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AFRICA RISING: PROSPECTS FOR THE HOPEFUL CONTINENT

Interview with Ade Onitolo, Senior Analyst, IHS

In 2011, The Economist dubbed it “the hopeful continent”, and with good reason. Africa is shaking off the stereotypes of receiver of aid and sufferer of famine, and looking to build a brighter future of sustainable economic growth, investment, and growing democratic prospects. Already, the continent is seeing results, with several nations joining the ranks of the top ten fastest growing global economies. By 2050, the continent is predicted to have the world’s second largest population, which leaders are hoping to leverage on the global trade stage in manufacturing, services, agriculture, and technology.

In early May 2014, the World Economic Forum hosted its annual Africa meeting in Nigeria, sub-Saharan Africa’s largest economy and most populous nation. To better understand the Forum’s theme, “Africa Rising”, Diplomatic Courier sat down with analyst Ade Onitolo, senior analyst at international consulting firm IHS.

Prior to joining IHS, Mr. Onitolo spent 12 years in the Foreign and Commonwealth Office (FCO) as a member of the Diplomatic Service and the Government Economic Service. In his most recent position at the FCO, he headed its Africa Strategy Unit, building on his four-year posting to South Africa where he headed the Political-Economic team in the British High Commission.

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[Diplomatic Courier:] “Africa Rising” was one of the key themes of the 2014 World Economic Forum meeting in Nigeria. Sub-Saharan Africa is the second fastest growing economic region in the world right now, right behind Asia. Can you give us a picture of what “Africa Rising” means?

[Ade Onitolo:] It really is setting Africa in the context of a past, which, in the 1990s, was about restitution and poverty and what many called “the hopeless continent”. Now we have is an economy that has risen by 7 percent in the past ten years—and that growth has of course largely been dependent on climbing commodities—but we’re also now seeing that it’s diversifying beyond that into manufacturing, infrastructure, services, tourism, entertainment. Innovative ideas are coming out of Africa and going abroad: using mobile phones, telephone banking is going to the UK, being spearheaded in Kenya and spread across this continent.

“Africa Rising”, I think, is saying Africa is becoming a part of the global economy, and you need to take notes. Somebody said today that if you want to make it in multinational business, you’ve got to be in Africa, and you’ve got to be in Africa today.

[DC:] What are some areas with the largest potential for growth?

[AO:] Largest potential for growth—I think it’s certainly the ICT sector. I think we’ve seen mobile phone technology being used in pretty innovative ways on this continent. I think it’s a surprise to many people that the broadband penetration is very, very far behind. While about 80 percent of Nigerians have a mobile phone, the broadband penetration is only about six percent.

So can you imagine what’s been achieved by the mobile phone, and then you move onto broadband, the scope… I mean, this is continent was colonized by the British and French, so it already has a language and a cultural [connection] there that facilitates call centers and customer service relations. And this is all coming at a time when Asia is getting a bit more expensive for outsourcing. Suddenly you have that industry here, and I think it’s going to grow.

I think there’s also a clear understanding that Africa is a continent like no other. It has problems that other continents don’t have, and so people are using ICT infrastructures to solve problems that Africa has, such as crime. For example, how do you get an innovative system that kind of tells all your neighbors you’re about to get robbed? How do you identify fake drugs from real ones? How can you tell whether the weather’s going to be good or bad and along which parts of your supply chain is that going to be so you can plant? There are loads of things you can do with technology. That for me is, I think, the biggest growth area in the future.

But there are many growth areas. It’s very difficult to kind of trim it down to just that. ICT itself seeds into loads of other sectors. Retail is super enlarged. Africa has the fastest growing cities at the moment; the urbanization rate is 3.6 percent, faster than anywhere else. And the middle classes are growing, so the population that will be earning between $10,000 and $20,000 thousand is expected to grow to about 20 percent of the population by 2022, according to McKinsey’s. So you suddenly have all of those household goods; at my consulting firm, businesses ask us for advice about Africa, and the businesses that are coming to us are not only the energy traders anymore—they are firms that sell household goods, firms that work in telecommunications, firms that work on securing telecommunications, and those kinds of things.

[DC:] You mentioned that Africa’s middle class is the fastest growing in the world, but there are still large inequality issues in Africa. What are some other challenges to Africa’s economic growth?

[AO:] I think the largest challenge, of course, is getting the infrastructure behind the growth. Africa’s infrastructure is barely improved in that… Well, it’s not to say that it’s barely improved. Barely improved is a bit unfair, but its improvement has been behind the growth of the economy, so we’re outstripping the infrastructure we’ve already got.

If you think about Mozambique, only 25 percent of the rural population lives within two kilometers of main roads; so 75 percent of these small-hold agriculture owners form a majority of the population and they don’t have access to the markets they’re supposed to sell into. That is surely a constraint to how well growth is shared across the continent.

But infrastructure around communications is not there either. Even though 80 percent of Nigerians have mobile phones, those phone calls drop off very often, and the quality isn’t so very clear. And the reason for that is that the power and the other infrastructure behind this mobile technology is not there. So that has got to improve.

There are other things, like finance. There’s a lot of interest in Africa’s finance at the moment, because 40 percent of this population is unbanked, and small and medium enterprises suffer from this most. If they have to pay about 30 percent or more to take out a loan—and that’s even if they’ll be given one—because they don’t have collateral. Because ownership rights and land tenure is not as secure as elsewhere, you can’t use that to borrow money very easily.

The final thing is really education and experience. When we have multinationals working in Africa who are thinking possibly about how to feed locals into their supply chain and bring local small enterprises on, these small enterprises don’t have the experience to work with international contracting standards. I think all these problems, however, are not discouraging, and it shouldn’t be discouraging for investors. If anything, investors should get off on problems, because that’s where the entrepreneurial activity lies, and that’s why all the banks are coming here. That’s why China’s investing so heavily in infrastructure.

[DC:] I wanted to talk a little bit more about infrastructure, starting with access to electricity. Electricity access on the continent is only about 1/10 of that in other developing areas, and 74 percent of the population does not have access to a steady electricity supply. What initiatives are underway to change that?

[AO:] Nigeria is a really good example of what’s been going on. Nigeria, for a very long time, was at the mercy of a government parastatal that was supposed to deliver electricity and just didn’t. Electricity was very unreliable under that parastatal. It has improved in the past ten years, but it’s still not very good. You still won’t have electricity for the whole week. You still need a backup generator. If you’re a business, that’s worth its salt.

To improve the situation, Nigeria has now broken down the parastatal power holding company and sold it off in smaller units, so there are now privately operated power units that are meant to improve the generation of energy. Challenges to achieving this, of course, are that project management in Nigeria tends to be behind schedule, and there are problems with getting the feedstock to provide the electricity and get the gas up to scratch. At the moment Nigeria flares more gas than it can afford to.

But it’s very clear that it needs to improve, and privatization and bringing in international skills is one of the main ways that governments are going about this.

[DC:] Going from electricity infrastructure to internet infrastructure—you mentioned several issues surrounding the access, including mobile access, broadband access. What initiatives are underway to change those situations?

[AO:] A lot of countries are building their policy frameworks to ensure that broadband access is secured, so your data that you might enter into someone’s database doesn’t belong to them; it belongs to you, and you have a right to how they use it. It’s not something that’s widely recognized in Africa, and it’s one thing that they get encryption, but they also improve it.

The other [point] is making sure that the business environment is secure enough for international companies to come in, and make the investments that are necessary.

[DC:] Clearly there is a huge market for foreign investment right now, but which countries do you think are doing the best job of opening their economies, their legal systems, and regulatory systems to this kind of investment?

[AO:] It’s very difficult to pick winners in this environment. You can probably, without me having to tell you, count the countries on the fingers of one hand that are not at the moment thinking about improving their business environment. Sometimes it sounds like mixed messages to investors when improving the investment environment is about the government taking stakes in companies or forcing companies to do things that are social.

Unfortunately that is part and parcel of how to do business in Africa. If growth is not shared, then it’s not sustainable. What’s being done across a lot of countries is creating regulatory frameworks that include what the taxation levels are going to be, what the rules are governing international business, and how they’re supposed to work with locals. Without pointing out the countries you need to be worried about, I think investors need to ask themselves whether those industrial strategies have been developed in collaboration with the private sector and with civil society where there’s some kind of agreement around what was meant to be done, and whether the final objective of the regulations has been clearly and explicitly explained. It’s only when the final objective is known, that businesses can come in and act in the spirit of the legislation and regulation, rather than just try to tick the boxes on what the government says we should do.

[DC:] What are some of the risks of investing in Africa right now?

[AO:] As an investor, you should know that Africa has a lot of political volatility, so ahead of elections, it’s very commonplace for budget deficits to rise significantly, sometimes for violence to increase. You’ve got that happening here in Nigeria.

Some of the risks are that Nigeria—and Africa as a whole—has thousands of ethnic groupings, and several regulatory environments. Understanding those well [is important]. Understanding where you operate: what are the interests of the communities, and how do they relate to neighboring communities? And, therefore, how does your investment affect all of that? That way, when you go in, you are working within the grain of what’s suitable for the community and enrich your business also.

[DC:] What role can public-private partnerships play in Africa Rising?

[AO:] Public-private partnerships are key. African governments need the investment and international experience to deliver on infrastructural challenges. And there is a lot of international experience from others who have used public-private partnerships, and so Africa should learn from them carefully. Sometimes it’s not actually been the cheapest way of the government doing it, as we’ve seen examples of in other parts of the world, but bringing private sector and private sector thinking in on Africa’s challenges, I think, is a very good idea.

[DC:] China’s economy has seen a little bit of a slowdown from its explosive growth of a few years ago. Has this affected its investment or its relationship with African nations

[AO:] Africa has long depended on China as a large source of exports, but we have to qualify that in a couple of ways. The first thing is China’s slowdown is really not that much of a slowdown. Most people expect China to continue to grow at about 7 percent a year. That means China is still doubling in size every ten years, so still growing very fast.

The second thing is that the exposure of African countries to China is very different across the continent, so Angola and Zambia are more exposed than Nigeria and Kenya, for example. If you think about how a lot of Zambia’s copper is being used as collateral in China’s shadow banking system, if China’s shadow banking system unravels, you might see a massive drop in the price of copper even further than it has dropped so far. It might affect Zambia a great deal, but that wouldn’t be of any consequence to a country like Kenya.

What we’re seeing with China’s involvement in Africa is [the relationship is] more broad-based than old, traditional natural resources. Indeed, energy only really accounts for about 20 percent of China’s investment on the continent now, and China is moving into infrastructure, manufacturing, agriculture. Ethiopia doesn’t really, or hasn’t so far, have a lot of natural resources besides agriculture, but is now manufacturing textiles and shoes. Similarly in Lesotho and other places—this is all China’s doing. China’s relationships with Africa, in that respect, are not likely to change in the context of the slowdown. If anything, they might even grow, because China is slowing down in order to make its growth a bit more balanced, less filtered towards exports, more filtered towards domestic consumption demand.

But China has a lot to offer the world, and I suspect that a lot of China’s industrial capacity will be offshored. Where will it be offshored to? It’s likely that some of it will be going to Africa. China’s not going to stop consuming raw materials anytime soon. The rest of the world is still growing; I think Africa will take a knock by China’s slowdown, but it’s by no means a massive knock. It’s not going to take the steam out of Africa’s promise.

[DC:] My final question for you is on the topic of security, which seems to be on everyone’s mind following the kidnapping of nearly 300 girls from their school. So by all accounts, if a woman is able to attain an education, it raises economic output significantly, and as you mentioned, ICT is a huge sector for opportunity and for growth, and STEM fields provide a large opportunity for jobs and for economic growth in Africa. So are there initiatives underway in Nigeria or any other African country to promote education in a positive light or to secure the safety of schools?

[AO:] Securing the safety of schools is, as President Jonathon said [at the World Economic Forum Africa meeting], a new issue, really. The kidnapping of kids and taking them away from schools is new, and it’s unusual, so I don’t think there’s much comment or historical examples to pass on to alleviate that. I’m sure in the future there will be more done.

In terms of reducing the gender gap, yes. The millennium development goals indeed have been an aspiration for a number of countries. Africa is not on target to make them but has made improvements in the past few years. I don’t have the figure off the top of my head, but I know that a number of countries—South Africa and others—introduced quotas for women in different areas of work, which I think has a trickle down affect in that it provides hope to young women who now know what they can achieve. [This is happening] through legislation around meeting universal primary education and making that free, the same for boys as it is for girls, and any discrimination is frowned upon. There are still cultural things that make it so that the women in a family tend to do the cooking while the boys don’t. That is becoming somewhat outdated in a lot of families, but that’s going to be with us for a while. I think that big battles before us are on the cultural attitudes. I haven’t seen much action being taken there.