8 September 2017

Africa: Developing Businesses of Scale in Sub-Saharan Africa - Insights From Nigeria, Tanzania, Uganda and Zambia

Tagged:
analysis

This paper provides a snapshot of the current business environment in Nigeria, Tanzania, Uganda and Zambia, and an analysis of the constraints and opportunities for company growth in those four countries.

Summary

This paper presents a snapshot of the business environment in Nigeria, Tanzania, Uganda and Zambia, from the perspective of the owners and managers of over 60 businesses interviewed as part of the research phase. It is also an analysis of the constraints facing, and opportunities for, company growth in these countries. Although there are some common factors between them, the four countries have very different political economies, and for this reason the picture that emerges is diverse.

The population of sub-Saharan Africa, currently exceeding 1 billion, is projected to more than double by 2050. In order to reap the benefits of this 'youth bulge', the labour pool needs to have access to jobs. The continent's economic performance, in terms of growth in GDP per head, is less than half that of South Asia, while Africa has over twice the level of unemployment. Mass unemployment can lead to political instability and keeps country tax bases low, making investments in improving the business climate more difficult. In line with the UN Sustainable Development Goals, specifically Goal 8 concerning targets for growth in formal employment and higher productivity, all four countries studied in this paper grapple with the challenge of creating an effective enabling environment for local businesses to grow and thus to provide more and better formal jobs.

There is no single solution for scaling up small and medium-sized enterprises (SMEs) in Africa. The political economies of African states and sub-regions preclude easy generalizations. A primary conclusion is that any attempt to finance or stimulate business growth must be shaped by a deep understanding of the specific national and regional context. But there are a number of common constraints to business across Nigeria, Tanzania, Uganda and Zambia, particularly limited access to mid-scale finance for SMEs, a lack of capable managers, poor infrastructure - especially electricity and roads - a constrained pool of skilled workers, and corruption.

There is enormous entrepreneurial energy in each of the four countries surveyed, as well as huge potential and an increasingly acute need for job creation. Enabling local businesses to reach scale constitutes a significant opportunity for investors and an essential part of the transformation of Africa's economies. Governments in all four countries have recognized the need to expand and diversify local businesses, and are pushing forward with investments in infrastructure and improvements in the business environment. But the core constraints remain pervasive.

Improved infrastructure makes a difference, but is not a panacea. For example, Uganda has improved its basic infrastructure, but business has not yet expanded in proportion to these improvements. Across the four countries, even where roads are good, roadblocks and customs posts can add significantly to transport costs. Extending electricity grids potentially has a major role to play in boosting productivity and the expansion of firms, and therefore in indirect job creation, but many citizens cannot afford to access available supply.

Banks and lenders need strategic patience in order to be catalysts for business expansion. Growing a business can take many years, but too many banks operate on a model of issuing short-term, high-interest loans. This is particularly the case in the context of economies and populations that remain heavily dependent on small-scale agriculture and a large informal sector: many SMEs are seen as risky propositions by commercial lenders. Banks compete for mass-market savings and appear keen to extend mobile banking, but this is not matched by dynamism in lending to SMEs.

Improving education and workers' skills are vital. In all four countries, the lack of skilled labour and management is identified as an important barrier to scaling up. The youth bulge is not being matched by an increase in skilled human capital for businesses to draw on.

These constraints are particularly acute in terms of developing agricultural businesses, which are still the mainstay of economies across the four countries. Trapped in patterns of smallholder production, isolated by infrastructural deficits in transport and storage, dependent on natural inputs and with weak patterns of formal land-holdings, SMEs working in agricultural production and processing are risky propositions for lenders, and offer low yields for investors. Governments have recognized the imperative of developing agriculture, notably to provide mass employment for booming populations, but significant policy challenges remain.

Government policies and practices as well as patronage politics remain common deterrents for business growth, and contribute to keeping many businesses informal and small-scale. Resources such as the World Bank's annual 'doing business' rankings are useful indicators across the countries assessed, but they reflect the formal content of regulations rather than their implementation on the ground - and can thus gloss over the realities of the political economy. Some of the most creative business innovation has been in working around the state, rather than with it. Pro-business policies are often superficial, while real political will to enforce regulations or to simplify and streamline taxation is scarce.

There are significant opportunities for those with access to private capital, as well as for foreign-owned and -managed firms. Many are flourishing. But even if these firms are able to provide large numbers of jobs, they still run the risk of real and perceived inequalities, between locals and expatriates, or between those with access to urban markets, advanced education or political connections. Getting companies to scale up is critical, but ensuring that local entrepreneurs from all walks of life are able to compete - by supporting access and improvements in local supply chains, for example - is also key.

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