Managing risk, doing business and ultimately succeeding in Africa

For those wanting to access opportunities on the African continent, risk is often cited as a key challenge. However, risk is a widely used but nebulous term. To this end, the Africa Risk Conference brought together various expert stakeholders to unpack risk and discuss how it can be managed and mitigated on the continent in the process of doing business.

The important role of engaging in nation branding as an exercise to proactively raise nation competitiveness, manage country perceptions and, invariably, risk was also deliberated on. It was concurred that there is a significant re-branding opportunity for many countries on the continent as external perceptions of “old” Africa have not entirely caught up with the realities of the “new” emerging Africa.

Delegates at the Africa Risk Conference 2012 had the unique opportunity to participate in the Deloitte Insomnia Index. Delegates were required to classify and rank thirteen themes as either risks/challenges or opportunities from their perspective as companies either considering Africa expansion or already operating on the rest of the continent.

The top three opportunities that businesses view on the African continent are: Economic Growth, the Emerging Middle Class and Cultural Diversity. On the contrary, the following three emerged as the top risks/challenges: Political Environment, Regulatory Environment and Tax, Customs and Duties respectively.

Africa Opportunities

1. Economic Growth

Africa is the region, currently, and into the foreseeable future, with the highest concentration of fastest growing economies. Going forward to 2015, Africa boasts the highest concentration of high growth economies. According to The Economist, 7 of the 10 fastest growing economies in that period are African – Ethiopia, Mozambique, Angola, Zambia, Tanzania, Congo and Ghana, at 13.6%. As a region, average growth stands at 5.5%. Furthermore, because this growth is coming off a low base, it is not expected to plateau for a while. There was also discussion at the conference on the sustainability of this growth rate given the decline in the demand for commodities as China’s fiscally driven infrastructure boom shows signs of abating.

2. Emerging Middle Class

The African middle class has been rising steadily – from 151.4 million in 1980 to 313 million in 2010 equating to 34.3% of the population. On the basis of this trajectory, it is expected that there will 1.1 billion middle class consumers by 2060 (42% of the forecast population). At 313 million, the current African middle class is roughly the same size as its Indian and Chinese counterparts. The biggest beneficiaries of this emerging African middle class are consumer goods and services: retail (both food and clothing); technology, media and telecommunications; entertainment; financial services; and healthcare. The conference also observed that Africans in the diaspora are returning back to the continent and creating a “new class of professionals”. However, while opportunities abound, it cannot be business as usual given the need to adapt to local needs and preferences.

3. Cultural Diversity

Interestingly, 111 delegates viewed cultural diversity as an opportunity and this is reflective of the mind shift in how businesses are now choosing to approach doing business on the continent. While cultural diversity has typically been viewed as an added challenge to navigate, businesses are now choosing to view the opportunity as residing in that very diversity. However, to harness these cultural differences implies research that is not only country-specific but also spending “a day in the life of …” consumers to understand how they view, interact with and use various branded products, what these brands represent in their lives and what the levers are for further market penetration. This implies that local knowledge is a key differentiator.

Africa Challenges

1. Political Environment

Political Environment was ranked as the biggest challenge to doing business on the continent. The reality, though, is that Africa is the most stable it has ever been with less conflicts and wars. An interesting statistic was presented by one of the panellists that between 1960 and 2000, Africa experienced some 85 coup d’états and only 10 in this last decade. The last few years have been marked by a number of peaceful transitions of power, with the most notable and recent ones in the following countries: Malawi, Nigeria, Senegal and Zambia.

2. Regulatory Environment

Regulatory Environment was ranked the second biggest challenge in terms of business on the continent. The African regulatory environment is challenging for a number of reasons. Firstly, there is sometimes the lack of policy clarity which then heightens perceptions of risk. It was concurred at the conference that above all, investors seek stability before putting their money into a particular environment. Secondly, is the lack of policy continuity. Changes in government or even, just, cabinet reshuffles within the same government, sometimes lead to changes in policy and this can be particularly disruptive in sectors such as power/energy, for example, where investments require a long term outlook. Third, is the lack of policy consistency. If, for example, a country has chosen to make it easy to do business, this should reflect in the time to register a new business, to open a bank account, to get work permits, to get construction permits and so forth and requires a concerted effort across all government agencies. Policy consistency will come through in how the policy is executed and this manifests, ultimately, through the investor’s experiences.

3. Tax, Customs and Duties

Tax, Customs and Duties unsurprisingly ranked highly as a challenge. Delays in moving goods across borders within and between regions are well documented and this is a key priority for the African Union and the various regional bodies. Delays at African customs are, on average, longer than in the rest of the world: 12 days in sub-Saharan countries compared with seven days in Latin America, less than six days in Central and East Asia, and slightly more than four days in Central and East Europe. These delays add a tremendous cost to importers and exporters, and they increase the transaction costs of trading among African countries. For food and other perishable goods, such delays can be devastating. The net impact of these trade barriers is that intra-Africa trade remains extremely low at 13%.

Given that various governments on the continent have committed to the Tripartite Free Trade Area comprising SADC-COMESA-EAC, trade and non-trade barriers are likely to reduce over time. The view emerging from the conference was that Africa should grow exponentially with regional integration. Africa is managing to achieve an impressive average 5% growth rate despite the significant trade and non-trade barriers currently in place.

Jacqueline Chimhanzi is the lead of Deloitte’s Africa desk, while Anushuya Gounden is head of the Africa desk