Over the Counter Aid

Friday, August 19, 2005

Over-the-Counter Aid
From rock stars to world leaders, moving Africa out of poverty has become the feel-good cause of the day. Commissions of political bigwigs report on it, summits issue communiqu?s on it, musicians play for it. Meanwhile, business is quietly getting on with doing something about it.

Conjure up an image of Africa and business, and the odds are that you will think of a continent rich with an abundance of natural resources that the East Asian Tigers could not have dreamed of as they started to pull themselves out of poverty half a century ago. And, to be sure, investment in the extractive industries has increased rapidly in recent years due to instabilities in the Middle East.

Yet beyond the well-known story of diamonds and gold lies one of wealth generation through business largely unacknowledged outside the continent–the growth of South African companies into regional multinationals across a broad range of industries.

Companies such as the Standard Bank Group and Metoz Holdings’ food group Metcash Trading–all Forbes 2000 companies–have developed into centers of regionalization.

These and others are forming an engine of growth for countries closely linked with the South African economy, such as Botswana, which is trying to turn itself into a financial services hub for foreign investors who want to run pan-African operations. “In economic terms, South Africa is to Africa what the United States is to the world,” Moeletsi Mbeki, businessman brother of President Thabo Mbeki, told the Royal Institute of International Affairs in London last year.

Metcash, which says it is the “largest distributor of fast-moving consumer goods on the African continent, is an exemplar of the trend. From its head office, symbolically situated at the intersection of Amethyst Street and Crownwood Road in the heart Johannesburg, South Africa’s economic capital, South Africa’s largest retailer (annual sales: $2.7 billion) is feeding Africa via more than 700 wholesale stores and supermarkets in Botswana, Malawi, Zimbabwe, Uganda, Angola, Namibia, Swaziland and Lesotho as well as South Africa, where it claims 35% of the wholesale cash-and-carry market.

Dubbed the “African Wal-Mart” in part because of its cavernous stores and superstores that sell food, liquor and consumer goods, Metcash is not seeking to mimic the upmarket drive of American and European grocers in order to grow its business. “The demand for food and other consumer products across the continent is largely unmet,” says Chief Executive Carlos dos Santos.

To keep prices low, dos Santos keeps profit margins low. Metcash earned just $98 million on sales of $7.6 billion in 2003. The company has just been struck by some 4,000 of its employees, who accused it of firing 600 unionized workers whom it then offered to rehire at lower wages.

As well as low costs, Metcash’s success has come from the old-fashioned virtue of knowing its customers. In places like Angola, where its local operation mostly runs wholesale stores, families buy large 3-kilogram cans of food to feed their families for a week.

Other examples of the potential of the intra-African market abound, even though they often get overlooked amid the hullabaloo over the aid versus trade debate:

–Electricity and energy: In sub-Saharan Africa, at best only one in three people has access to electricity. South African state-owned utility Eskom, which is among the top seven utilities in the world in terms of generation capacity, has developed a near monopoly on power supply and generation in southern Africa, currently providing 95% of South Africa’s and 51% of sub-Saharan Africa’s electricity. Eskom investments include the $500 million Inga development, with a 3,500-megawatt hydroelectric plant and dam on the Congo River.

–Retail banking: South Africa’s banking system is well established, and Standard Bank (Stanbic) is one of the country’s largest banks, with assets of $109 billion. It operates in 17 African countries. Managing Director Sim Tshabalala sees “the vast informal sector as a potentially big market for banking services,” such as loans and credit.

–Telecommunications: Mobile phones are more appropriate than landlines, given Africa’s teeming cities and vast rural distances. That accounts for the fact that mobile phones are the more prevalent of the two. Yet Africa is far from saturated with mobile phone operators. The big three in South Africa, Telkom and Vodacom, are steadily increasing their Pan-African operations.

Many investors in emerging markets continue to regard Africa as high-risk, preferring to put their money in the better-known emerging markets of Latin America and Asia. Former U.S. Secretary of State for African Affairs Walter Kansteiner, now a principal of the Scowcroft Group, a boutique investment organization in Washington, D.C., says that those wary of investing in Africa are “simply wrong.”

Kansteiner says that the primary aid policy of developed nations toward Africa should be investment. Supporting business in Africa is a powerful way to build capacity and develop the local economy in response to local demand. Kansteiner proposes that the Bush Administration’s aid program–Millennium Challenge Account–should get actively involved with local venture-capital funds, especially those associated with the Black Economic Empowerment Initiative, which aims to put economic power in the hands of black South Africans through equity, job opportunities and training, though it has been seen by some as a deterrent to foreign investors.

This initiative is not only starting a deliberate transformation of business within South Africa but also potentially promises to be a powerful force in the north. Since the initiative’s debut in 2003, African businesses and businessmen from as far as Ghana and Senegal have been relocating to Johannesburg to take advantage of the business incentives and opportunities it has made possible for black-owned businesses, and giving another twist to a virtuous circle of enterprise.

Source: Forbes