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Part three: How can corporate governance catalyse growth in Africa?

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Part three: How can corporate governance catalyse growth in Africa?

Having explored the different components of corporate governance in part one, and understood how the composition of a company's board can be detrimental to its governance strategy in part two, Ocorian Director for Africa, John Félicité presents the final part of his series examining how corporate governance can catalyse growth on the continent. This part will specifically focus on Africa and how, by engendering sound corporate governance practices, its population can prosper.

By 2025, the UN predicts that there will be more people resident in Africa than Chinese in China. Extend that by another 25 years to 2050, and its population is predicted to top 2.4 billion, fuelled by an urbanisation rate already greater than that of China's during its period of rapid economic expansion (1980s-2010).

The past 15 years have served as a fitting prelude to UN predictions, with many African nations experiencing sustained economic growth over the period. In some cases, annual growth rates have regularly stayed above 5 percent, buoyed by rising commodity prices, a growing and consumer hungry middle class, budget surpluses, foreign investment and fewer conflicts. These factors, paired with the opportunity that over half a billion people - largely under 25 - subscribed to mobile services provides, has seen the continent acquire the status of the world’s last frontier for business and development, leading to a new 'scramble for Africa'.

Yet, if you scratch just a little under the thin veneer of government and investor hyperbole, there exists a beleaguered and all too familiar narrative. Economic growth, while fast, has come from a low base. Behind the rates of growth and population expansion, 28 of the world’s poorest countries are located in Africa. Two in five Africans are illiterate and most strikingly, the average poverty rate for sub-Saharan Africa stands at about 41 percent.

Aid never was the most practical, long-term solution to African prosperity. As a more proactive replacement for traditional aid financing, hope (and expectation) lays with private equity to spur growth on the continent. In order to secure the investments the continent so desperately needs however, effective governance principles need to be adopted by those companies wishing to attract foreign money.                                                                     

Why Africa needs good governance

When you want to grow an international business, access financial capital and be sustainable, governance is essential. With better corporate governance practices across African businesses, more funds will flow into them. As a 2002 McKinsey survey titled, Perspectives on Corporate Finance revealed, institutional investors will pay a premium for stock offered by well governed companies, especially in developing markets. The survey also found that in deciding where to put their money in these countries, investors pay more attention to governance issues than to financial metrics.

Governance should occupy and remain in the spotlight, with the end goal being that of African nations achieving intelligent governance structures. As explored in parts one and two, intelligent governance is the means of aligning society's value chain whilst building and maintaining the qualities that are at the foundation of all commerce: confidence in the government delivering on its promises and public trust.

In action, intelligent governance would see collaborations increase between entrepreneurs and their governments, with the state and private sector supporting entrepreneurs by offering training, access to technology platforms and financing. As a result, operators in the informal sector will transition to the formal one, increasing their chances of success in the larger market. This formalisation will also bring other benefits, such as improved quality and quantity of employment, an increase in fiscal revenue and the overall improvement in quality of life.

Harnessing Africa's potential

It is unrealistic to simply expect the governance principles of the Western world to operate effectively in Africa. Even the modern hybrid model of 21st century China - a combination of 20th century Chinese communist ideology blended with 21st century capitalist practices - will be unsuited to the vast cultural interpretations across the continent. To understand governance in Africa, it is important to recognise the part played by colonialism.

From 19th century European colonialists, to the Cold War in which capitalist powers used the continent as a buffer against the spread of communism, Africa has been recklessly divided and extorted for material gain for centuries. The era of the Cold War also coincided with the independence of many African nations, so the backdrop of how to rule and the definition of governance was tainted by the circumstances of the day. The running narrative? Africans have rarely had a meaningful say in how Africa is governed.

With most African countries gaining independence at the peak of the Cold War, the loss of financial support from countries like the USA, France, Germany and Russia resulted in attention inevitably turning towards the East. The cost of that ideologically oriented external support was a failure to develop institutions and infrastructure in a way that engendered self-reliance. As a result, the economies of many nations sharply declined.

Fast forward to today, and Africa once again finds itself the subject of geopolitical and economic interests. Investment signs are positive. Nearly two-thirds of LPs (65%) view Africa as more attractive for PE investment than developed markets over the next ten years and foreign direct investment increased 6 percent in 2018, defying a global drop of 19 percent. However, levels are but a fraction of those required to keep up with population growth.

In the absence of the - often considered - corrosive competing influence of the superpowers, the continent has been given another chance to build its institutions and develop. There is no coincidence that from 1989 onwards, Africa has experienced its most significant period of political liberalisation since the independent movements of the 1960s. That said, the influence of China continues to grow, with infrastructure and project financing feeding into its global development strategy, the One Belt, One Road initiative (OBOR). Although providing nations with infrastructure they desperately need in order to both function and grow, it is an initiative garnering heavy scepticism. Seen to be entrapping a number of African nations into debt, the loans are somewhat unrealistic for many governments to repay, particularly considering the IMF regards 16 African countries to be at high risk of debt distress.

With other major players such as France, USA and Germany also dealing heavily in African investments, the 'scramble for Africa' colloquialism has reared its head once again. Perhaps an ignorant phrase demeaning African countries' efforts to excite international investors as individual nations, the investment narrative presenting the continent as more of a collective isn't necessarily a bad thing. As a larger bloc, Africa presents a much more attractive investment prospect, particularly considering the African Continental Free Trade Agreement has passed the minimum threshold required to go into operation. The agreement is set to make Africa the world's largest free trade area since the creation of the World Trade Organisation over 70 years ago, with a combined gross domestic product of $2.5 trillion. However, to genuinely harness Africa's potential, businesses must place good governance at their cores and from that framework, value and investment will follow.

For intelligent governance to really take hold, what is now required is the acknowledgement at the roots of the tree that the people deserve transparency and with it, the confidence that they too will benefit from the economic growth. The difference with today's modern scramble for the continent and the rush to strengthen diplomatic, strategic and commercial ties with African nations is just that, the fact that those African nations and the people within have a very real chance of ensuring that they will also benefit from the economic development of their nations.

The statistics may show promise but, as noted by President of the African Development Bank, Akinwumi Adesina, "Africa cannot power its economy with potential". It must translate this potential and opportunity into tangible economic benefits.

Good governance, good progress

Whilst certain foreign nations entering Africa may at first appear to be indifferent to the benefits of transparency or corporate and social governance, there will be a point when the problems associated with murky agreements and disregard for intelligent governance will come back to affect them.

The role that intelligent governance plays in this latest scramble will make the difference between sustainable economic growth for the people of Africa, or the continued exploitation of the continent. The effects of the latter could lead to a level of social unrest yet unseen by the world. The simple fact is that if Africans do not benefit from the economic development of their nations and feel the benefits of economic freedom, then the levels of immigration seen to date will seem miniscule.

Leading by example

For Africa to make the most of its potential through its own volition, its economies must work cohesively towards the same goals and governance must improve. This has not been the case so far. But where nations have failed, multilateral development institutions committed to the prosperity of the continent have attempted to take the lead.

Yet some have suggested that entities such as the African Development Bank's (AfDB) African Development Fund should play a bigger role in monitoring governance. However, few understand that the same entity only has about 15% of the resources that the World Bank has for Africa. As founding president of the Center for Global Development, Nancy Birdsall stated, "The creditors of the ADFB have sufficient control to ensure the Bank's financial soundness (and AAA rating), but a collective action of constraining any push for reforms in the Bank's operations… Therefore its governance arrangements are not conductive to raising money to finance the banks activities." Perhaps the idea of intelligent governance in Africa should be driven by Africans?

Power to the people

How would global corporates and multinationals respond if African governments were the ones demanding greater transparency on who is using and how they are using Africa's raw materials?

What would happen if African governments began to ask for greater transparency of the value chain before giving licences for the mining of raw materials?

The African Union (AU), like the AfDB, suffers from a similar problem in that 80% of the funding comes from donors however; these donors are from within Africa. For the AU to make progress, it needs to approach the dilemmas of:

  • how to ensure the AU is sustainably self-financed;
  • how to ensure it focusses on key priorities with continental benefit;
  • how to ensure the alignment of all AU institutions to achieve those priorities; and
  • how to manage the business of the AU in both political and operational terms.

The above require a change in mind-set from within African governments as to what governance means for them. They need to view things holistically, recognising how sound governance will help African nations achieve the goals required to ensure economic growth at all levels.

Many feel that the lack of development progress during the last 50 years can be attributed to a failure of governance and leadership across the continent. What Africa requires is profound leadership that can entrench good governance at an institutional level, which then percolates down to the public, aligning the value chain needed for intelligent governance.

History's clean slate?

Today, Africa's much anticipated middle class is finally becoming a reality. More Africans are evading the poverty trap and enjoying greater physical and financial security. A 2016 McKinsey Global Institute report predicts household spending in Africa to grow from $1.5trillion in 2015 to $2.1 trillion by 2025, with spending by businesses expected to grow from $2.6 trillion to $3.5 trillion in the same period. The same report also presented data highlighting that Africa can nearly double its manufacturing output from $500bn to $930bn by 2025.

It is the middle class demographic that will further Africa's development. They are educated, hard-working, in a position to demand change and crucially, know what changes they should be demanding. Good governance holds the key to unlocking Africa's market value, and it is the educated middle classes that can unlock the door.  

Through the use of International Financial Centres, we provide governance and board services to companies wishing to build enterprise and shareholder value. You can learn more about those services here or contact John below.

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