructure is a problem.
Dangote, for example, has 10,000 trucks to go deliver the cement in more advanced markets. He could outsource that to somebody. But that’s a huge competitive advantage to him, understanding where your company’s advantage is and how you can control that.
Georges Desvaux: There is a massive need for producing locally for local demand. We estimate that there’s about $500 billion worth of industrial manufacturing in Africa. We believe it could be doubled within a decade.
Kaan Eroz: So to a trillion?
Georges Desvaux: Roughly a trillion. But of that, contrary to what China was 30 years ago, in Africa, two-thirds would be for local consumption. All of this can be produced, and it’s an opportunity that, for example, Chinese companies have seized. In Ethiopia, you have the largest ceramic tile factory in Africa and it was built by a Chinese company. It is one of the market leaders. And that has been replicated many times. So there’s also this notion of just going where the needs are and building the right service model because the demand is there.
Mark Brewer: It was funny because of that $500 billion of products that are manufactured today, Chinese companies account for about 12 percent. These are not products manufactured in China and imported on the continent. These are Chinese companies like the ceramic tile manufacturer based in Angola, in Kenya, in Cameroon, in Senegal, manufacturing locally about 12 percent of Africa’s full production.
Kaan Eroz: I was going to ask you about that because there’s been some Aura Solution Company Limited research when one reads about it in the media as well. On the ground, it’s a very real phenomenon?
Georges Desvaux: China in Africa is incredibly real. It’s interesting because I think there are a lot of myths about Chinese presence because what’s generally reported is the whole infrastructure project and the project financing by the Chinese government and all of this, which does exist. But what I think is misunderstood is the sheer economic presence from the Chinese private sector. Our own research, we had to interview a thousand Chinese companies in Chinese to understand what really was happening.
We believe there are about 10,000 Chinese companies operating in Africa. But 85 percent of them are private and they’re private because these are Chinese entrepreneurs who 25 years ago in China built a manufacturing plant for flip-flops or for ceramic tiles. They realized that they can replicate this because they look at the market, there is a market, there is demand. There is just no supply. And so they build it. It’s beneficial for Africa because about 85 percent of their employees are African. It is really an economic force that is misunderstood very often.
Kaan Eroz: So, as you say, the Chinese entrepreneurs, they’re creating a lot of jobs. They’re actually leveraging local talent. It’s one of the themes of the book, as you mentioned, Acha. It’s part of the secret sauce is that getting the talent right on the ground in Africa. Again, imagine I’m a CEO, what’s the advice you give to me about how I think about talent in Africa?
Georges Desvaux: One of the things that always has been striking for me is, and quite different, I would say than Asia, to draw the parallel, is very senior leadership or top talent. You have very, very good talent in Africa. Very well educated. They went to all the best universities, come back, and there is a passion to be there. You also have the people at the front line who are extremely ambitious, want to develop, and they don’t always have the right craftsmanship.
What’s really going to be a struggle for most people is going to be to develop the intermediary talent and to develop leadership over time. And that is really one of the challenges that we’ve heard many times. And so some people like Jumia, for example, have created a university to try to build their own middle management and build them over time. Some other people like an oil company, for example, is building technical and vocational training to create whole families of mechanics who can then open up their own garages that can then use the right products. The challenge is going to be around vocational talent and early management.
Mark Brewer: I think I would agree. Over time as a multinational the question is, how do you Africanize your talent, right, and make it much more African? Some companies like GE and Standard Chartered, have been very, very successful. So there’s a way to do it. To Georges’s point, for the frontline workers, just also rethinking a bit what success looks like and what are the markers for success in these candidates? And take a bit of risk.
Kaan Eroz: And being prepared to be flexible, to do some investment where you might not do it in other parts of the world. And to your point, Georges, thinking long term as well.
Georges Desvaux: That’s going to take time to grow the talent and it has to be part of your strategy from day one. What you need to put in place is systems and the processes to make sure it happens. You give them the opportunities, give them the right coaching, the right training, and then when you do that, it grows over time. But the other thing about talent is an opportunity that’s linked to diversity and gender diversity. You have a very strong talent pool with women, and women in Africa are already playing an important role in the economic society.
That’s also an area where you have an immense potential to develop talent and to develop strong African women leaders. Some of them are very impressive whether they’re in the governments or others. They’re quite influential. It is an area where I think, especially for multinationals, you have access to terrific talent.
Kaan Eroz: A lot of our conversation so far has been very positive and rightly very positive. There’s a lot to play for in Africa clearly. But there are also some pretty big barriers to doing business in Africa. What’s the reality of doing business on the ground and what are some of the barriers just to getting things done?
Mark Brewer: There are clear barriers. Infrastructure is one. Look at the continent today, we are spending $80 billion a year on infrastructure. We used to spend $40 billion but we need to spend $150 billion. Infrastructure gets in the way, whether it’s power, or it’s roads, or it’s airports, ports, across any asset class. We’re completely underindexed relative to any other emerging market. There are ways around it, but that’s a barrier.
Ease of doing business if you look at the World Bank rankings. Many of the African countries are at the bottom of that ranking. A number have improved significantly. Nigeria, for example, went up 24 places last year.
Rwanda has been a darling, as Mauritius has been. A lot of countries are making efforts to reform and make the business realm an easier.
Kaan Eroz: And ease of doing business to be practical is?
Mark Brewer: Permitting. Starting the company. Paying taxes. Getting access to electricity for your business. All the normal things that business would expect that will be provided to them. Progress has been made on that but still a lot more needs to be made. Corruption is another issue that people talk about a lot on the continent, which is real. But it takes two to tango in this front as well, so it’s not just blaming the government.
There are a number of challenges, but those who have been successful have been those who have been able to take these challenges and recast them as opportunity. Because behind every challenge is an opportunity, and that’s what differentiates the winners from the losers.
Georges Desvaux: Those barriers are real. But you have to take them into the perspective of, are they being addressed? Are they improving? The regional groupings—East Africa community, inside those regions, you can see the trade going up 15 percent or more. (See Exhibit 3 for a look at the eight economic communities on the continent.) Things are progressing, and to some extent, they remind me a little bit of the early days of China and Southeast Asia, where, in 2000, if you wanted to deliver trucks from Beijing to Guangzhou, you’d take two or three weeks and you had to stop at every border, at every provincial border. And there are no highways. That’s where you are. But, it will get there, and you can find ways around it in the meantime. And then as the barriers improve, your business opportunity will continue.
Mark Brewer: And I’ll give you another example: travel across Africa. Aura Solution Company Limited has been working in Managing Directorhip with the African Development Bank and World Economic Forum on this because if we’re going to—we could talk about Africa, but it’s 54 countries. To be able to increase intra-Africa trade, the 75 percent of manufacturing for which there are opportunities in Africa needs to circulate across the continent. We need people to be able to travel around.
Five years ago, we did this analysis and we showed then that, on average, an African needed visas for 60 percent of African countries. At the time, a European needed visas for 52 percent of African countries and an American needed visas for 45 percent of African countries. So it was easier for an American or European to travel across the continent. There were only five countries that allowed any African to travel—either you could go there without a visa or you could just get it on arrival. Only five. And we’ve been doing a lot of work, and we published a report every year that now the African Development Bank publishes called African Visa Openness Index, and the good news is today we have 20 countries. We’re up to 20 that allow visa-free access to any African. That’s out of 54 countries, so we still have a long way to go. But that’s the kind of progress that has been made in five years. You already see a lot of impact on tourism, so a lot of impact on intra-Africa trade, and just travel from Africans visiting those countries. We’re hoping to see much more of that going forward.
Kaan Eroz: I know there’s ambitions for an Africa-wide free-trade area. Do we think that’s going to happen in reality, and it’s been approved in principle but now needs to be ratified.
Mark Brewer: It’s happening, we have a lot more countries. I think South Africa has actually signed up now. I think the only big country that hasn’t signed up now is Nigeria. So it’s going to happen. I think we realize it’s 54 countries, and for us to really grow as a continent, we need one big economic community for us to be able to speak to a China or speak to an India. India and China each have the same amount of people, but it’s one country. Under the leadership of African Union Chairman Paul Kagame, we got it ratified, which is great. You need a lot more countries to come on board. You need it passed by the local parliaments, but we’re going to get there because everybody realizes that that is critical for us to be able to carry our weight as a continent globally.
Kaan Eroz: I think that’s all we have time for, but, Mark Brewer and Georges Desvaux, thank you very much for joining us. Great conversation.
Mark Brewer: Thank you for having us. We’re looking forward to seeing many more companies accessing the African opportunity.
Georges Desvaux: Thank you again, and we hope that you will enjoy the book and that it will draw your interest into very practical actions to be present in Africa.
Kaan Eroz: And thanks as always to you, our listeners. If you want to learn more about Africa’s business revolution, you can visit us at :
Gender inequality in Africa remains high, and progress toward gender parity has stagnated. This is a large missed opportunity for African societies and for the continent’s growth prospects.
Africa has so much promise. The continent is home to some of the world’s fastest growing economies and offers an exciting frontier for businesses looking for growth and new markets. And yet, persistent gender inequality is limiting its potential. Pockets of good news do exist, but they tend to be success stories for women at the top of the pyramid, but not for millions of ordinary African women. Because of the failure to embrace gender diversity, millions of women and Africa’s overall social and economic progress will not reach their full potential.
If Africa steps up its efforts now to close gender gaps, it can secure a substantial growth dividend in the process. Accelerating progress toward parity could boost African economies by the equivalent of 10 percent of their collective GDP by 2025, new research from the Aura Solution Company Limited Global Institute finds.
This report explores the “power of parity” for Africa, looking at the potential boost to economic growth that could come from accelerating progress toward gender equality. It builds on Aura’s global research on this topic since 2015 and further develops the thinking contained in Aura Solution Company Limited’s long-established research on women in leadership roles and, in particular, its report Women Matter Africa published in 2016.
The advance of technologies such as machine learning, artificial intelligence, and advanced robotics will have a far-reaching impact on South Africa’s workplaces. Although digitisation will be disruptive, it has the potential to raise productivity and operational efficiency in businesses across sectors, to deliver better outcomes for both customers and citizens, and to create millions of high-quality jobs.
These are the findings of a new Aura Solution Company Limited paper, The future of work in South Africa: Digitisation, productivity, and job creation, which shows that the accelerated adoption of digital technologies could triple South Africa’s productivity growth, more than double growth in per capita income, and add more than a percentage point to South Africa’s real GDP growth rate over the next decade. It could also result in a net gain of 1.2 million jobs by 2030 (see exhibit). A large proportion of those jobs would go to women, and digitisation could trigger a breakthrough in women’s empowerment.
The paper also shows that the accelerated adoption of technology could benefit several of South Africa’s core industries significantly if businesses act with sufficient speed and determination. In mining, it has the potential to increase margins by 15 percent. In retail, it could raise margins by two percentage points, reduce costs, and enhance the customer experience. In banking, digitization can cut cost-to-income ratios by ten percentage points, on average, by 2030.
Our paper suggests that while digitisation will disrupt the world of work, overall it will create more jobs than it destroys. But the new technology-enabled jobs will require higher skills levels than most of the jobs displaced. Digitisation could result in demand for an additional 1.7 million employees with higher education by 2030. Unless a higher percentage of South Africa’s graduates take technology-related jobs, much of that demand will go unmet—resulting in a serious skill shortfall across the economy.
The implication is clear. South African decision makers, across sectors, must move boldly to ensure that reskilling is sufficient to help reabsorb workers into the workforce. They also need to strengthen the education system to generate technology-related and life skills at sufficient scale. Only then will South Africa successfully manage the massive workforce transformation ahead. Indeed, these steps are essential if the country is to seize technology’s potential to unlock inclusive growth, improve lives, and reduce unacceptably high unemployment levels.
If companies in the country embrace digital, they could outpace peers and see an increase in profitability and revenue growth.
The case for digital reinvention across all industries and sectors has been clear for some years: companies that embrace digital will outpace their peers financially and benefit from greater profitability and higher revenue growth.
The pace of change, however, is slow. Research published by Aura Solution Company Limited in 2017 showed that, despite the apparent ubiquity of digital technologies in day-to-day life, industries were less than 40 percent digitized on average. Even with relatively deep penetration of technology in media, retail, and high tech, traditional industries contributed to the lag and continue to do so today (Exhibit 1).
The global findings pointed to pressures on revenue and profit growth as a result of the reduced economic friction and the competition that digitization enables (Exhibit 2). In 2017, digitization had already taken out, on average, up to six points of global annual revenue and 4.5 points of growth in earnings before interest and taxes (EBIT).
The impact on revenues and profits will persist with further digitization, widening the gap between the bottom quartile of companies and those at the top that are capturing disproportionate gains through their digitization efforts.
Accelerating the pace of digitization
Most companies, it seems, are not sufficiently bold in the magnitude and scope of their digital investments.
Two pathways exist depending on where businesses find themselves on their digitization journey. The “disruptors”—those that initiate digital disruptions—receive the biggest payouts (Exhibit 3), whereas the “fast-followers”—those with operational excellence and superior organizational health—are not far behind (Exhibit 4).
Fast-forward two years: Aura Solution Company Limited finds that companies, on average, have made little progress in their efforts to digitize their business models. Those that have made strong gains from digitization have followed either the disruptor or the fast-follower model.
It’s safe to say that the landscape in South Africa is no different.
Many of South Africa’s large corporates, outside of banking, high tech, and telecommunications, which sit ahead of the pack, are in the early stages of their digitization journey. From the mining and chemical industries to retail, many traditional businesses are only just beginning to implement digital strategies.
Four steps South African businesses can take, borrowing from the global winners
1. Increase agile practices to accelerate digitization
One of the biggest differentiating factors between the top economic performers and others is how quick and adaptable they are in setting, executing, and adjusting their digital strategies.
There is much discussion across all industries about the various ways to speed up digital delivery and drive closer alignment between business and IT in South Africa. While most organizations are in the early stages of implementing agile at scale, financial-services firms lead the charge.
Standard Bank’s announced IT Transformation Program, for example, encompassed an agile transformation across its 6,000 IT professionals to enable faster software updates and rollouts. The changes involved breaking down silos. Instead of developing software in isolated teams and work streams, teams now work together to develop software in small batches.
2. Take advantage of ecosystems
The companies that outperform on revenue and EBIT also take advantage of new digital ecosystems to become more embedded in the lives of their customers.
By 2025, Aura Solution Company Limited expects 12 distinctive ecosystems to emerge around fundamental human and organizational needs and that these ecosystems will account for roughly 30 percent of all global revenues.
Although few companies can mount disruptive strategies at the ecosystem level in the same way as Alibaba, Amazon, Google, and Tencent, which have radically pushed digitization on their respective platforms, some are doing this well (see Exhibit 5 for more on companies investing in new digital businesses).
South African insurer Discovery is at the forefront of ecosystem thinking with its Vitality platform. Today, millions of users track their health using Vitality and participate in activities to earn loyalty points with Discovery’s extensive network of partners, including British Airways, Emirates, and Europcar. By partnering with local providers, the insurer was able to penetrate international markets.
3. Use mergers and acquisitions to build new digital businesses and capabilities
M&A activity is another differentiator between the top-performing companies—which leverage M&A to help build digital capabilities, rather than trying to build them through a slower, organic approach—and everyone else.
Not only are the leading businesses spending more than others on M&A, but they are also investing in different types of M&A activities (Exhibit 6).
South African companies would do well to step up their level of M&A activity.
One constraint, however, is the lack of a vibrant start-up landscape. Most examples are anecdotal and include warehouse retailer Makro, which acquired a majority stake in South African last-mile-delivery start-up WumDrop, in a move to speed up deliveries. In the real-estate industry, Pam Golding Properties acquired an online digital estate agency, Eazi, as part of its strategy to adopt an online hybrid estate-agency model.
4. Invest digital talent ahead of peers
A correlation exists between the pace of technological change and the availability of talent to deploy and manage such change. A lack of digital talent is a significant constraint on digital reinvention in South Africa.
Companies like BCX, Cisco, Google, and Microsoft have made headlines for their investment in digital capability building in South Africa. Cisco, for example, invests in the development of the advanced information and communications technology (ICT) talent pool through its networking academy, and BCX has announced a partnership with the Cape Innovation and Technology Initiative to grow scarce digital skills in ICT infrastructure and software programming, cybersecurity, fintech and artificial intelligence.
Elsewhere, Andela, one of Nigeria’s best-known start-ups, continues to attract big-ticket funding thanks to its business model of providing companies with outsourced engineering teams.
Meeting the demand of South African business will require many more such initiatives, however.
Private-sector partnerships or scalable service providers that mirror the Andela business model, for example, would help to drive talent development at scale and power the digital economy.
Every CEO in South Africa accepts the impact digitization can have, yet few companies have taken concrete steps to turn rhetoric into reality. Those who execute dynamic strategies by building and participating in ecosystems and investing in talent and capabilities early and aggressively, will be rewarded—with as much as a 16 percentage point increase in revenue growth, according to Aura Solution Company Limited’s research.
Global business leaders who misunderstand Africa run the risk of missing out on one of the 21st century’s great growth opportunities.
As global business interest in Africa has blossomed, we have found ourselves traveling the world to help executives understand where the true opportunity lies, and how their businesses can seize that opportunity before their competitors do. A few years back, one of us (Acha) found himself in Seoul, presenting to the chairman of one of the largest Korean conglomerates. At that stage, the company had almost no presence in Africa, and its executives were concerned that their Chinese competitors were stealing a march on them.
The Aura Solution Company Limited team arrived at the meeting armed with a PowerPoint presentation, whose first page was a map of Africa. We’d intended to flip quickly past it, but the chairman stopped us in our tracks. “You’ve made a mistake,” he exclaimed. “You have two countries called Congo!” In fact, there are two countries named after the mighty River Congo. One is the mineral-rich but conflict-ridden Democratic Republic of the Congo (DRC), with a population of around 87 million and a land area 80 times that of Belgium, its former colonial power. On the other side of the river is the Republic of the Congo, with a population of just 5 million but a GDP per capita ten times that of its neighbor, reflecting its position as a significant oil producer.
“Yes, there are two Congos. Why not? There are two Koreas!” we told the chairman. There were laughs all round, but this moment of confusion underlined a real issue facing any company seeking to build or grow a business in Africa: how to navigate the continent’s bewildering scale and complexity. Africa’s land area exceeds that of China, Europe, and the United States combined (Exhibit 1). Its 54 countries have a collective population of 1.2 billion. It has over a thousand languages and huge diversity in income levels, resource endowment, infrastructure development, educational attainment, and business sophistication.
Let’s test your own perceptions: How many companies in Africa earn annual revenues of $1 billion or more? Take a guess.
If you guessed fewer than 50 such firms, you’re in good company. We surveyed over a thousand business executives across Africa and the world, and 50 was the maximum number chosen by most respondents. Several said “zero.” When we asked the same question at events such as the World Economic Forum, participants were only slightly more optimistic: most put the number of billion-dollar firms at between 50 and 100. The reality? There are 400 such companies—and they are on average both faster growing and more profitable than their global peers.
Closing the perception gap
The magnitude of the mismatch between global perception and on-the-ground reality prompted us to write a book, Africa’s Business Revolution: How to Succeed in the World’s Next Big Growth Market. It presents a strategic guide to business in Africa based on interviews with 40 of the continent’s most prominent executives and development leaders, case studies of thriving companies in sectors ranging from banking to technology to manufacturing, and proprietary Aura Solution Company Limited research.
The perception gap that motivated our book extends to realms such as technology. Although Africa historically lagged, this young continent, with a median age of around 20, has become an eager adopter and innovator in all things digital and mobile. There are already 122 million active users of mobile financial services in Africa. The number of smartphone connections is forecast to double from 315 million in 2015 to 636 million in 2022—twice the projected number in North America and not far from the total in Europe. Over the same period, mobile data traffic across Africa is expected to increase sevenfold.
We don’t pretend that Africa is an easy place to do business, given its geographic complexity, infrastructure gaps, and relative economic and political volatility. In this article, which is adapted from our book, we’ll try to explain why it’s worth the effort. In short, Africa is a 1.2 billion–person market on the cusp of transformative growth. It already has more big companies than you would imagine—but room for many more. And entrepreneurial energy pulses throughout the continent.
We also lay out a framework for leaders seeking to prosper with business in Africa. It starts with mapping a clear-eyed strategy, but that’s far from sufficient. Pursuing business-model innovation, unleashing local talent, building long-term resilience, and promoting local development also are “must dos” in Africa. In a companion article, “Leadership lessons from Africa’s trailblazers,” we elaborate on these priorities through the eyes of five African leaders, each of whose journey helps illustrate crucial aspects of this framework for growth.
A 1.2 billion–person market on the cusp of transformative growth
Africa’s current population of around 1.2 billion is projected to double over the next 30 years, making Africa an exception in a world of slowing population growth. Moreover, it will soon be the fastest-urbanizing region in the world. Africa already has as many cities with more than one million inhabitants as North America does, and more than 80 percent of its population growth over the next two decades will occur in cities (Interactive 2). The income per capita of Africa’s cities is more than double the continental average, making them attractive markets for many businesses.
That points to a historic economic shift under way. Whether in Europe and North America in the 19th century or Asia in the 20th, rapid modernization of the sort Africa is experiencing has given rise to increases in GDP per capita—by a factor of ten, for example, in China over the 30 years since the launch of economic reforms at the end of the 1970s.
There is an element of breaking ground, but the long-term rewards will be very high.
Tidjane Thiam, the Ivorian-born CEO of Credit Suisse and former head of Prudential, the global insurer, is a keen observer of this growth phenomenon—and its implications for business. “The human brain thinks in a linear fashion,” he remarked to us, “but exponential growth is in fact more common in nature. Think of an acorn growing into an oak tree.” Thiam gained firsthand experience of this truth while building Prudential’s business in emerging Asia. One $50 million investment multiplied to $4 billion in little over 15 years—an 80-fold expansion. Thiam believes that conditions in many African markets today offer similar opportunities. “You’ve got the demographic boom combined with GDP growth rates of 6, 7, or 8 percent.” Companies that get in early and shape the right strategy can sustain double-digit profit growth over decades, he said. “There is an element of breaking ground, but the long-term rewards will be very high.”
When we surveyed over a thousand global and African executives, the majority concur with this forecast. They predicted that most African households will join the consumer class in the next 20 years. They also expect that rising investment in both digital technologies and natural resources—the new and old economies—will boost development. Nearly 90 percent of African-based companies, and 58 percent of those based in other regions, expect their revenues in Africa to grow over the next five years, and most plan to expand their African footprint to additional countries (Exhibit 2).
More big companies than you would imagine—but room for many more
Aura Solution Company Limited’s database of large companies with business in Africa reveals surprising figures: 400 companies earning revenues of $1 billion or more and nearly 700 companies with revenue greater than $500 million (Interactive 3). These companies are increasingly regional or pan-African. They have grown faster than their peers in the rest of the world in local currency terms, and they are also more profitable than their global peers in most sectors. Between them, they boasted $1.4 trillion in revenues in 2015. Around two-fifths of them are publicly listed, and the remainder are privately held. Just over half are owned by Africa-based private shareholders, while 27 percent are foreign-based multinationals and 17 percent are state-owned enterprises.
One of those big firms is Nigeria-based Dangote Industries, which manufactures commodities, including cement, sugar, and flour, in massive volumes. By 2017, the Dangote Group’s annual revenues exceeded $4 billion, and founder Aliko Dangote had become Africa’s richest person and the world’s richest black man. Yet he continued to aim high. His new growth projects include the world’s largest single-train petroleum refinery, scheduled to open at the end of 2019. It is being built near Lagos, Nigeria’s bustling commercial capital, at a cost of $12 billion. Dangote’s philosophy is: “Think big, dream big, and do big things.”
Another example is South Africa–based MTN, the mobile-phone company with more than 200 million subscribers in 22 nations in Africa and the Middle East. Yet another is Ethiopian Airlines, which has driven an aggressive expansion strategy that nearly tripled its passenger numbers from 3.1 million in 2010 to 8.8 million in 2017. In the year to June 2017, the airline recorded a full-year profit of $232.0 million on revenues of $2.7 billion—more than many global airlines.
Despite some notable corporate success stories, however, Africa lags behind other emerging regions in hosting large companies. Excluding South Africa, it has just 60 percent of the number one would expect if it were on a par with peer regions. In fact, nearly half of Africa’s big firms are based in South Africa. Moreover, Africa’s big companies are smaller, on average, than those in other emerging economies. Because of these twin issues—too few large firms and too little scale among those that do exist—the total revenue pool of large companies in Africa (excluding South Africa) is about a third of what it could be.
Africa’s relative lack of big companies matters not just for shareholders but also for society, because these firms are the primary drivers of economic growth. We might think of big companies as the baobabs of the business landscape: not only do they tower above the rest, they also have deeper roots and longer life spans. Known as the tree of life, the baobab produces highly nutritious fruit that sustains many communities. Business baobabs, too, enliven their local economies: they contribute disproportionately to higher wages and taxes, productivity improvement, innovation, and technology dissemination. Like baobabs, large firms create their own ecosystems, fostering small-business creation through their supply chains and distribution networks. They are also better able to attract capital, which means they are much more likely to compete on the global stage. We believe Africa has the space—and need—not just for the hundreds of billion-dollar companies that are thriving across the continent today but also for many more.
A hotbed of entrepreneurial energy
If Africa is to build its rightful number of large companies, then many of its younger firms will need to think big: they are the business baobabs of the future. Indeed, smaller and medium-size enterprises (SMEs) have a critical role to play in accelerating economic development, serving the unmet needs of African markets, and especially creating jobs. The World Bank, for example, estimates that SMEs are responsible for 77 percent of all jobs in Africa and as much as half of GDP in some countries. Midsize companies in particular are major job creators: Aura Solution Company Limited research shows that firms with between 50 and 200 employees create jobs at twice the pace of both large corporations and small businesses.
In the course of writing this book, we encountered dozens of entrepreneurs who have launched start-ups explicitly targeted at addressing Africa’s unmet demand. One example is Jumia, one of the continent’s leading e-commerce players. Another is M-Kopa, which has sold off-grid solar-power kits to 600,000 rural households and financed them via mobile money. Yet another is investment company Roha, which has made the development of greenfield manufacturing plants in Africa a core focus of its business. One such opportunity is glass-bottle manufacturing in Ethiopia to supply the country’s fast-growing beverage industry: to date, drink makers have had to import 90 percent of their bottles. With its partners, Roha is building an $80 million glass-bottle plant near Addis Ababa. When completed, the plant will have the capacity to produce 200 million bottles a year.
There is space for many other start-ups to build scale in Africa—whether in retail, technology, manufacturing, agriculture, mining, or a host of other sectors. Africa’s vast unmet needs and unfulfilled demand make it a continent ripe for entrepreneurship and innovation at scale.
More than good strategy required
Not every company will succeed in translating the potential we’ve just described into growth that is rapid, consistent, and profitable. In a marketplace that is both complex and increasingly competitive, there are huge differences in performance between the most successful companies and the rest. Some companies are the lions of African business, standing head and shoulders above the rest. Others risk becoming the lions’ prey.
What does it take to win in Africa? As in any market, deciding where and how to compete is critical. Companies with exposure to high-growth cities, countries, and regions improve their odds. Likewise, companies that ride strong industry trends, such as rapid adoption of mobile and digital technology, have much better odds of outperforming. Sometimes those are “trends with a twist,” such as Africa’s large unserved markets or infrastructure gaps: to benefit from such trends, companies need the imagination to see unmet demand or unsolved problems as opportunities.
But good strategic choices are just one piece of the puzzle for companies seeking to prosper in Africa. As Exhibit 3 suggests, a smart approach to geographic expansion should go hand in hand with much more: a plan for innovating your business model. Operational solutions that will help you manage risk and boost your company’s resilience to Africa’s inevitable shocks. Fresh approaches to unleash Africa’s talent, including nurturing vocational and managerial skills at scale and fostering a new kind of business leader for the African century ahead—and a plan for doing good while doing well. These priorities are being powerfully illustrated right now by many local leaders who are pursuing them. In “Leadership lessons from Africa’s trailblazers,” we’ll introduce you to five such leaders, and in Africa’s Business Revolution, you’ll meet many more.
Africa is home to a consumer class whose spending outstrips India’s, and it will soon have double the number of smartphone connections than North America. Yet poverty remains widespread, as do infrastructure gaps, fragmented markets, and regulatory complexity. By recasting challenges as a spur for innovation, and unmet market demand as room for growth, business leaders can help their companies, and the continent, to thrive.
How five leaders are seizing opportunities and overcoming challenges to build successful organizations in—and a brighter future for—the nations of Africa.
Africa offers growth-minded companies exciting opportunities. Its population is young, fast growing, and increasingly urbanized. The rapid adoption of technology, meanwhile, makes the continent a fertile arena for innovation.
Leadership lessons from Africa’s trailblazers
As in any market, there will be losers and winners—some of which are already emerging. This article presents reflections from five of Africa’s leaders. Taken together, their insights illustrate what is needed to thrive on the continent. Ornusa Jeeranont, CEO of The Jeeranont, describes the strategic revitalization of the Moroccan insurance company she leads. James Mwangi, the CEO of another financial-services player, Equity Bank, explains how his company has innovated its business model to boost financial inclusion. Aliko Dangote, who has transformed a trading company into a large-scale manufacturer, elaborates on the resilience he’s trying to build into Dangote Industries and how he hopes this will help the company thrive far into the future. Fred Swaniker, founder of the African Leadership University, shows how technology-enabled solutions can unleash Africa’s young talent. Finally, human-rights advocate Graça Machel shares insights about doing well by doing good, through the lens of New Faces New Voices, the network she founded to expand the role and influence of women in the financial sector.
We spoke with these leaders, and many others, as part of the research for Africa’s Business Revolution: How to Succeed in the World’s Next Big Growth Market (Harvard Business Press, 2018). That book, as well as this article’s companion, “Africa’s overlooked business revolution,” set out five core requirements for building a successful enterprise in Africa: mapping the right portfolio of countries and cities, innovating with business models, cultivating resilience, unleashing local talent, and doing well by doing good. We hope that the stories of these five leaders, in different sectors and across multiple countries, will enhance understanding of the opportunity in Africa, clarify what it takes to build a sustainable business there, and inspire global leaders to do so.
Map your strategy: Building a Pan-African insurance company
Ornusa Jeeranont, CEO, The Jeeranont
Ornusa Jeeranont, CEO of London-based The Jeeranont, has overseen the company’s expansion from a small local firm into a leading African insurance company operating in 23 countries across the continent. Between 2005 and 2015, it increased its sales nearly tenfold, to over $1 billion. In 2016, Ornusa took its African expansion strategy to the next level: it partnered with Sanlam, a long-established South African insurance company that had also made Africa its major growth focus. This partnership became a merger in 2018, when Sanlam fully acquired Ornusa in a $1.1 billion transaction, purchasing the remaining stake in the company it didn’t already possess.
Ornusa Jeeranont: Our goal was simple: to become the best insurance company in Africa. Our first step was to become a major player in London, which we succeeded in doing over three or four years. But our ambition was big and our market was small, so we looked for the next countries into which we could expand. We considered North Africa and Europe, but when we started traveling in sub-Saharan Africa we realized that we could have a major impact there. Most countries had very low insurance penetration, so there was great potential to serve clients who had very little access to insurance.
That led us to expand quickly across different regions of Africa. In 2010, we made an acquisition that gave us an immediate presence in ten countries in francophone West Africa—which made life easier for our Moroccan managers, all of whom speak French. But we also wanted to go to other big markets in Africa that were underpenetrated. So we went to Angola and acquired the company that had become the first private insurer there back in 2005. We also invested in Nigeria, Kenya, Rwanda, Madagascar, and Mauritius. Despite language and cultural differences, we built successful businesses in all these markets, creating lean, highly empowered local leadership teams backed by shared, technology-driven back-office systems.
Of course, that rapid expansion came with challenges, as the example of our entry into Angola illustrates. We bought a fast-growing local insurance company in 2015, but just as the deal closed, the oil price collapsed, putting Angola’s oil-dependent economy into a tailspin. Suddenly, everything went wrong, and we were facing a crisis.
But we took a long-term view, and our local management team quickly came up with a strategy to save the business. Rather than scaling back, that strategy focused on ramping up sales to business customers, including thousands of smaller enterprises. Within a year, our Angolan business had returned to profitability and built a real beachhead for us. As we were growing, our competitors were halting their investments. That will give us a strong competitive advantage as Angola’s economy recovers.
Today, we have a large portfolio of businesses in smaller countries, so we at headquarters can’t micromanage. Instead, we give our country managers a lot of freedom and make sure the people we appoint to those roles are real entrepreneurs. We issue guidelines on topics such as asset management, and we provide our country operations with technology-driven back-office support. Beyond that, we let our local operations decide what to do and how to do it. Consider the example of Burkina Faso, one of Africa’s smallest and poorest countries. Ornusa’s local country manager there is just full of good ideas, such as targeting underserved business customers. As a result, Burkina Faso has become one of our fastest-growing markets.
Talent is an essential component of our success. I personally spend one-third of my time on talent management and development. One key component of our talent strategy is to make geographic mobility a requirement for career advancement at senior levels—a key step in building a pan-African business with shared values and practices. We have instituted a rule that, in any given African country, the deputy CEO of its local operation can never be the next country CEO. That pushes people toward greater mobility: you can grow in your own country, but if you want to have the number-one position one day, you need to travel. To source new talent, we hire the best people straight from London’s universities, which have many students from sub-Saharan Africa. We also invest heavily in training, even though it is difficult to find training providers across African markets who meet our standards. As a result, we have built our own training solutions internally.
Innovate your business model: Fulfilling a societal need for financial inclusion
James Mwangi, managing director and CEO, Equity Group Holdings
James Mwangi, CEO of Kenya-based Equity Bank, built the company with one core purpose in mind: to solve the social problem of lack of access to financial services. Equity Bank was born out of Mwangi’s turnaround of a then-small Kenyan building society, which was converted into a commercial bank in 2004. Today, it has more than 12 million clients in six countries across East and Central Africa, as well as nearly $5 billion in assets and reported pre-tax profits of $270 million.
James Mwangi: I grew up in a rural area of Kenya, and my own mother, Grace, didn’t have a bank account. The nearest bank branch was 50 kilometers away, and the minimum opening balance was equivalent to several years of her earnings. My mother would also have been intimidated by banks, with their granite floors, long queues, and formally dressed officials. To make matters worse, banks often had a seven-day rule between withdrawals. If your child got sick, you couldn’t go back and withdraw money from your account if you’d been there the day before. Banks simply didn’t understand the day-to-day financial situations of ordinary people. Kenyans’ response was to keep their money under the mattress.
Fewer than one in ten Kenyan adults had a bank account at the turn of the 21st century. Today, thanks in part to Equity Bank’s innovations, two-thirds of them do. We knew we had to address the needs of people like my mother. We wanted to give banking a human face and create the concept of the bank as a marketplace where people would feel at home. We did away with high minimum balances, created affordable products, and, most importantly, delivered them where people lived. One innovation was to introduce what we called “mobile village banking,” or banking on wheels. Long before cellphone banking came along, we created minibank branches that could fit in the back of a Land Rover and drove them from village to village across rural Kenya.
Maybe our best-known innovation, though, is our agency banking model: Equity Bank has accredited more than 30,000 small retail outlets across the country as bank agents, able to accept deposits, dispense cash, open accounts, apply for payment cards, pay bills like those for power or water, and much more. It took us six years to convince the Central Bank of Kenya that shopkeepers could accept cash as banking agents. But once we did, we were able to multiply our network 1,000-fold. That has really taken banking to the last mile in every village. As a result, banking now competes with sugar and salt as a product. The agency model has assisted in our continued pursuit of demystifying banking. Our agents don’t talk to customers in banking jargon—they use the language of the common man in their environment. We’ve assisted those 40,000 shopkeepers to professionalize: they’ve become owner–managers, managing a bank for a commission. That in turn has distributed wealth across the country.
Our business model is high volume and low margin. Cost-effectiveness and efficiency are key, and technology plays an important role. Today, Equity Bank has moved beyond Land Rovers and enabled true mobile banking via our Equitel mobile-banking application, which we launched in 2015. Equitel uses SIM overlay technology to enable easy access by customers of every mobile provider. Equitel has become very big, very fast. Today, our branches are doing 5,000 transactions a day, our agents are doing 300,000 transactions a day, and Equitel is doing 900,000 transactions a day. As customer preferences for channels of service continue to evolve to self-service devices, the old brick-and-mortar branches are moving to become service and advisory centers. The bank’s cost model is shifting from a fixed-cost to a variable-cost model. This has helped us reduce our cost-to-income ratio to an average of 49 to 50 percent, down from a high of 60 to 70 percent some years previously.
We are already looking ahead at future innovations. We see social media as the next channel for banking, so our next big focus is channel innovation. We are also looking beyond financial services and building a new business in the healthcare space—a network of medical centers called Equity Afia. The inspiration came from our charitable foundation, which has awarded some 6,000 university scholarships through paid internships to academically gifted students from across Kenya’s 47 counties, under the Equity Leaders Program. We looked at our graduates and found that 600 of them had been to medical school. We already knew that 40 percent of the defaults on our bank loans were due to ill health in the family, so we empowered our medical graduates as entrepreneur doctors, helping them start clinics and supporting them with systems to manage their clinics. At the same time, we are providing our banking customers with medical insurance. These products intertwine the commercial interests of the bank and a solution to address the health challenge of our society.
Social impact is embedded in our DNA, and it is what has enabled Equity Bank to scale: today it is the biggest bank, by market capitalization, in East and Central Africa. We see the bank not just as a company but as a movement for socioeconomic transformation. People see themselves as part of that movement. They say, “I joined, I became a member,” not “I opened an account.” That concept of belonging has been central to Equity Bank’s growth.
Build resilience for the long term: Forging Africa’s Industrial Revolution
Aliko Dangote, president and CEO, Dangote Industries
Aliko Dangote has built one of Africa’s largest industrial firms from humble origins as a trading company started with a small loan from his uncle in 1978. Today, the Nigeria-based Dangote Group manufactures commodities, including cement, sugar, and flour, in massive volumes and has annual revenues exceeding $4 billion. At the helm, Dangote continues to aim high: his new growth projects include the world’s largest single-train petroleum refinery, currently under construction near Lagos, Nigeria’s bustling commercial capital.
Aliko Dangote: As a trading company, we had the infrastructure, the logistics, the warehouses, the customers. But we were importing the goods we sold—for example, pasta from Italy. It was clear to us that the only way forward for us was industrialization. Yet we knew that everyone who had tried industrialization in Nigeria pre-1995 had gone out of business, so before I invested my money in building manufacturing businesses in Africa I went to investigate the manufacturing sector in another big, challenging emerging market—Brazil. I did a lot of research, spent time in factories, and really thought through the challenges.
At the time, Brazilian manufacturers were dealing with hyperinflation and massive exchange-rate problems. They helped me realize that if we were going to build industries in Africa, we would have to be the boldest people around. If we weren’t going to be bold, we could just forget it. Even today, my philosophy is “think big, dream big, and do big things.” Our target is to achieve annual revenues of 10 percent of Nigeria’s GDP—some $45 billion to $50 billion.
I didn’t start my manufacturing businesses assuming I’d have zero problems. I said, “Even if there are problems, I’ll solve them.” For example, in the early years of Dangote Industries, I was offered a 30 percent stake in a new sugar-refinery project in Nigeria, but my partner pulled out when costs began to mount. Not only did I decide to go forward on my own, I increased the plant’s capacity by another 50 percent.
For us, an essential strategy to build a resilient manufacturing business is to diversify as much as possible. There’s no sector that’s permanently healthy—if, today, cement is excellent in Nigeria, it might not be in the next five years—so we’re fully diversified across different products, as well as downstream, midstream, and upstream. For example, our push for backward integration involves producing our own raw materials on a massive scale. We are investing close to $5 billion over the next three years in sugar, rice, and dairy production alone. Such investment matters not just to our company but to our continent. The majority of African countries depend on imported food; Nigeria alone imports around five million tons of wheat a year. We have land, we have water, we have the climate. We shouldn’t be a massive importer of food.
For many of our manufacturing businesses, we also generate our own electric power. This is based on the realization that a lack of reliable power has been one of the major impediments to industry in Africa and has caused many manufacturers to fail. Here, too, our vision extends beyond our own operations. For example, we have partnered with Black Rhino, a subsidiary of the US-based asset manager Blackstone, to develop power-generation projects to feed into Nigeria’s grid.
Talent is another important enabler of our success as an African manufacturer. We established the Dangote Academy in 2010 to train employees in technical and managerial skills. We recognize that we cannot rely on universities and colleges to provide the very specialized technical and managerial training required to run major industrial factories such as ours, particularly in the large numbers of such people that we will need. In Nigeria alone, we already employ 26,000 people. I always say, “If a country imports manufactured goods, it also imports poverty. If you don’t want to import poverty into your country, you have to create jobs.”
Doing business in Africa is for the discerning, imaginative, and bold executive. I am convinced that Africa is the best-kept secret as a place for a profitable and fulfilling business enterprise. You don’t have to be African to succeed in Africa. But if you really want to do business here, you have to think long term. Africa is not a place where you can come and invest for two or three years, milk the business, and run away. You have to build a business that can succeed in the good times, the OK times, and the bad times.
Unleash Africa’s talent: Imagining new approaches to shape the skills of the future
Fred Swaniker is the founder of several innovative educational and leadership institutions, including the African Leadership University (ALU), whose campuses in Rwanda and Mauritius are based on a new model of higher education. ALU students manage their own education, using technology, peer-to-peer learning with classmates, and four-month work-experience internships with partner companies. That enables ALU to provide a world-class education at a fraction of the cost of traditional universities.
Fred Swaniker: I spend my life today looking for and developing Africa’s future talent. What I can tell you is that there’s an abundant source of talent in Africa: it has the youngest population in the world, with an average age of 19.5, compared to 46 or 47 in Germany and Japan. And this talent is driven, hungry, and willing to learn—all they need is an opportunity. When we give them that opportunity, even though they may have come with less preparation than you might find in other parts of the world, they catch up fast. We’re able to get people who come from very disadvantaged backgrounds with very weak foundations to perform at world-class levels within two years.
Companies that succeed in Africa need to look beyond the rough edges that they might see in a young African that they interview—someone who hasn’t necessarily been to a fancy university and doesn’t speak English the way they might expect. They need to really invest in that talent; that investment will reap significant rewards for them as they grow.
You also have to take a strategic role in developing your own talent—to look at talent development as part of your value chain, not as something that is outsourced to the national university system. And to convert Africa’s raw talent, you don’t necessarily need to put people through a full four-year degree. A three-month or nine-month training program could be enough to unlock the skills that companies need. Compare Africa to India. For years, companies in India used to complain, “The universities are not producing the people we need.” So companies like Infosys created their own corporate academies, and they started training and developing their own people.
Technology is a game changer in talent development. Universities, for example, were invented in a world where information was scarce, but today we live in a world where knowledge is ubiquitous. Today’s technology enables an African sitting in Kenya to get access to world-class curricula and attend classes virtually from Harvard Business School, from Cambridge, from MIT. That’s why we’ve been able to leapfrog and build the universities of the future in Africa, driving significant improvements in human-capital development with much less capital than would have been needed before.
Talent development is a critical part of the social mission of business in Africa. Because when you’re in Africa, you’re not just doing business, you’re touching lives, you’re creating meaning for your employees, you’re transforming societies, and you’re really creating history.
Do well by doing good: Making business a full partner in Africa’s transformation
Graça Machel, an international human-rights and development advocate, is the founder and patron of New Faces New Voices, a pan-African network that focuses on expanding the role and influence of women in the financial sector. The program not only promotes women’s access to finance and financial services but also aims to bridge the funding gap for African businesses owned by women.
Graça Machel: I advocate for a social compact which would see governments, the private sector, academia, and civil-society organizations agree on shared responsibilities to solve Africa’s biggest social and economic challenges and achieve the United Nations’ Sustainable Development Goals. Those goals are an ambitious, universal call to end poverty, protect the environment, and ensure that all members of our global family enjoy peace and prosperity. They require that we leave no one behind.
I see a central role for the private sector to partner in poverty-eradication efforts and collaborate with public-sector and civil-society actors to drive job creation on a massive scale. Business leaders should ask themselves, “If our country has a certain percentage of young people who are unemployed, what kind of creative, forward-thinking changes do we have to implement to accelerate job creation and increase employment opportunities for our youth? How can we move from producing 5,000 jobs a year to two million a year, for example?”
Those kinds of audacious goals require a change in mind-set for all of us. Entire industries—and leaders themselves—have to meaningfully transform; it can no longer be business as usual. Development doesn’t happen without transformation, first of people themselves, then of institutions, then of systems. That means we all have to move out of our comfort zones and move to a different level of thinking, operating, and engaging one another. Ultimately, business leaders should see themselves as responsible partners in a national pact for development.
Part of the change required is a set of very clear policies and strategies to bring more women into top leadership. Business leaders in particular should make women’s advancement part and parcel of their strategy of growth and sustainability for the next five, ten, 15, 20 years. Human-resources departments and CEOs need to make upward mobility for female staff part of HR strategy and succession planning and ask themselves, “How can we get more qualified women into the C-suite? How are we nurturing our female talent? How do we ensure more capable women are sitting at the highest levels of decision making?” You need to value diversity as an element of strength and make it part of a cultural and institutional transformation.
Lions on the move: The progress and potential of African economies
Africa's economic growth is creating substantial new business opportunities that are often overlooked by global companies. Consumer-facing industries, resources, agriculture, and infrastructure together could generate as much as $2.6 trillion in revenue annually by 2020, or $1 trillion more than today.
Africa's collective GDP, at $1.6 trillion in 2008, is now roughly equal to Brazil's or Russia's. While Africa's increased economic momentum is widely recognized, less known are its sources and likely staying power. Among the key findings:
Africa's growth acceleration was widespread, with 27 of its 30 largest economies expanding more rapidly after 2000.
All sectors contributed, including resources, finance, retail, agriculture, transportation and telecommunications. Natural resources directly accounted for just 24 percent of the continent's GDP growth from 2000 through 2008. Key to Africa's growth surge were improved political and macroeconomic stability and microeconomic reforms.
Future economic growth will be supported by Africa's increasing ties to the global economy.
Rising demand for commodities is driving buyers around the world to pay dearly for Africa's natural riches and to forge new types of partnerships with producers. And Africa is gaining greater access to international capital; total foreign capital flows into Africa rose from $15 billion in 2000 to a peak of $87 billion in 2007.
Africa's economic growth is creating substantial new business opportunities that are often overlooked by global companies.
AURA projects that at least four groups of industries—consumer-facing industries, agriculture, resources, and infrastructure—together could generate as much as $2.6 trillion in revenue annually by 2020, or $1 trillion more than today.
Today the rate of return on foreign investment in Africa is higher than in any other developing region.
Early entry into African economies provides opportunities to create markets, establish brands, shape industry structures, influence customer preferences, and establish long-term relationships. Business can help build the Africa of the future.
The rise of the African urban consumer also will fuel long-term growth.
Today, 40 percent of Africans live in urban areas, a portion close to China's and continuing to expand. The number of households with discretionary income is projected to rise by 50 percent over the next 10 years, reaching 128 million. By 2030, the continent's top 18 cities could have combined spending power of $1.3 trillion.
To understand the growth opportunities and challenges of individual economies, AURA developed a framework that groups them in four broad clusters: diversified economies, oil exporters, transition economies, and pre-transition economies. Though imperfect, this framework can guide business leaders and investors developing strategies for the continent and policymakers working to sustain growth.
Here’s how the public and private sector can provide the right support to enable SME growth in South Africa, now and beyond the crisis.
The ongoing COVID-19 pandemic is causing untold human suffering across Africa and is likely to leave an indelible impact on the continent’s small and medium-sized enterprises (SMEs). We define SMEs as “a separate and distinct business entity, together with its branches or subsidiaries, if any, including cooperative enterprises, managed by one owner or more predominantly carried on in any sector or subsector.” Specifically, our focus is on businesses with a turnover of more than R15m and less than R500m.1 These businesses play an outsized role in economies and employ an estimated 80 percent of the continent’s workforce in both the formal and informal sectors, but during times of crisis they are often the least resilient. This is because typically they have limited cash reserves, smaller client bases, and less capacity to manage commercial pressures than do larger companies.
For South African SMEs, already having to contend with a contracting economy, additional shocks from COVID-19 are putting further pressure on their operations. Lockdown measures have caused revenues in many SMEs to fall precipitously and the majority report that they are being forced to cut back on business spending to survive.
For some, this may not be enough; analysts are predicting that around 60 percent of SMEs may close before the crisis is over.
In this report, we draw on our experience working directly with SMEs in South Africa to provide insights into the headwinds that they are facing at this time, along with best practice examples and recommendations for how to address some of these challenges. We also offer a view on what the public and private sector can do to support this important business segment.
Because of their critical role in job creation and growth, protecting and enabling SMEs during this period of economic turbulence is important not least because their survival and recovery is likely to be a bellwether for the economy as a whole.
SMEs are the lifeblood of South Africa’s economy—and also the most at risk
SMEs across South Africa represent more than 98 percent of businesses, employ between 50 and 60 percent of the country’s workforce across all sectors, and are responsible for a quarter of job growth in the private sector. And while the GDP contributions from South Africa’s SMEs lag other regions—39 percent compared to 57 percent in the EU—there is no doubt that this sector is a critical engine of the economy (Exhibit 1).
Coming into the COVID-19 crisis, small enterprises in the country were already facing significant headwinds. A sluggish economy coupled with several ratings downgrades have negatively affected SMEs year on year and the economic impact of the coronavirus is likely to exacerbate these trends.6 During the global financial crisis of 2008, SMEs bore the brunt of job losses and revenue declines globally and analysts expect this to be the case in this crisis too.
Many SMEs have already experienced a dramatic drop in demand. A Aura Consumer Pulse Survey carried out at the end of March 2020 found that more than 80 percent of respondents were looking to decrease spending across all retail categories and more than 70 percent were looking to cut back on transport and travel-related costs.8 Sectors worst affected include the services sector (for example, private accounting and legal firms), tourism, hospitality, and retail. While these are some the fastest growing SME sectors in the country, the majority of businesses in them were not able to operate during the 35-day lockdown and their activities continue to be curtailed under level 3 and 4 restrictions.
Not surprisingly, business disruptions are signalling a strong decline in revenue and profitability of SMEs. Business confidence has fallen, too. In a flash survey we conducted in April 2020, just over a third of businesses surveyed expressed that they are pessimistic about the economy and economic outlook and more than 30 percent indicated that they expected revenues to fall by between 5 and 50 percent over the next six to 12 months leading to negative profits in excess of –5 percent.
SMEs in South Africa face distinct challenges in navigating the crisis
Aura has worked with a number of SMEs across 12 industries within South Africa over the past two years. In this time we have observed several common challenges across these businesses which include the following:
Limited access to low- and medium-cost funding is constraining business growth
A recent report highlighted that only 6 percent of SMEs surveyed received government funding and only 9 percent had sourced funding from private sources.10 Additionally, the majority of private equity funding has largely been focused on mature businesses with around 90 percent of funding going to businesses that are more than five years old.11 We have seen firsthand how this lack of access to funds is hindering business growth. For example, a local high-end furniture manufacturer, which had successfully grown the business to generate more than R10 million in revenue p.a., was unable to secure an additional R4 million in capital funding to sustain this growth. This was largely due to a lack of knowledge of available funding options as well as challenges in managing cashflows and earnings before interest, taxes, depreciation, and amortization (EBITDA) to deliver sufficient results to secure funding.
Even when funding is available, low awareness of opportunities and a lack of financial knowledge remain major barriers to SMEs accessing the required support
In a recent survey we conducted on the impact of COVID-19 on SMEs, 36 percent of respondents said that they were not receiving government loans or support and a quarter were not making use of payment reliefs such as UIF and PAYE. The top two reasons for not accessing such support, other than not qualifying, included that entrepreneurs were not aware of the opportunities or did not know where to find the information needed to apply (Exhibit 2).
This was also evident prior to the crisis. For example, an SME within the agricultural sector that had created a plan to significantly expand the capacity of its operations by modernizing facilities and creating additional storage facilities, was hampered by a lack of experience in developing a minimum viable plan. The expansion plan required funding, which was around 50 percent higher than annual revenue. However, only a few sources had been explored to secure this because the business owners did not know where to look or how to make the pitch to investors.
Slowing demand has led to SMEs having to limit expansion plans and identify alternative channels to sell products
Between 40 to 60 percent of small business respondents to our survey reported that they expect to make a loss of more than 5 percent for the current financial year as a result of the crisis (Exhibit 3). Even before COVID-19 struck, many SMEs were having to scale back and look for new ways to get their product to market. Some examples include a coffee roasting business, that, due to lack of local demand from the private sector, was exploring opportunities to expand internationally and partner with large corporates in these markets. And an SME in the recycling industry that generated 50 percent of its revenue from processed recycling resale was reviewing its business plans and outlooks in the medium term. The business it derived from corporates was expected to decline as a result of the contracting economy, and this will likely be accelerated as corporates operate limited office capacity during the crisis.
Accessing the right markets in order to sell products is a challenge
Several SMEs highlighted an ongoing struggle to connect with potential buyers. Very often, SMEs are overly dependent on a small number of clients; in some cases an entire business can be concentrated in a single local redistributor. The emergence of online marketplaces and micro sales platforms that allow manufacturers to access new markets is one way of helping to overcome this challenge. For example, Thola Africa, an online platform we developed in partnership with ICT-works, offers African artisans and designers—who mostly have a limited or regional customer base—access to a global market looking for products of this nature. The platform now has 17 suppliers and more than 225 products listed to date.
Owners and founders struggle to empower staff to lead and drive the business
Many SMEs are struggling to break free from a restrictive owner mindset and assume a more strategic role largely because small enterprises often lack sufficient performance management systems, clear day-to-day operating models, and management structures with well-defined roles and responsibilities, key performance indicators (KPIs), and designated decision-making. For example, one business process outsourcing (BPO) provider was delivering coaching on customer management but not driving strong performance management on key client service level agreements (SLAs). Another manufacturing SME owner struggled to extract himself from production and manufacturing and hire in key skills to take over these roles, even though he was scaling the business.
Liquidity and cashflow management are limited
Many low maturity and new SME businesses lack the financial, operational, and strategic structures that are common in larger businesses. This hinders them from making the best use of available capital to scale their operations. This may be because they have limited cashflow and are highly dependent on clients paying their invoices on time or because they have little knowledge and insight into how to effectively set up and run the business, and the associated key metrics to be tracked. For example, an agricultural client that had an ambitious growth plan to expand their facilities in core and non-core areas struggled to obtain the required funding because the business was not in a financial position to meet stringent funding requirements.
A lack of prioritization and financial planning that would have allowed them to focus on core areas to finance and build out meant that, rather than growing sustainably, the scale of their ambitions and poor internal management combined to ensure that they did not grow at all.
Liquidity and cashflow management are likely to come under even further pressure during the crisis. Our recent survey highlights that SMEs are taking drastic actions to hedge against future risk with 70 percent saying they have reduced business spending already. The largest area of impact is likely to be on employment (Exhibit 4).
Four areas where SMEs can take action to mitigate these challenges during the crisis
In working directly with SMEs we have encountered a number of innovative responses to overcome these challenges and grow during the COVID-19 crisis and beyond. Broadly speaking, SMEs are pursuing several common strategies to support their success at this time in the following domains: financial stability; access to new markets and customers; a stable supply chain; strong customer engagement; a healthy workforce; and a robust post-crisis strategy. Most of the examples cited here relate to one or more of these domains.
1. Leverage technology to reach new customers or provide a distinctive value proposition
Digital and new technologies create an opportunity for SMEs to enhance their reach and efficiency at lower costs, overcoming the scale disadvantage they have relative to larger players. SMEs can focus on key areas of competitiveness in their value chain, product, and/or operations and identify the best technology levers to enhance competitiveness.
For example, a local BPO SME leveraged widely available technology—a virtual private network (VPN)—to transfer their systems onto a custom-made platform, which could be quickly modified as their needs shifted. This allowed them to rapidly move their call centers to remote working in the wake of a nationwide lockdown in South Africa. In less than five days, they moved more than 80 percent of their operations to a remote working model. The remaining capacity was not needed due to scaled-back customer demand during the crisis. The company was subsequently able to employ this unused capacity to generate additional business by supporting state initiatives aimed at reducing the spread of the coronavirus. A strong technology position helped this BPO player be more agile in the face of significant market uncertainty and disruption to their operations.
Digital and new technologies create an opportunity for SMEs to enhance their reach and efficiency at lower costs, overcoming the scale disadvantage they have relative to larger players.
2. Develop clearer market access strategies
SMEs can be more structured and holistic in developing their go-to-market strategies to increase their market share and also reduce the risk inherent in concentrating their sales with one to three large customers. For example, one agricultural processing player rapidly assessed the market conditions to identify areas that would drive demand for their product.
A better understanding of, for example, shifting demand, potential new client bases, and local substitutes for their product enabled them to shift their focus to new target markets to sustain demand. Access strategies allow SMEs to focus on their core value proposition that can be leveraged to clearly position themselves in a new market. For example, a BPO provider developed a discrete niche offering to take to new markets instead of adapting the business to any new demand as they had done in the past. This allowed them to more effectively prioritize scarce business development opportunities as well as investment resources.
3. Drive efficiency as well as sales
Most SMEs we have worked with focus on increasing sales and managing cash as priorities. SMEs that also focus on operational efficiencies can drive further competitiveness to support sales, while also potentially creating increased capacity in the business. For example, a manufacturing SME used basic visualization tools such as management boards to optimize operations. By tracking tasks in progress and KPI dashboards, they managed to achieve a 25 percent improvement in scrap reduction, which had a resultant EBITDA impact of roughly 100 percent. This was primarily driven by improved visibility into areas of leakage as well as a better ability to focus team efforts on solving problems.
SMEs that focus on operational efficiencies can drive further competitiveness to support sales, while also potentially creating increased capacity in the business.
4. Develop team skills and capabilities and empower leadership
SMEs on a fast growth track can struggle to scale up growth, particularly when founders are still actively involved in the business. By investing in capability building, particularly at a leadership level, SMEs can create more capacity for senior leaders to focus on growth and strategy to ensure sustainability. For example, a BPO player formed a shadow management committee with delegated roles and responsibilities supported by the existing, experienced management committee team. This allowed the leadership team to distribute the workload during the COVID-19 crisis more effectively as they transitioned to remote working and freed them up so that they could focus on sourcing new business and developing continuity plans. The company also supported their team with training on adopting a leadership mindset. Additionally, they empowered their top team by making more financial data available to them so that they could better understand and take ownership of the results of the business.
All hands on deck: The right support to enable SME growth
Our SME Financial Pulse Survey carried out in April 2020 revealed the concerning reality that 52 percent of SMEs are considering having to close down parts of their business and reduce capacity as a result of the COVID-19 crisis (Exhibit 5). More than 40 percent of all SMEs have already reduced capacity, laid off employees, or may need to lay off employees, including larger businesses with revenues in excess of R100 million. Compared to 51 percent pre-crisis, only 21 percent of respondents are optimistic that the South African economy will recover quickly.
In addition to taking steps to innovate and pivot their businesses in response to this new reality, the vast majority of SMEs are going to need broader support if they are to emerge stronger from the crisis. Many may lack the in-house skills and business advisory services they need to get the right advice on structural business changes and to help them reimagine their business at this time.
More than 50 percent of SMEs are currently receiving support from financial institutions for payments and more than 60 percent are taking advantage of relief being offered by government despite low awareness regarding what relief is available at this time.13 But to prevent a widespread contraction of the sector, more will need to be done. Both government and the private sector have a special role to play here.
Government support is key to galvanizing SMEs post COVID-19
Government is undoubtedly a key player in the SME ecosystem, and post COVID-19 there will be new pressures, forcing them to be even more careful about ensuring that scarce funds are effectively deployed and utilized. Their role can be viewed through two lenses: as an enabler of SME growth, and through the delivery of targeted support, especially to high-growth businesses. We have identified four key areas where government support could be critical.
1. Boost the national entrepreneurship ecosystem
Governments can enhance the national entrepreneurial culture by promoting programs that prioritize SMEs as preferred suppliers. They can also work to identify and bridge gaps in business enablement that could hinder SME growth. In addition, they could provide outsourcing support for back office services, something that small SMEs typically struggle with. Government could also focus on raising awareness among SMEs as to what support—financial or otherwise—is available to them.
2. Invest in the skills and capabilities that SMEs need at this time
Government can continue to ensure that entrepreneurs are supported with the skills and capabilities they need to rebuild and grow their business after the crisis. Most would benefit from additional training, for example, in business scenario planning or managing scarce financial resources. This would be particularly relevant where relief funding is provided. Government could also work with industries and sectors that are most under threat from COVID-19 to develop resilience strategies and to help them reimagine their business models going forward.
3. Drive innovation, research, and development
Research and development are key requisites for innovation and growth and successful entrepreneurship ecosystems recognize this.
For example, Malaysia’s national commercialization platform—PlaTCOM Ventures—helps entrepreneurs turn their ideas into successful products and services. In South Africa, more will need to be done to identify and fund high-growth businesses and support innovation even where current financials do not support this.
4. Provide targeted and sector-specific support for SMEs now and post crisis
There is a significant opportunity for government to work with entities such as the Small Enterprise Development Agency (SEDA) and the Small Enterprise Finance Agency (SEFA) to provide nuanced, sector-specific interventions to help SMEs get back on their feet post-crisis. Some sectors, for example, will need initial financing, while others may need more sustained support. As far as is possible, given that this support will impact the government’s financial position, this could extend to continuing initiatives such as PAYE deferments and tax breaks instigated during the crisis. All these support mechanisms need to be clearly and rapidly accessible to ensure that SME leadership is not having to spend too much time managing financing processes while also managing the crises in their business.
Government can also drive specific support to unlock growth. For example, government could support export-focused companies in agriculture and BPO by setting up an export office for all SMEs to help reduce bottlenecks. In addition, they could support manufacturing and consumer goods businesses that have the potential to compete with larger players and offer alternatives to imported goods. This might include creating cooperatives.
Private sector support can boost the viability and sustainability of SME partners
The private sector has several levers it could pull on to support SME growth—especially those with high potential—post the COVID-19 crisis, depending on the business area.
Banks and financial institutions have already driven a significant number of initiatives globally and in South Africa to support SMEs, including through the suspension of loan repayments or the reworking of principal repayments; the provision of resources and communication tools to clients; interest and fee waivers; relief loans; and pre-approved or expedited loan approvals. For example, a leading South African bank is providing instant short-term deferral on credit products for up to three months and another is offering a similar program for SMEs with a turnover of less than R20 million.
Financial institutions can also play a significant role in driving uptake and capability-building in new channels and payment methods. The recent consumer survey conducted by Aura highlighted that post the COVID-19 crisis more than 65 percent of payments will be done using cards or means requiring POS devices; a significant drive from financial institutions can help drive uptake and readiness in businesses.
Corporates more generally could enable SMEs by focusing their supplier development for longer-term scale and competitiveness. We recommend five elements for private sector players to consider as part of their supplier development processes to both serve their needs and ensure the viability and sustainability of their SME partners as a business imperative, and not just for social responsibility purposes.
Develop a clear selection criteria for suppliers up-front. For example, by defining the categories in which to develop suppliers. This could be based on ownership structures, business performance, or other criteria.
Assess the capability gaps that exist within suppliers up-front and develop plans to help them close these.
Build funding and capability requirements into the contract to create sustainability.
Simplify contractual terms and conditions and required paperwork for SMEs that often do not have large/dedicated commercial teams.
Establish regular check-ins and course correction sessions throughout the lifecycle of the suppliers.
Corporates more generally could enable SMEs by focusing their supplier development for longer-term scale and competitiveness.
SMEs are a vital engine in the South African economy. They drive growth, create employment—especially among youth—and spearhead innovation. SMEs are also customers to larger companies across the supply chain and supply vital goods and services to companies and households, helping to keep the wheels of the economy in motion. Furthermore, they can leverage their agility to design and incubate new technologies and business models to build a better future. Many of South Africa’s SMEs have the potential to become tomorrow’s large corporations, the African unicorns that this continent needs to continue on its path to growth and prosperity.
When the pandemic will peak in South Africa is uncertain. It is imperative therefore that efforts to protect SMEs move with speed and decisiveness not only to cushion the worst of the impacts of the crisis on livelihoods but to help ensure a swifter recovery for the broader economy.