The story of how Africa has changed dramatically for the better has been told many times in recent months but — it seems — most of us in SA still consider it a somewhat implausible piece of wishful thinking. In the middle of last year, McKinsey Global Institute released its Lions on the Move report, an analysis of how African countries’ gross domestic product (GDP ) had grown 5% a year from 2000 to 2008 after decades of, at best, simply limping along. Given the depth of material presented, the upbeat findings of the analysis and the reputation of the consultancy putting its name to it, the report continues to receive widespread coverage alongside increasing interest in the investment opportunities in Africa.
Recently, we at Sphere Holdings thought the time was right to revisit the themes and opportunities contained in the Lions on the Move report, so we invited Acha Leke, head of McKinsey’s Lagos operation, to run through the research with an audience of about 40 people in Johannesburg. Those attending represented companies in which Sphere is invested, partners and associates, most with operations north of our borders, all with a real interest in the rest of Africa.
According to Leke, the sustained growth Africa experienced up until 2008 was not simply driven by the resources boom (resources directly accounted for only 24% of the growth). Of equal importance were fundamental macroeconomic and political changes that ended conflicts and brought a measure of stability to the continent undreamt of in the 1980s.
Then there was a raft of business-friendly reforms and urbanisation. In emerging economies, the simple act of moving to the city can raise a worker’s productivity fivefold. In Tanzania, Kenya and Mozambique, Leke explained, urbanisation accounted for between 30% and 50% of the growth these economies experienced. At the same time, there has been a "seismic demographic shift" — by 2020, more than half of all households will have discretionary spending.
By 2020, according to McKinsey, four sectors in Africa — consumer-facing industries, infrastructure, resources, and agriculture — will be worth $2,6-trillion a year.
Leke went on to recall that foreign direct investment in Africa had spiked in about 2005-0 6. Not only had the reforms he spoke of encouraged outside investors, Africa almost overnight began to offer the best returns of any developing region.
Shortly before Leke’s presentation in Sandton, I travelled to northern Mozambique with Ian Victor, MD of Pandrol, a company in which Sphere is invested and which is the world’s leader in rail-fastening systems.
Brazilian miner Vale is investing as much as $3b n in its 11-million-ton Moatize coal project in the Tete basin and the project is moving swiftly towards production. Vale has announced it is putting $1,6b n into Moatize but we experienced for ourselves the company’s determination to put even more into ensuring that, when it comes on stream, the mine is able to move coal to its customers. The existing Sena railway line to Beira is being upgraded but it is unlikely it will ever be able to satisfy the volumes Vale has in mind for Moatize.
So the Brazilians are already planning another, higher-capacity, line to Nacala, one that will have the potential to ship much more coal than Beira will be able to manage.
As Victor put it, until not that long ago people would wait for the World Bank to fund something such as a railway line. Of course, World Bank funding came with strings attached, took time and couldn’t benefit a private project directly. Nowadays, investors aren’t waiting for the likes of the World Bank; they are so encouraged by what has been happening in Africa that they’re making things happen themselves, investing directly in infrastructure. As I travelled in northern Mozambique I couldn’t help but think that what was happening there reflected how we South Africans had been caught asleep at the wheel. Here is a shallow deposit that will be able to support mining for a century or more, yet we somehow missed the boat. We seem to think that, because Mozambique is our neighbour, we will get first right of refusal over any developments in that country. Clearly the Brazilians didn’t see things that way.
Another business represented at Leke’s presentation wa s Savcio, which is the largest privately owned provider of maintenance and repair services for electromechanical equipment and transformers in Africa.
The company is the established market leader in SA, and Africa is the natural outlet for its expansionary ambitions. Savcio has been operating across Africa for some time, delivering services on site or, when the equipment cannot be serviced locally, shipping it to SA to be worked on, and then shipping it back. This adds significantly to the cost.
Savcio, through its strategic objective of geographic expansion in Africa, recently acquired an engineering firm in the Zambian Copper Belt, from which it will service Zambian business as well as clients in the Democratic Republic of the Congo and surrounding countries. Now, according to director Mervyn Naidoo, Savcio is looking to establish a permanent West African presence by entering into a joint-venture partnership there.
Studies and reports such as those by McKinsey are invaluable in telling the new African story, but for those seeking investment opportunities they will always only tell part of the story.
As those attending Leke’s seminar were at pains to point out from personal experience, there are challenges of infrastructure, political and economic stability, language barriers and, still, questionable business practices. Also, as Naidoo pointed out, each African market is unique and each needs its own research.
For smaller businesses, this is a particular challenge: there is only so much management resource available to invest all the time and effort required to find out how things work in particular countries. For all but the biggest corporations, South African companies looking north need to concentrate their energies on a select number of countries.
But for all these difficulties and challenges, businesses such as Savcio and Pandrol are going into Africa, having a look for themselves and exploiting the kinds of opportunities identified on a macro scale by the McKinsey report.
And, as Leke highlighted, the rewards can be significant. Based in Nigeria and having consulted widely in the telecommunications sector (one of the "consumer-facing" sectors the report highlighted and which added 316- million subscribers across the continent in under a decade) he knows just how challenging operations can be.
Nigeria has a population almost three times that of SA’s but its electricity supply is minuscule in comparison; with a capacity of 4800MW — Eskom’s Medupi power station will feed more electricity into the grid than all of Nigeria’s generating sources could supply if they were combined.
In Nigeria, such is the patchiness of electricity supply that cellphone base stations all need generators, which need fuel, which needs to be delivered by a fleet of trucks on exceptionally busy roads.
Yet, Leke noted, MTN had recently reported margins from its Nigerian operations that were 29% higher than those in SA. The messages are clear: do your homework, be targeted and prepared to invest for the long haul, and Africa can offer your business exceptional returns.
By Itumelend Kgaboesele, Business Day
