By Marc van Olst
An auspicious meeting took place at the Berlin residence of Chancellor Otto von Bismarck about 130 years ago. Foreign ministers of 14 European powers and the United States established ground rules for the future exploitation of the “dark continent”. It must have been a lively and tense meeting as the superpowers negotiated their share of the spoils. Access to seaports, Africa’s riches (including ivory, gold, rubber and slaves), current occupations and speculative future prospects would have formed the basis for these negotiations. Most of the borders that were defined during this meeting still remain today and contribute significantly to many of our headaches. Still today, we honour these arbitrary lines in bizarre ways like changing which side of the road we drive on when crossing from one country to the next. Still today, a large portion of capital flows and exports happen between the African country and its previous colonial master. For better or worse, this single meeting that took place in 1884 irreversibly shaped a continent without the continent even being involved.
If the Berlin meeting shaped the previous era, this week’s Emerging Markets Private Equity Conference in Washington DC will no doubt shape part of the next era. Over 800 delegates from 50 countries representing over 300 investors gathered to discuss the role of private equity in the Africa and other emerging markets.
Whereas the Berlin meeting was devoid of an African voice, this time Africans stood alongside the powerful men and women from the developed world to present the case for the continent in a positive but sober way. Whereas the Berlin conference symbolised an opportunistic scramble for Africa, the Washington conference epitomised a thoughtful weighing up of risks and rewards, challenges and opportunities. It is altogether a more noble pursuit and one that Africa should take very seriously.
So why is there a sudden interest in Africa?
The world has changed considerably over the last 5 years. ‘Too-big-to-fail’centres of economic power are showing signs of distress. The threat of a Eurozone meltdown is not far fetched. The IMF has downgraded the UK’s growth forecast to 1.1%. The US dollar is under threat as the US GDP runs out of options for future growth, leaving it one remaining trump card: a weaker currency to improve its balance of trade. Those who invest money on behalf of pensioners and life insurance clients are running out of places to find a return in the developed world.
With about 65% of the world’s GDP growth expected to come from the emerging markets in the future, there is a real need for developed world investors to take a risk on them to sustain their own economies. China, South East Asia, Russia, Brazil, India, Turkey, Eastern Europe, South America, North Africa and sub-Saharan Africa have all come into view on the radars of the private equity community. The large institutional investors like the US and European pension funds have been allocating a larger portion of their funds to private equity fund managers (increasing from about 6% to over 15% over the last five years) in the hope of bolstering their overall returns and sustaining their liabilities. Private equity in turn is allocating a larger portion of the funds under their management to businesses in the emerging market.
In stark contrast to the doom and gloom in the USA and the Eurozone, Africa shines brightly. The continent has enjoyed 10 years of consecutive growth exceeding the world average. In 10 years’ time, seven out of the top 10 fastest growing economies are predicted to be in Africa. Ghana has already recorded 13% growth and Kenya 5%. Our rapidly emerging middle class population hungry for Western-style goods and services like fast food, bank accounts, mobile phones and insurance is fuelling unprecedented growth. Infrastructure developments across the continent are making it exponentially easier to do business. Our disproportionate endowment of mineral wealth and remaining arable land allow much more predictable returns. Access to energy is also an opportunity that cannot be ignored. In 2030, 60% of the world’s population without access to electricity will be in Africa.
This is not a fairy tale; the evidence is already there. Over the last five years, private equity returns in sub-Saharan Africa have topped the rest of the world hitting levels of 25%.
The old passion killers about poor governance and corruption are being reviewed too. In 2011, a record 36% of African countries improved their regulatory environment for doing business. Thirty five African countries are ahead of India and China in terms of the Global Corruption Indices. According to the Ibrahim Index of African Governance 2011, 27 countries have improved political governance, 38 countries have more sustainable economic opportunities and 48 countries have made advances in the human development index.
Political instability is always a very real possibility. There are countless examples of coups wiping out the gains from years of hard work and sustained economic growth in Africa. PE investors don’t seem to be too concerned. Over 70% of investors polled at the conference were not worried about the effect of political instability. Perhaps this means that they have found opportunities in sectors that are less affected by politics (e.g. the consumer sector)?
Private equity offers Africa and other emerging markets a real opportunity to improve its economic growth in the old fashioned way – by building businesses (and employment) from the ground up. To do this, they will need to bring technical and management skills too. In China for example, one of the big players has invested alongside the Chinese state-owned dairy company to use its capital to dramatically accelerate the dairy production. It has done this by building new dairies and increasing the yield per cow by threefold.
We must not confuse private equity with philanthropy. The private equity industry is not signing up to take on the responsibility for dealing with the inequality and other social challenges on the continent. While the industry has brought huge impetus to business sustainability (through the environmental, social and governance improvements that are part of their investor mandates), they are here for one reason only – to make money. My personal view is that we should embrace this newfound recognition of Africa as a business destination rather than an aid destination. Could it be that these champions of capitalism will do more to lead Africa out of poverty than the 50 years of dependency-creating aid that the continent has received?
Africa will need to continue to look to development funds, bilateral agreements and global philanthropy funds to finance projects that deal our social challenges. More importantly, our citizens should do much more to hold their governments accountable for putting their tax money to better use.
In conclusion, the second scramble for Africa has started to happen. It is led by a much more responsible set of adventurers but it is still about the money. Africa should embrace the opportunity that these capital inflows will create in terms of building real commercially exciting industries. We should look to get more from this gold rush than just money. We should use this economic impetus as a catalyst for improving the lives of all of its citizens. We need to get ahead of the game now by laying the foundation for greater equality through a stronger economy so that her people are ‘equally prosperous’ rather than ‘equally poor’. We must strive towards a partnership relationship rather than a beneficiary-benefactor relationship.
To be able to be an equal partner on the journey, we should take pre-emptive steps to be ready as the developed world clambers to partake in the bountiful opportunities that she presents. As we get ready for Africa’s second coming, perhaps we should reflect on the following questions.
Can we market the continent better? Will we continue to get caught up in the negative and leave the investors wondering whether there are any positives? This does not mean hiding our dirty laundry under the carpets. Investors like risk – where there is risk, there is return. We need to speak about the opportunities and help investors understand the risks in a balanced way.
Can we increase our level of ambition? Next time an investor comes to help us build another subsistence agriculture project, for example, can we help them to understand that by investing properly in a dam, the right equipment, proper human development and good technical advice, we are able to build very profitable agri-businesses instead of more apologetic subsistence schemes? If we are inviting investors to partake of our natural resources, can we make a business case for them to add value to these resources before we send them off to the end-users? Can we have the self-respect that we need to have high ambitions?
Can we learn from each other? If they don’t understand Africa then it is our job to help them. If we don’t understand how to build a profitable commercial venture, we must learn from them. It is all about an attitude of partnership.
Can we put the enablers in place? Capital is not enough. Without secure property rights, transport and communication and education; capital is useless. There is no economy in the world that has grown sustainability without all four ingredients (see The Birth of Plenty by William Bernstein). Can we use all of our own resources now to ensure that we prepare the ground so that the seeds of capital produce a social and economic harvest beyond our wildest dreams?
Can we position labour more attractively? As a continent, we need ‘jobful’ growth. We need growth to be an instrument of equality. We need labour intensive growth. Can we ensure that our labour pools are as attractive to the external investor than imported machinery? Can we ensure that our labour regulation makes the choice of man vs. machine more attractive?
Can we make our communities part of the solution? Foreign investors understand that no ‘licence’ to operate is secured against a populist uprising by the communities in question. They invest more readily where the communities are enthusiastic about the arrival of new industry. We cannot expect them to sell the investment to the communities though. This is our role as African recipients. We must always remember that investors have choices. In India, for example, the production facility for the TATA Nano was moved from the east of India to the west of India because of the cold reception that the investors met with in the East.
Can we find the ‘AND’? Can we introduce foreign investors to opportunities that have very attractive financials and a massive social impact. The mobile phone revolution is a perfect example but if it had started as a philanthropy project, I doubt we would have attained to penetration that Africa now enjoys and unleashed the many opportunities for improved healthcare, more efficient markets and better education.
Can we walk the precipice without falling off? There is no sensible African that believes that pure socialism or pure capitalism can deliver sustainable economic growth and an improved quality of life. No other successful economy exists on a pure form of either (even the USA). Why then do we allow ourselves to be pulled into debates as to whether a person is a ‘socialist’ or a ‘neo-liberal’? This ideological confusion creates a fog of war, which makes investors very nervous. Not because they are primarily motivated by returns but because they see us oscillating clumsily between two extremes which make it hard for them to know how to do business with us. Can we as leaders walk the tightrope and avoid following the easy path down the slope to pure capitalism or pure socialism?
In the end, the opportunity is ours to use or lose. We need to decide whether we will see this moment of exuberance as an opportunity or a threat. We need to prepare the ground to multiply the impact. Finally, we need to use the proceeds of the impending boom to ensure that every person on the continent has as good a chance as the next to participate in the economy after the boom.
Our time has come.
Marc van Olst is a venture capitalist and business builder. He is also active in community development and social activism in South Africa.