international analysis and commentary

Africa’s success models: private sector and innovation

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A 2017 McKinsey survey[1] found support for several Africa scenarios over the next twenty years. Of the 253 African executives who responded it found:

  • 85% believed Africa would be the fastest growing region in the world;
  • 62% believed most African households would join the consumer class;
  • 65% believed education performance would improve significantly due to digital technologies and other investment; and
  • 66% believed that new investments in Africa’s mineral resources would contribute significantly to the continent’s economic growth.

In the medium term these executives believed their companies would operate in more African countries (72%), increase revenue from Africa (89%), and increase workforce in Africa (76%).

This optimism is well-founded. There have been several success stories across the capability spectrum of Africa. The optimism is based on the endowments of fertile land, growing labor force, and increased foreign investment in infrastructure and commercial enterprises (such as the success of horticulture in Ethiopia and Kenya).

However, firms are reluctant to invest for the medium and long term due to the small market sizes, lack of regional markets, and fragmented institutions, among other constraints which lend themselves to uncertainty.  The COVID-19 pandemic adds further uncertainty to business models across the continent.

Africa has developed novel business models in response to such constraints, and many of these models are well suited to rebuilding post-pandemic. When M-Pesa, the mobile payment system was launched in 2007, much of Kenya’s population was unbanked. The system was attractive due to convenience, low-tech technology requirement, and safety. M-Pesa evolved from a DFID (the UK government’s Department for International Development)  project motivated by the unintended use of mobile airtime as a currency, to enable microfinance payments. Safaricom became the project implementor and rolled out the service. By 2013 around 16 million people had M-Pesa accounts. Since then the model has spread to over 90 countries with over $690 billion in transaction value[2]. M-Pesa itself processes more payments than Western Union does across its global network which is now its “peer-to-peer” (P2P) partner across the globe. M-Pesa was born out of necessity, and technology trends of increased wireless connectivity and access to mobile handsets – digital disruption[3].

Local M-Pesa agency in Nairobi, Kenya

 

The mobile handset became the bank branch and payment system, along with a hyper-local network of corner-store agents who provided reach through on-the-go training, and a way to deposit and withdraw funds. The effect has been incredible with thousands of new subscribers joining every day, some businesses conducting payroll, and banking services being offered on the core payment offering (e.g., savings account with partner banks). The regulatory environment and Safaricom’s arrangements regarding custody allow it to remain free of banking regulation encumbrances.

Econet is a privately held African telecommunications, technology and renewable energy group, focused on digitally connecting customers in the 28 markets. Econet Group has developed  offerings spanning mobile telephony, fiber infrastructure, media broadcasting, financial services (Fintech), e-commerce, Internet of Things (IoT), and renewable energy. The group originated in Zimbabwe and was established in 1993. It came to prominence due to a successful legal challenge leading to the dismantling of the state monopoly in Zimbabwe’s telecommunications sector[4]. Today the group is not only bidding to enter Ethiopia’s recently liberalized telecommunication sector, but also working to develop a Pan-African e-procurement system for COVID-19 products.

Competencies in telecommunications, working with countries liberalizing their state-dominated sectors, and transactional software development underlying payment systems are being leveraged to deliver a solution to Africa Centres for Disease Control and Preventions’ distribution and supply problems with “pooled orders [which] would allow African countries to better compete in the global market”[5] for COVID-19 products – connecting African countries with certified (by Chinese regulators) suppliers and to negotiate prices. Econet Group’s founder is providing the software development talent to deliver a COVID-19 “Amazon”-like product in weeks not months.

Successful firms are able to find their way through a myriad of constraints as illustrated by M-Pesa finding a supportive regulator permitting experimentation, or a legal system which allowed Econet’s constitutional challenge, while growing and sustaining engineering and other specialized domestic talent around appropriate product offerings for domestic and export markets.

The World Bank’s IFC (International Finance Corporation) reviewed 18 country private sector diagnostics (CPSDs) in Africa and the Middle East and found that the most dominant concerns for private sector participation was market dominance by state-owned enterprises (SOEs), and complex regulations, followed closely by unfavorable competition policies, and land and property rights. Trade, talent, and infrastructure constraints were prevalent in less than a quarter of the countries (See figure).

Prevalence of constraints highlighted in 18 Country Private Sector Diagnostics (CPSDs) in Africa and Middle East geographies between 2017 and 2019. (% of 18 countries)

 

African countries which produce successful private sector firms tend to not hinder diversification and encourage upgrading into high complexity production of goods and services (i.e., increase “country fitness”[6]).  Inevitably, these firms strive to leverage capabilities across the value chain, core platforms and businesses to judiciously diversify.

Africa’s potential competitiveness in manufacturing is based on latent comparative advantages (Lin et al., 2020[7]). The most commonly cited advantage arises from Africa having low unit labor cost in several activities. While higher complexity, value add, and wages are typically achieved through innovation and upgrading, sometimes a receptive business environment can favor connected firms. Another common advantage is an abundance of natural resources that can supply raw materials for domestic processing such as raw mango into dried fruit for muesli, skins for the leather goods industry, and arable land for agribusiness. However, even these inputs require specialized capabilities for efficient production at scale and with requisite quality (e.g., unmarked leather hides).

COVID-19 is a different type of crisis, one in which the capabilities are largely left intact. Capital, labor, and land are largely preserved. What changes are the channels of transmission, the processes, and the inter-connectivity which affect productivity and disturb just-in-time value chains and requires refinements to existing business models. COVID-19 economic impacts (including from social distancing measures) will undoubtedly temper expectations of the executives surveyed by McKinsey in 2017.

Yet, the already successful development of software and platforms to enable novel business models such as M-Pesa illustrates that African companies can overcome the pandemic as long as human losses are limited, and thus domestic talent is maintained. It will require modification to existing processes and business models potentially leading to new business opportunities and a changing competitive environment.

 

 


Footnotes:

[1] Leke, Acha, Mustafa Chironga, Georges Desvaux.  Africa’s overlooked business revolution.  McKinsey Quarterly.  Survey results retrieved from McKinsey Insights executive survey on business in Africa, 2017 https://www.mckinsey.com/featured-insights/middle-east-and-africa/africas-overlooked-business-revolution

[2] GSM Association, State of the Industry Report on Mobile Money, 2019.  Retrieved from https://www.gsma.com/sotir/wp-content/uploads/2020/03/GSMA-State-of-the-Industry-Report-on-Mobile-Money-2019-Full-Report.pdf

[3] Several applications of digital technologies enabling new business models can be found in IFC’s Reinventing Business Through Disruptive Technologies, available at https://www.ifc.org/wps/wcm/connect/publications_ext_content/ifc_external_publication_site/publications_listing_page/reinventing-business

[4] More information about the group as well as its operating companies and sectors is available at https://www.econetafrica.com/about-econet

[5] African nations join forces to procure medical equipment, Neil Munshi, May 15, 2020, FT.com.  https://www.ft.com/content/72edfd6a-8300-4944-893d-54d08954df6f

[6] Economic Fitness is a measure of complexity-weighted diversification.  It has been used in World Bank Group country strategy as illustrated in Roster, K, L. Harrington, and M. Cader, Country Case Studies in Economic Fitness: Mexico and Brazil.  https://www.mdpi.com/1099-4300/20/10/753

[7] Lin, Justin, M. Cader, and L. Pietronero.  Complexity creates markets. IFC EM Compass Note 87, July 2020.