Doing Business In Africa

Acha Leke, senior partner at McKinsey Africa, is one of Africa’s most sought-out consultants, serving governments, multinationals and private sector institutions across Africa on issues of economic development, tax administration, growth strategies, holistic transformations, and investment decisions.

He started at McKinsey in 1998 and has been instrumental in shaping the face of one of the world’s best-known management consultancy firms. In this interview with African Banker, he reveals some of the trends of 2017 and explains what to expect in the year ahead.

What were the key trends coming out of the McKinsey reports with regard to Africa in 2018?

One: Africa is still growing. We have slowed down but we are still growing and the growth is much more nuanced. Ten years ago, all 30 top economies in Africa were growing and 27 of the 30 had accelerated growth. In this last five-year period only 13 have shown accelerated growth – so it’s much more complex.

The top six economies in Africa have slowed down. But you have to go beyond the surface. What has really happened is that the economies in North Africa suffering from the fall-out of the Arab Spring have slowed from 5% growth to zero. Also, in the oil economies of Nigeria, Angola, Algeria, growth is about half of what it was. But the other economies such as Côte d’Ivoire, Rwanda, Ethiopia and Senegal are actually doing well, so it’s much more nuanced.

Two: companies have started to realise they can’t simply go anywhere in Africa and make money; they need to be a bit more grounded to really understand what’s going on. Everyone agrees there are massive opportunities on the continent but [they are] realising it is different from what it was 10 years ago.

In light of this research, and to realise opportunities, which areas are showing growth and where should investors focus their efforts?

If you look at consumer trends, financial services and retail telecoms are really taking off so you see huge opportunities and investment in that space.

There are 400 companies making $1bn or more in Africa today – most people think the figure is more like 50 to 150, but in fact there are 400. The profitability of these companies, relative to companies around the world, shows that African companies grow faster and are more profitable. So it’s still a continent where you can actually have huge growth on the back of the consumer.

We’re publishing a report this year on what it takes to doing business in Africa and one of the findings is that it’s a continent where you can actually do good and do well. So you can make good money for your shareholders and you can also make a difference to people’s lives.

African countries consistently battle high levels of debt, overstretched budgets and significant unemployment; yet, ideas of a growing middle class and rising incomes are consistently voiced as an African reality. How do we separate fact from fiction?

It’s clear that because of all of these issues – a slowdown in growth, slowdown in emerging markets, low oil prices, slow FDI or security issues – the macroeconomic situation has deteriorated. The indicators you look at, whether it’s debt to GDP growth, current account deficit, fiscal deficit – many of those have gone down the drain.

However, the good news is that we have gone through the bottom of the barrel. Nigerian oil production has gone back up; it’s the biggest economy on the continent and it’s out of a recession.

South Africa, for the first time, has recorded 2% growth in the last quarter so you’re starting to see promising signs. The Nigerian stock exchange has gone up by 50% in the last six months, so you’re starting to see a recovery. It’s true we are far from where we need to be but the good news is the public and private sector have taken the downturn seriously. I sense we are actually now going to recover.

Yet, as consumer spending has slowed on the continent, are Africa’s consumer markets still as attractive as they once were to investors?

While it has slowed down, the growth rate is still the second-fastest in the world. We used to grow at 5%. We are now growing at 3 to 4%. Consumer spending was about $800bn in 2010 and it’s gone up to $1.4trn – we project it’s going to be $2.1trn in 2025. A few things, however, are changing.

The first is where you go to capture these consumers. The biggest growth is coming from East Africa, with about 12 to 15% of all consumer spending. West Africa now has between 9 to 11% so the geographic distribution of spending is changing. So for companies it’s very much about being in the markets of tomorrow, not in the markets of yesterday.

The second thing lies in core segments. We are seeing a lot more movement out of basic needs into the emerging consumer segment. With the growth of GDP per capita income, a lot of households are starting to move from just money for food, to the purchase of a TV or a fridge. You also have affluent households, so the question is, how do you make sure you have services and products that cater across all of these segments.

The third factor is that whatever you say about Nigeria  – I set up the Nigerian McKinsey office and was there for three years and it’s not the easiest place to do business – it will always account for more than 20% of all consumer spending on the continent. So if you are trying to build a meaningful, sizeable business on the continent you have to find a way to be in Nigeria, there’s no question about it.

And then the fourth thing is very much centred around cities. There are still opportunities in rural regions, but the reality is 75 African cities account for almost 50% of African spending on the continent, so our clients are very much dealing with cities, not countries. It’s not a case of, which five countries should I expand into, it’s, which are the next 20 cities I should be in.

What remain the overriding concerns for investors looking to invest in Africa?

The typical concerns involve macroeconomic stability. Without it you are not going to attract investors. What’s happening to the currency, to inflation; the macroeconomics are critical.

In Rwanda, the ease of doing business in Africa is what attracts investors at the end of the day and what they recognise is that Africa is the land of opportunities. Everywhere you look there’s opportunity but the question is, what is it going to take to capture that opportunity.

What more needs to be done to effectively facilitate cross-border African trade and liberalise the African continent? 

Intra-African trade is still at 12- 14% – and there are a number of reasons for this. We used to have export-based economies but now a lot of economies have gone down the path of diversification, which is critical because you can actually provide goods which you can sell on the continent.

On paper our economies work: no need to pay duties when taking goods from Lagos to Dakar for example, but try to do that in a truck and see what happens. It needs to work more in practice, we need better people and a number of [new] roles and institutions. We need to relax visa requirements because if I can’t come to your country, how will I trade with you?

Five years ago, there were only five countries that allowed visa-free access in Africa. You just showed up and got a visa. Now Kenya has announced a similar policy and the number of African countries doing so is now 15.

We need to support people like Moussa Faki Mahamet, the AU chairperson, and entrepreneurs like Aliko Dangote and Strive Masiyiwa, who are actively pushing to make sure more and more countries sign up. The big risks that governments thought they would face from opening up simply didn’t happen. 

Indeed, there were three big objections. One involved a worry about jobs from opening up the barriers, but the reality is that the sub-regions are already open, so if you haven’t seen an influx before, you won’t see it on a larger scale. Rwanda was afraid of that and it didn’t happen. The second was security. Governments thought that if they opened up, terrorists would come in, but as President Kagame has said, ‘If a terrorist wants to get into your country they’ll get in, they don’t go to the embassy and get a visa.’

The third was revenue. For many, the only source of tourist revenue is visa fees but you can charge for visas on arrival and get money back to your embassy that way. Those countries which have relaxed their borders have seen an influx of tourism and increased trade so we are encouraging other countries to go down that path.

You have said in the past that the issue with African leaders is that they don’t deliver: policy and reality are two different things. What can be done to ensure African leaders deliver?

The biggest impediment to Africa’s development is our leaders. We see countries which have really good leaders like Kagame, Ouattara, Desalegn and Sall. These guys have made a huge difference in their countries, and they have the interests of their people at heart. We need to track and monitor and hold people accountable if they don’t deliver. 

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