AfricaThe new frontier for growth

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Table of contents1. Executive summary 4

2. Methodology 10

3. Introduction 12

4. Consumers 16

5. Resources 24

6. Talent 36

7. Capital 48

8. Innovation 58

9. The race is on... 68

10. Appendix 70

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Until recently, any conversation about emerging markets was dominated by talk of Brazil, Russia, India and China (BRIC) and select other emerging economies. Now, however, after decades of poor performance, Africa has worked its way into the global dialogue on economic opportunity and growth.

As Muhtar Kent, the CEO of Coca–Cola, said “Africa is really going to blossom in the next decade,”1 and his view has been echoed by Bloomberg2, Reuters3, Newsweek4 and Time5. In fact, the growth of Africa’s gross domestic product (GDP) between 2002 and 2008 makes it the second-fastest growing region in the world. Indeed, 13 African countries already have a higher per capita GDP than China, and 22 are higher than India.

However, for most businesses the key question is the degree to which this growth is sustainable, especially considering the fact that some African countries have chronic problems. Despite these challenges, Accenture believes that the recent growth is indeed lasting and should increase. Accenture’s optimism is based on the significant positive changes apparent in five key dimensions: consumers, resources, talent, capital, and innovation (see Figure 1). In our view, ongoing positive changes in these dimensions should lead to direct and indirect improvement in Africa’s GDP, and thus support the continent’s overall growth.

Executive summary

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Five key dimensions of growth As shown in Figure 1, the five dimensions of growth Accenture has observed in Africa coincide with the critical aspects of successful business operations: gaining customers, sourcing high-quality and affordable inputs, building a workforce to convert inputs into value, acquiring capital to fund ongoing growth, and developing innovations to support long-term success. In short, Africa increasingly has much that global businesses need to thrive—beginning with consumer demand.

Growing consumerism in one of the world’s largest marketsThe African continent has the world’s second-largest population, as well as impressive growth in both consumer

and business spending. These factors will continue to drive increased consumer spending as well as capital investment from companies gearing up to meet this growing demand. To be sure, the consumer dimension forms a critical part of an economy’s growth: Consumer spending in Africa accounted for more than 60 percent of GDP in 2008.

However, more than half of Africa’s population still lives under the poverty line. This has resulted in a large informal market, which ranges from 30 percent of the total market in South Africa to almost 60 percent in Nigeria, Tanzania and Zimbabwe. Due to the unstructured nature of this market, its participants’ lack of disposable income, and the severe infrastructure and linguistic challenges it presents, many global companies have been unable to penetrate it.

Even with these challenges, Africa is becoming an important consumer market for companies looking to

expand. It is the second-most populous continent in the world, with an estimated 955 million people—a total that is expected to increase to more than 2 billion by 2050. In addition, consumer spending increased by more than 100 percent from 2000 to 2007, growing from US$376 billion to US$761 billion.

Just as important, these consumers are undergoing several important demographic changes. For example, a growing portion are joining the increasingly sophisticated middle class. In fact, according to Professor Vijay Mahajan, the middle class now makes up 35 percent of Africa’s population.6 This growing middle class is driving increased demand for services. The services industry now comprises more than 40 percent of Africa’s GDP, up from 30 percent in 1980. In addition, Africa’s rate of urbanization is the world’s highest,7 which in turn is creating concentrated and increasingly affluent consumer markets. These markets are getting easier to reach, as

Figure 1: Five dimensions of growth in Africa

Consumers

Capital Talent

Innovation Resources

Dimensions of growth

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well, thanks to new regional economic communities and bilateral trade agreements.

As these trends continue, Accenture estimates that Africa will attract a flood of investment to meet the needs of a continent likely to be home to one in five of the world’s people by 2050— all eager to improve and expand their lifestyles.

Increasing global demand for Africa's resourcesAfrica's plentiful reserves of natural resources have long been recognized, consequently, most of the world’s resource companies have had a long-term presence on the continent. As resources in other parts of the world grow scarcer and more expensive to extract, those in Africa will only grow in importance.

These natural sources of wealth include timber, agriculture, fresh water and mineral deposits. Demand for these products generates income for the country and attracts investment from foreign and, increasingly, domestic investors. However, poor governance relating to the extraction of these resources has led to decades of conflict, neglect and mismanagement. In addition, few of the proceeds from the sale of resources have been used to support African development. As a result, a lack of infrastructure still plagues Africa. For example, a recent study indicated that companies doing business on the continent lose, on average, six percent of their revenue due to a lack of electricity.

Despite these challenges, the sheer scale of Africa’s reserves and the world’s hunger for them add up to robust global demand—as well as increasingly well-developed local demand and infrastructure. For example, China is investing more than US$7 billion in factories, roads, railways, schools and hospitals in exchange for mining and oil concessions. And as emerging markets like India and China continue to grow,

Africa’s abundant resources will help meet their need for minerals and energy. Africa also is rich in renewable resources such as hydro and solar, which could come into play as the world steps up its efforts to protect the environment.

This external demand will be supplemented by increasing local demand as domestic markets grow. These domestic markets will benefit from stronger global demand, in turn, as a growing portion of Africa’s resource companies adopt the practice of beneficiation. The central tenet of this practice is striving to perform more downstream activities, such as the cutting and polishing of diamonds or the refining of crude oil, within the local economy from which the resources are extracted.

Africa as a new source of talentIn Accenture’s view, the growth potential of a country can be gauged less by its material assets and resources than by its talent and human capital. This is due to the fact that as people learn new skills and become literate, they earn more money and demand more goods and services. In turn, this demand creates a favorable environment for entrepreneurs, both large and small. These new businesses attract investment from government, private individuals and even foreign entities.

The good news is that Africa’s talent market is rapidly maturing, and postsecondary school enrollments have increased at a compound annual growth rate of 12 percent since 1975. However, Africa faces a number of challenges relating to talent, including low literacy and skill levels, as well as the large-scale emigration of skilled workers.

In spite of these challenges, there are signs that certain aspects of the talent situation are improving. Africa’s labor force participation has jumped 17 percent since 2000 and, on average, African workers are less than half

as expensive as their counterparts in Central Asia, Latin America and Eastern Europe. In addition, Africa’s tertiary education enrollment rate is among the world’s highest, and several African countries are making efforts to improve vocational skills training. At the same time, some regions’ unprecedented growth is leading to an influx of skilled former expatriates.

Together, all of these developments indicate that Africa could indeed be on the brink of a talent revolution in which key skills are inexpensive and readily available. Malcolm Gillis, the former President of Rice University, puts it well: “Today, more than ever before in human history, the wealth—or poverty—of nations depends on the quality of higher education."8

Capital is flowing more freely, which facilitates tradeAfrica’s abundance of natural and human resources historically has been compromised by a lack of capital to fund the launch of new enterprises and the sustainable expansion of existing businesses. That is changing, thanks to positive regulatory reforms, substantial increases in foreign direct investment, decreasing debt and growing intra-African trade.

However, Africa’s financial systems still suffer from several challenges. On the one hand, many African financial institutions have barely penetrated their potential markets. Likewise, raising capital in Africa can be a daunting task for many businesses due to high borrowing costs, the perception that large-scale African investments are risky, and Africa’s lack of domestic stock exchanges.

On the other hand, several factors are driving positive change in this dimension. In recent years, Africa has seen its financial markets deepen, increase in sophistication and efficiency, and in general become more stable. Africa’s financial markets also are liberalizing, with better

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governance and policies to protect capital. For instance, regional trading blocs such as the Common Market for Eastern and Southern Africa (COMESA) have encouraged positive and standardized regulatory reforms. These reforms have encouraged private capital inflows to grow by a factor of 5 from 2000 to 2007. In fact, a recent study shows that publicly traded African companies enjoy an annual return on capital that is 65 percent higher than those of similar firms in China, Vietnam and India.9 At the same time, Africa’s growing assortment of formalized trade blocs have led to loosened trade restrictions between member states and the global economy in general, boosting both intra-Africa and global trade.

In short, multiple financial factors are working in concert to enhance Africa’s attractiveness as a business locale and boost its integration with the global economy.

Innovation is unlocking new growth areas How will Africa ultimately earn a place among the pantheon of the world’s economic players? In Accenture’s view, one of the most powerful qualifiers will be the continent’s ability to unlock new growth areas through continuous innovation.

Increased innovation will help Africa to grow GDP by impacting gross investment and private consumption. For example, demand for mobile telephony (driven in part by a lack of fixed lines throughout Africa) has led to investment in wireless communication infrastructure and services. African consumers have flocked to mobile phones, and penetration levels in nearly all countries have risen sharply. This consumer demand has opened the door for a wide range of companies to invest in innovative solutions such as mobile banking.

In the past, however, Africa has not been thought of as a source of innovation, or as a place in which to bring innovative products to market. Its sociopolitical climate was seen as too unstable, and its consumers as too poor to afford even cheap

new technologies. These factors affected economic performance, since productivity improvements often are driven by innovation.10

Today, however, Africa’s infrastructure for information and communication technology has undergone substantial improvement, including new mobile technologies and several undersea fiber-optic cables that provide affordable bandwidth. In addition, Africans have rapidly adopted new technologies (especially mobile phones), which has encouraged the development of new business models. For example, in Kenya, more than 6 million people use mobile banking services, and the continent’s business process outsourcing industry is thriving.

However, the ultimate indication of Africa’s developing innovation skills is its growing volume of homegrown ideas. Befitting the continent’s uptake of mobile services, two of the most noteworthy developments are based on mobile technologies: Kenya’s M-PESA and South Africa’s eWallet, both of which have been widely adopted. Innovative solutions for health care and agriculture also have been developed—and consumed—by Africans.

The time to act is nowDue to a host of advances across the dimensions of consumers, resources, talent, capital and innovation, Africa is fast becoming known as a rising star with untapped growth potential. And while there is a window of opportunity for first-movers to grab a share of this growing market, this new frontier for growth is attracting the interest of companies from across the world. Paul Nunes, executive research fellow at the Accenture Institute for High Performance, believes businesses not planning and acting now will miss the boat—as so many did when it came to China. For those companies committed to capturing the next major growth opportunity, the time to act is now.

Table of

Contents

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The Multi-Polar World

Accenture defines the multi-polar world as an emerging global order characterized by disparate centers of economic power and activity. In contrast, the old global economic model was characterized by a concentration of economic power and activity in the developed world. In the first phases of globalization, economic activity began to spread more widely, but the developed world continued to operate the economic levers. It is now clear that economic power and activity are more evenly spread across the world, with multiple influential centers: Hence, it is a multi-polar world. Newly influential centers include Brazil, Russia, India, China and increasingly, we would argue, Africa.

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This report investigates the potential for growth in Africa based on an analysis of five key dimensions: consumers, resources, talent, capital and innovation. Good performance in these dimensions is essential for a country to be economically successful. Therefore, our underlying assumption is that positive change therein leads to direct or indirect improvement in GDP (see Figure 2), and thus supports overall growth.

GDP is a measure of a country's overall economic output and is defined by the following formula:

GDP = Private Consumption + Government Spending + Gross Investment + Net Exports

For each dimension, we have identified and investigated key factors to assess how well positioned Africa is to compete and grow in a multi-polar world. For example, in the consumer dimension, growing populations, increasing incomes and rising aspirations will drive increased private consumption by local consumers, as well as capital investment from

companies to meet the needs of these consumers. These improvements will have a direct positive impact on GDP (see Figure 2). A similar link can be drawn for the other four dimensions and will be explored in their respective sections.

The five growth dimensionsConsumersConsumers are individuals or businesses that use goods and services generated within an economy.

ResourcesResources are natural sources of wealth, such as timber, fresh water or mineral deposits.

TalentTalent comprises the skills and knowledge embodied in the labor force, and which produce economic value in a country.

CapitalCapital refers to the financial flows into and out a country, as well as the characteristics of the financial institutions based in the country.

InnovationInnovation is a new way of doing something. It may refer to incremental and emergent or radical and revolutionary changes in thinking, products, processes, technology and organizations.

We assess each dimension using a range of primary and secondary data variables. We will also attempt to highlight the development challenges that have plagued Africa in the past, as well as the key growth drivers in each dimension, using a combination of published research and anecdotal cases.

MethodologyFigure 2: Impact on GDP

Five growth dimensions

3. Talent

1. Consumers

2. Resources

4. Capital

5. Innovation

Governmentspending

Netexports

Grossinvestment

Medium impact Low impact

GDP elements

Private consumption

High impact

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For many companies, emerging markets represent an opportunity for growth—an opportunity that is all too rare in the saturated consumer markets of the developed world. Accordingly, companies are increasingly involved in evaluating how they can establish a profitable presence in some of these emerging markets.

Until very recently, any conversation about emerging players in the global economy was dominated by talk of India and China, but there is another global growth story that the world is starting to notice.

Africa and its rapidly urbanizing population of more than 1 billion have worked their way into the global dialogue on economic opportunity.

The media has been flooded with commentary of Africa’s phenomenal growth over the last decade and its growing status as an emerging market. There is an increasing belief that the continent is in the middle of an economic resurgence, and that Africa is becoming the next China or India.11

Introduction

Figure 3: Africa map

AlgeriaLibya Egypt

SudanChad

Morocco

MaliMauritania

Western Sahara

Tunisia

Niger

Nigeria Ethiopia

South Africa

NamibiaBotswana

ZambiaAngola

KenyaSomaliaUganda

Dem. Rep. of Congo

RwandaBurundi

Mozambique

Gabon

Cameroon

Congo

CentralAfrican Republic

Tanzania

Zimbabwe

Equatorial Guinea

Burkina Faso

Togo BeninGhana

Ivory Coast

LiberiaSierra Leone

Guinea

SenegalThe GambiaGuinea Bissau

Africa is becoming the new Asia. Africa remains at the very frontier of emerging markets.Newsweek Feb 2010

Not investing in Africa is like missing out on Japan and Germany in the 1950s, Southeast Asia in the 1980s and emerging markets in the 1990s.Reuters Jan 2010

Africa has a yet-to-be-tapped investment, trade and market potential.Bloomberg March 2010

This story is not about the Africa you think you know. Another Africa is rising, an Africa that works!The Times Jan 2010

Economic recovery and growth is coming to Africa faster than many had expected.The Economist March 2010

Africa no longer needs to be left behind. Africa is the potential pole of growth. Business Day April 2010

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Despite the recent upward trend, Africa remains a continent where people suffer severe poverty, where corruption is rife, and where the cost and difficulty of doing business are extremely high. In the traditional view, it is a continent that would stagnate economically without significant financial aid.

These large-scale challenges have raised questions as to whether Africa is able to live up to its promise or if the recent hype is just another false dawn.

Accenture believes that Africa’s recent growth will be sustainable, and that the continent is potentially set for even greater growth over the next decade. Edward Miguel, professor at the University of California, writes: “The turnaround has been pretty stunning, and there's something deeper going on than just a surge in oil and commodity prices."12

Africa is doing better than it has in decades. It has seen a particularly sharp increase in its economic

performance, with its gross domestic product (GDP) growing by an average of 6 percent between 2002 and 2008, making it the second-fastest growing region in the world, just behind Asia. Already 13 African countries have a higher per capita GDP than China, and 22 are higher than India.13

According to United Nations Economic Commission for Africa (UNECA) statistics, East Africa appears to have realized the strongest growth (6.6 percent), followed by West Africa (6.4 percent), Southern Africa (6.3 percent), North Africa (6.1 percent) and Central Africa (5.4 percent).14 More surprising, it is not only the resource-rich countries that are experiencing this growth—many African countries that do not boast oil or mineral wealth are growing as well.

As Muhtar Kent, CEO of Coca-Cola, says: “Africa is really going to blossom in the next decade”15

Clearly, Africa is becoming the next frontier for growth. This report will examine changes within the five key

dimensions we have described above to help explain how Africa will unlock its enormous and unexploited growth potential.

Figure 4: GDP growth (1984-2012)

0.00%

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AfricaWorldDeveloping Asia

2012E200820041999199419891984

Source: World Bank Indicators (2008-2009)

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An increase in consumer activity leads to growth in GDP by boosting private consumption and private investment. For example, growing populations, increasing incomes and rising aspirations will drive increased private consumption and spending from local consumers as well as capital investment from companies to meet the growing needs of these consumers. The consumer dimension forms a critical part of an economy’s growth, and in Africa consumer spending accounted for more than 60 percent of GDP in 2008.

However, Africa still faces significant challenges to unlock its consumer potential. For instance, more than half of its population still lives under the poverty line. This has given rise to the large informal market, which ranges from 30 percent of the total market in South Africa, the continent’s largest economy, to almost 60 percent in Nigeria, Tanzania and Zimbabwe. This market is unbanked and has no source of formal income. Due to the unstructured nature of this market, its participants’ lack of disposable income, and the severe infrastructure and linguistic challenges it presents, many global companies have been unable to penetrate it.

Nevertheless, Africa is becoming an important consumer market and an attractive target for companies looking to expand. And while Africa has historically been seen as a supplier of resources, it is increasingly viewed as a source of demand.

Significant positive changes are driving this new growth, among them a rapidly growing and urbanizing population. This growing population is driving higher levels of spending. At the same time, the population is getting richer as a middle class emerges (see Figure 5 for a snapshot illustrating the relative prosperity of the various parts of Africa).

As the second-largest populous continent on the planet, Africa has started to enjoy impressive growth in both consumer and business spending.

Dimension 1: Consumers

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Figure 5: Snapshot of gross national income (GNI per capita) by countrySnapshot of gross national income (GNI per capita) by country

Low ($0 - $400)

Medium ($400 – $1,000)

High (Above $1,000)

Data not available or 0

Country Figure Rank

Seychelles $7,837 1

Libya $5,488 2

Mauritius $4,409 3

Botswana $4,143 4

Gabon $4,040 5

Equatorial Guinea $3,776 6

South Africa $3,604 7

Tunisia $2,424 8

Namibia $2,284 9

Algeria $2,159 10

Gross national income per capita is the dollar value of a country’s final income in a year divided by its population. It reflects the average income of a country’s citizens in a given year. On average a citizen in Africa earned US$819 per year between 2000 and 2006.

Source: World Bank, Africa Development Indicators (2008-2009)

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Africa will attract a flood of investment to meet the needs of a continent likely to be home to one in five of the world’s people by 205016.

ChallengesHowever, this projected growth will encounter some challenges, chief among them poverty and myriad cultural differences across the continent.

Irregular and informal income streamsAlthough Africa is making great strides to fight poverty, it is estimated that almost 50 percent of African consumers live below the poverty line. These consumers often operate in the informal sector, which is characterized by irregular cash flows and little access to credit. Members of the informal sector tend to live in rural villages or urban slums, making traditional methods of selling less

effective.17 Companies that sell higher-end products have found it particularly difficult to target African low-income consumers, especially as they lack access to credit.

Vast cultural differencesAfrica is not one single market. It consists of many different ethnic tribes and is the most multilingual continent in the world. It is estimated that more than 1,000 different languages, classified into six major linguistic families, are spoken.18

These vast cultural differences, which also include tastes, preferences, religions, income levels, and so on, translate into highly differentiated marketplaces across the continent. Companies wishing to expand into Africa must be ready to adapt their marketing and distribution strategies accordingly.

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Nigeria is one of the top 10 fastest-growing drinks markets in the world. Diageo, the international drinks company, sells more Guinness in Nigeria than in any other country apart from the United Kingdom.

In fact, Nigeria drinks more Guinness than Ireland, and observers think it is only a matter of time before it overtakes the UK as the world's biggest consumer.

According to The Sunday Times, “Sales in Nigeria, grew by 13 percent.” 21 Market research confirms this trend, with beer volume sales expected to grow by almost 50 percent to 2.34 billion liters. And with dollar sales projected to soar by 171.3 percent to $7.2 billion between 2009 and 2014, it is easy to see why international drinks companies are hustling for a piece of this evidently lucrative market.22

Case study: Diageo’s success with Guinness in Nigeria

Drivers of growthAt the same time, several key drivers are shifting Africa from a source of supply to a source of demand, such as the sheer size and growth of its population, Africans’ increasing spending levels and sophistication, and the reduction of trade barriers.

Large and growing consumer marketAfrica has been experiencing a population explosion. The population has grown from 221 million in 1950 to more than 955 million in 2009, making it the second-most populous continent in the world and one of the largest consumer markets. It is estimated that Nigeria, Ethiopia, the Democratic Republic of the Congo and South

Africa account for almost half of the total African population and are seeing the continent’s greatest population growth.19 Nigeria, Africa’s most populous country with 150 million residents, will become the sixth-most populous country in the world by 2050, with 244 million people.

African population growth is expected to remain very strong—the United Nations forecasts that Africa will contain 2 billion people by 2050, surpassing India and China.20

Figure 6: African consumer spending (US$)

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$761bn

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Shoprite Group is now the largest retailer in Africa, with 698 outlets in South Africa, and a further 129 in 15 other African countries, including Angola, Mozambique, Tanzania and Nigeria. It has set out to dominate the African continent in the same way that Wal-Mart dominates the United States, and Tesco the United Kingdom.24

James "Whitey" Basson, Shoprite’s managing director, is the pioneer of the group’s expansion into West Africa. He is convinced that Nigeria, the second-largest domestic market in Africa after South Africa, holds enormous promise.25

Shoprite is planning 70 new shops in Nigeria within the next decade, at least 20 of them in Lagos.26

Most recently, Shoprite announced that it will start trading in the Democratic Republic of the Congo by the end of 2010 or early 2011 after investing R350 to R400 million (approximately US$46-$53 million) in the country.27

With its first-mover advantage in several African consumer markets, Shoprite has proved beyond all doubt that it can successfully operate in Africa.

Case study: Shoprite’s African expansion

Increasing spending power coupled with big aspirationsAs is well known, China looks to Africa for critical resources. Less well known, perhaps, is that China also sees the growing (in both size and income) African consumer market as an attractive proposition.23

African consumer expenditures increased by more than 100 percent from 2000 to 2007, from US$376 billion to US$761 billion, showing a compound annual growth rate of almost 13 percent. Consumer spending contributed to more than 60 percent of Africa’s GDP in 2007. This surge in consumer spending has also led to increased business-to-business trade. One example of this is SAP, a large application provider, which has more than 200 business consumers across the continent, including mining houses, governments, banks and retailers. Source: World Bank Indicators (2008-2009)

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Historically, downtown Nairobi was characterized by images of famine and war that often feature in coverage of Africa. But there is another Kenya. It can be found in shopping malls and multiscreen cinemas, and in high-class restaurants and nightclubs. It can also be found amongst Kenyans browsing the Web on wireless laptops in coffee shops, looking for new houses at property trade fairs, and keeping tabs on their investments in the stock market reports published in the national business daily.

Deregulation and other growth stimulants have turned Nairobi into a booming economic center that’s now home to multinational businesses, towering office buildings and a growing middle class.

Kenya’s middle class is estimated at 1.5 million, mostly located in the urban areas. This middle class has played a crucial role in the growth of the economy.32

Case study: The emerging middle class in Kenya

Africa consists of a large, aspiring consumer base that is richer than India’s and is comparable with some of the emerging countries in Asia on the basis of gross national income per capita. Botswana, Mauritius, Seychelles, Lesotho, Cape Verde and Gabon have seen remarkable growth, more than tripling their income per capita since 1960.28 Every day, these consumers need to eat. They need clean water. They need shelter, clothing, and medicine. They want cell phones, bicycles, computers, automobiles and education for their children.29 For all these reasons, and despite the challenges, Africa represents a compelling opportunity.

Emerging middle classGraham Stock, from JP Morgan’s Emerging Markets division, states that there is still a large pocket of untapped growth in Africa’s consumer market: “There is considerable room for growth in the African consumer market, and this growth is likely to be powerful."30

This growth is most likely to come from Africa’s rapidly emerging middle class as it becomes richer and more powerful. It is estimated that Africa’s middle class consists of more than 350 million consumers (35 percent of the population) and this number is increasing.31

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Increasing consumer sophistication As Africa’s consumers move into the middle and upper classes, their desire for better products and services grows. The burgeoning middle class is driving up the demand for high-end products and services like cell phones, bank accounts, luxury cars and branded clothing. In fact, in Africa's 10 largest economies, the services industry now makes up more than 40 percent of GDP,33 a significant increase from 30 percent in 1980. This development signifies a transition from a primarily agricultural economy to a more sophisticated services and manufacturing economy.

Brand awareness in Africa is increasing considerably and all the big international brands are well known and sought after. Companies like Wrangler, Nu Metro, Nando’s, Shoprite, Game and many others have seen the opportunity at the base of the pyramid and have adapted their products and business models to reach Africa’s aspiring consumers. In the process, they are causing significant changes in both the local formal and informal consumer markets.

Trade barriers are diminishingIn the past, trade restrictions have fragmented African consumer markets. The development of several bilateral trade agreements and eight different regional economic communities in Africa—for example, the Economic Community for West African States (ECOWAS) and the East African Community (EAC)—is allowing companies to transact easily across borders, unlocking access to a massive pool of consumers. For example, a business positioned in an East African market like Kenya will now have access to significantly more potential consumers in the EAC.34

Increasing urbanizationAfrica has the world’s highest rate of urbanization. In 1950, only 15 percent of the population lived in cities. By 1990, this percentage had increased to 28 percent and, in 2010, now stands at 41 percent. It is expected that by 2025, 50 percent of Africa’s population will be urbanized.35 The major cities like Johannesburg (South Africa), Lagos (Nigeria), Nairobi (Kenya) and Dakar (Senegal) are attracting the bulk of migrants.

Countries like Burundi, Rwanda, Malawi, Ethiopia and Burkina Faso are still overwhelmingly rural, whereas in Djibouti and Gabon more than 80 percent of the country’s population lives in urban areas. Between 1995 and 2005, some countries witnessed particularly fast urban growth. For example, Nigeria, the most populous country in Sub-Saharan Africa, has seen the proportion of people living in urban areas grow from 44 percent to 52 percent in 10 years.36

“We are in the midst of a retail revolution driven by rapid urbanization... We see over 150 million people moving to urban Africa in the next 10 years," said Chu'di Ejekam, head of real estate for Actis in West Africa.37

Due to this exponential growth in the size of the consumer market and rapid urbanization, Africa is set to attract a flood of investment as foreign governments and companies scramble to meet the needs of a continent likely to be home to one in five of the world’s people by 2050.38

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Natural resources include such things as timber, fresh water and mineral deposits, whose economic value contributes to a country’s GDP. They are important to the global economy for two key reasons: Resources like oil and gas are sources of energy and nonfuel minerals are essential components in a broad range of consumer goods, military equipment, infrastructure and agricultural materials. The endowment of and access to natural resources thus has a direct link to the level of a nation’s output and GDP.

Africa’s rich resources have also been the cause of some of its greatest challenges. They have all too often proved to be a source of conflict, and poor systems of governance have also encouraged decades of mismanagement and downright theft. In addition, until recently little of the income from Africa’s resources has gone to building infrastructure.

There are, however, signs that the current competition for Africa’s resources is changing all that. Africa’s store of energy resources (see Figure 7 for a snapshot of oil reserves by country) and minerals gives its trading partners a stake in its prosperity. Trading partners like China, the United States and Europe are investing heavily in infrastructure in exchange for mining concessions. African resources companies are also beginning to move up the value chain, thus generating more income. In addition, renewable energy has increasing promise as a source of income for Africa. And as emerging markets like India and China continue to grow, Africa’s abundant resources will help meet their need for minerals and, most importantly, energy.

Long recognized for its valuable resources, Africa has hosted most of the world’s resource companies. As the scarcity of global resources increases, those resources in Africa will only become more valuable.

Dimension 2: Resources

Figure 7: Snapshot of proven oil reserves (billion barrels) by country

Low (0.1 – 1 bn barrels)

Medium (1 – 10 bn barrels)

High (Above 10 bn barrels)

Data not available or 0

ChallengesAfrica’s abundant resources—and the business of extracting them—have been held back by two main challenges: poor governance and a lack of infrastructure.

Poor governanceMany of Africa’s leading natural resource economies have experienced decades of conflict, neglect and mismanagement. As a result, some of these resource-rich economies have consistently appeared at the bottom of Transparency International’s Corruption Perception Index, namely, Angola (147th out of 179 in 2007), Congo-Brazzaville (153rd), and Equatorial Guinea and the Democratic Republic of the Congo (tied for 168th).

Against this backdrop, questionable and often unregulated investments in resources by overseas interests remains a concern. These overseas interests have the capacity to undermine Africa’s long-standing efforts to improve governance and transparency.39 In addition, traditional development partners are concerned that the unfettered exploitation of Africa’s resources is unsustainable and constitutes an environmental threat. African regulations are generally poorly implemented and provide, therefore, minimal protection.40

One example of where governance policies have been unable to prevent environmental damage is in Central Africa. It contains the largest tropical rainforest on the continent, a resource that has been severely deforested in the last few years.41

Country Figure Rank

Libya 43.7 1

Nigeria 36.2 2

Angola 13.5 3

Algeria 12.2 4

Sudan 6.7 5

Egypt 4.3 6

Gabon 3.2 7

Republic of Congo 1.9 8

Equatorial Guinea 1.7 9

Chad 0.9 10

In total, Africa has proven oil reserves of more than 125 billion barrels, representing more than 10 percent of the world’s reserves. Libya and Nigeria account for almost 65 percent of this total.

Source: BP Statistical Review of World Energy (2007-2008).

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Table 1: Africa’s infrastructure deficit

Lack of infrastructureAfrica lags behind other developing regions on most standard indicators of infrastructural development (see Table 1). Its greatest infrastructure challenges exist in the power and transportation sectors. Power-generation capacity and household access to power in Africa are approximately half the levels observed in South Asia, and about a third of the levels observed in East Asia. Unreliable power supply leads to losses in industrial production valued at 6 percent of company turnover. The cost of redressing Africa’s infrastructure deficit is estimated at $38 billion of investment per year, and a further $37 billion per year in operations and maintenance. Africa is currently financing almost half of this $75 billion annual investment through its own taxpayers.42

Furthermore, Africa’s limited infrastructure services tend to be much costlier than those in other regions. For example, road freight costs in Africa are two to four times as high per kilometer as those in the United States, and travel times along key export corridors are two to three times as long as those in Asia.43 Low population densities in some countries like Gabon or Botswana translate into high per-capita costs for road networks. Countries with high population densities, like Rwanda, The Gambia and Nigeria, tend to have more developed road networks.

Africa Other developing regions

Paved road density (kilometer per 100 square kilometers) 31 134

Total road density (kilometer per 100 square kilometers) 137 211

Main-line density (connections per 1,000 population) 10 78

Mobile density (connections per 1,000 population) 55 76

Internet density (connections per 1,000 population) 2 3

Generation capacity (megawatts per million population) 37 326

Electricity coverage (per percentage of population) 16 41

Improved water (per percentage of population) 60 72

Improved sanitation (per percentage of population) 34 51

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Source: Vivien Foster and Cecilia Briceño-Garmendia, Africa’s Infrastructure: a time for transformation (World Bank, 2010)

Drivers of growthWhile these challenges are formidable, several growth drivers also come into play. Africa boasts some of the largest reserves of many important resources and commodities, such as oil, iron, copper, gold, platinum, wood and agricultural products (for example, coffee and sugar). With sunny deserts, windy plains and flowing rivers, the continent is also extremely well endowed with the potential to produce large amounts of energy from renewable resources. Sustainable resources will only become more attractive as global action on climate change and sustainable development proceeds.

In the past, many countries preferred to obtain some of these products from sources that were cheaper and more politically stable. Now, however, the scale of global demand means that Africa can no longer be ignored as a source.

Increasing global demand for Africa’s resourcesDeveloped countries are large consumers, but small producers, of energy and commodity resources. It is estimated that the developed nations (mainly from the Organization for Economic Cooperation and Development) consume more than 50 percent of the world’s oil and gas, but produce only 25 percent.44 This has resulted in huge demands on developing countries, many of them in Africa, where these resources are abundant.

Africa possesses the world’s third-largest oil reserves. According to the 2009 BP Statistical Energy Survey, Africa had proven oil reserves of 125.6 billion barrels at the end of 2008, or 10 percent of the world's reserves, and, in 2008, the region produced an average of 10.285 thousand barrels of crude oil per day. It is noteworthy that Africa boasts the fastest growth rate in identified oil reserves, which doubled in the past two decades.45

The US Department of Energy has already forecast that the United States will import more than 770 million barrels of African oil annually by the year 2020.46 While the United States is still the largest importer of oil from Africa, China has become an important player as well, emerging as Africa’s second-largest trading partner. The export of natural resources from Africa to China increased from $3 billion in 2001 to about $22 billion in 2006, according to the World Bank. India is also looking to Africa for resources to fuel its vigorous growth: Trade between India and Africa has increased from $4.7 billion to more than $17 billion in 2007.

Table 2: Oil production (millions of tons)

1996 2006 2007 Percent 2007 world total

Percent change 2006-2007

North America 660 646 643 17 -0.5

South America 313 346 333 9 -3.6

Europe 680 848 861 22 1.5

Middle East 1,001 1,222 1,202 31 -1.8

Africa 356 474 489 13 3.2

Asia 367 380 379 10 0.3

World Total 3,377 3,914 3,906 -0.2

Source: BP Statistical Review of World Energy (2007-2008)

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Only four African countries are full members of the Organization of Petroleum Exporting Countries (OPEC): Algeria, Angola, Libya and Nigeria. Not coincidentally, they are the leading oil producers in Africa48 and together with Egypt account for 85 percent of the continent’s oil production. In addition, it is estimated that Africa holds between 19 percent (1.3 million tons) and 27 percent (4.4 million tons) of the world’s uranium reserves, which are critical to nuclear energy.49

Africa is also abundant in nonfuel mineral resources. Minerals are an essential component in the production of a broad range of consumer goods, military equipment, infrastructure and agricultural materials, and are also used for various applications in transport, communication and energy. It is estimated that Africa holds about 30 percent of the world’s minerals with more than 40 percent of the world’s gold, 60 percent of its cobalt, and 90 percent of its platinum.50

Figure 8: Africa mineral reserves

Gold Cobalt Platinum0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Africa Rest of world

Source: IPIS (2009)

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While oil accounts for 80 percent of Africa’s total exports to China, other important African export commodities include iron ore and timber, followed by manganese, cobalt, copper and chromium.

African exports to China have experienced a particularly swift advance, from less than $1 billion in 1992 to more than $54 billion in 2008.

The International Energy Agency now projects that China's net oil imports from Africa will soar from 3.5 million barrels per day

in 2006 to more than 13 million barrels per day by 2030. China already receives 60 percent of Sudan's oil exports. While the United States today is still the top importer of African oil, China is quickly closing the gap and has already sped past the United Kingdom and France to emerge as Africa's second-largest trading partner. China's industrial growth has made that nation the second-largest consumer of oil worldwide. There's no question that China is winning more and more of Africa’s oil as each month passes.47

Case study: African oil and China

South Africa seems to be the crown jewel, since it sits on one of the world’s richest mineral beds. Among other minerals, South Africa is the leading producer of platinum (80 percent of total production) and manganese (75 percent of world reserves). It is also the world’s second-largest gold producer (it was overtaken by Australia in 2007). The Democratic Republic of the Congo is the leading cobalt producer (36 percent), possessing half of the world’s known reserves, and is also a significant diamond producer. The Democratic Republic of the Congo, South Africa and Botswana together account for more than half of global diamond-mining output and 60 percent of known deposits.51

In sum, Africa’s abundance of natural resources strongly reinforces its strategic importance.

Increasing renewable sourcesAfrica is well endowed with a range of renewable resources, from wind and sun to rivers. As global efforts to combat climate change continue, Africa could increasingly become part of the solution.

For example, Africa has 95 percent of the world's best winter sunshine area, receiving more than 6.5 kilowatt hour/m2.d52 (Germany receives less than 1.0 kilowatt hour/m2.d). Therefore, Africa could potentially generate 95 percent of the world's solar thermal and solar electrical energy.53 It will be imperative to be able to monetize these renewable resources, both from the standpoint of their carbon value and their contribution to local development. Africa has an unprecedented opportunity to choose a cleaner development pathway that would maximize the use of low-carbon energy alternatives to meet the needs of future generations more efficiently and affordably.

The continuing high costs of renewable-energy technologies and the challenges they present, from intermittency to distance from demand, have hindered their growth, but global adoption is changing attitudes. As reported by

The Guardian, “Until now, only North African countries such as Morocco and Egypt have harnessed wind power for commercial purposes on any real scale on the continent. But projects are beginning to bloom south of the Sahara as governments realize that harnessing the vast wind potential can efficiently meet a surging demand for electricity and end blackouts.”54 Kenya is now one of the continent's greenest countries, with nearly three-quarters of its power coming from hydroelectric and geothermal sources. A consortium of Dutch and Kenyan investors has started construction of Africa's largest wind farm project. Valued at $760 million, the project aims to commission more than 350 wind turbines in the desert near Lake Turkana in Northern Kenya. When completed in 2012, the wind farm is expected to boost the power supply in Kenya by almost 30 percent.

The availability of finance to support these investments will continue to be a key driver for their development. As a new assessment published by the United Nations Environment Program (UNEP) shows, Africa has more than 120 carbon market projects up and running or in the pipeline. However, the assessment concludes, “in comparison to the rest of the world, the Continent is still lagging behind, with the potential for clean and green energy largely under-exploited.”55

Frost & Sullivan energy analyst Sipha Ndawonde concurs: “Green energy markets in Sub-Saharan Africa are still in their infancy and require significant public and private financing support and rapid technology diffusion. However, changing government perception in favor of green energy is adding impetus to market development. Increasingly, green energy projects are viewed as an effective tool to increase the levels of energy security in both off-grid and grid-connected applications.”56

Companies that deliver sustainability by creating value for their shareholders and society will continue to find success in this environment. For example, in Africa, brewing giant SAB Miller PLC is working to integrate traditional crops into its products and teach local farmers sustainable

farming methods. It, in turn, benefits from increased local consumption by a consumer base it has helped become more prosperous.

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The Desertec Industrial Initiative (DII) is designed to turn the Sahara's nearly endless sunlight into carbon-free electricity. It was launched in Germany in July 2009 by 12 European companies (including Germany's Deutsche Bank, Siemens, RWE and E.ON; Spain's Abengoa Solar and Algeria's Cevital).57

The $550 billion initiative has gained a great deal of momentum and incorporates countries from the MENA region (Middle East North Africa). Five more companies from Morocco, Tunisia, Spain, France and Italy have now joined the original consortium.58

The DII uses carefully positioned mirrors in the Sahara desert to boil water and activate turbines. According to the Desertec Foundation, the technology is based on a concentrated solar power plant. This works just like a coal steam power plant except that instead of coal, the power plant operates solely on concentrated solar power. The energy produced is transmitted to Europe and Africa by a super grid of high-voltage direct power cables.

“Energy experts have calculated that Desertec could meet at least 15 percent of Europe's needs,

and be up and running by 2019. By 2050, they estimate the contribution could be between 20-25 percent,”59 says The Independent.

Case study: Desertec

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Increasing local demand for resourcesAs Africa develops and its industries mature, its own need for resources is growing. It is particularly hungry for energy resources such as oil and gas.

Africa consumed more than 138 million tons of oil during 2007. This is up from 130 million tons in 2006 and represents almost 30 percent of its total oil production.60 Gas consumption was no different: In 2007, Africa consumed 83 billion cubic meters, up from 77 billion cubic meters in 2006.61

One example of increasing local demand can be found in Nigeria. It has the seventh-largest proven gas reserves in the world, but has primarily been focused on the export market. This is set to change, with the recently developed “Gas Master Plan.” This plan proposes a framework for Nigeria to maximize value from its gas resources by leveraging domestic demand.

Africa will start to increasingly consume and utilize more of its own resources as the continent continues on its growth path.

Resources companies are moving up the value chainAn interesting development in recent years is the way in which Africa’s resources companies have moved up the value chain by developing a strong focus on manufacturing. Historically, resources were extracted and exported in their raw state, but recent statistics indicate an increasing trend toward refining resources. For example, some diamonds are now being cut and polished in Africa, and various products are manufactured. Many African countries are now exporting leather instead of just hides, textiles in place of cotton, or paper, plywood or furniture instead of logs.

China is keen that its presence in Africa should be more than a resources grab, and sees manufacturing as a missing element in the continent's development and growth.

“The Chinese government has shown ‘strong interest’ in setting up factories in Africa, helping the continent develop a manufacturing base and boost its economy. While most attention on China's investment in Africa has focused on its large-scale pursuit of natural resources, experts say a growing number of the country's entrepreneurs are experimenting with production", reports the Mail & Guardian Online.62

African Business reports that China is investing in Africa's manufacturing sector by relocating factory work such as toy- and shoe-making to special economic zones in Zambia, Nigeria, Mauritius and Ethiopia.63

Many modern Asian economies began by mass-producing consumer goods and now outsource this manufacturing to other countries. For example, Japan moved its manufacturing to Southeast Asia while Hong Kong, Singapore, Taiwan and South Korea moved theirs to China. “With China's push for industrial restructuring at home, Chinese companies have been saying there's an urgent need

to move up the value chain. That might leave a space for Africa,” says the Mail & Guardian Online.64

Case study: China establishing a manufacturing presence in Africa

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In order to satisfy its energy demands, China is investing heavily in the oil-rich country of Angola.

Beijing secured a major stake in future oil production in 2004 with a $2 billion package of loans and aid. Chinese companies will build railroads, schools, roads, hospitals, bridges and offices; lay a fiber-optic network; and train Angolan telecommunications workers in exchange for mining concessions.

Using natural resources to pay for infrastructure in this way is now known in Africa as the “Angola Mode.”66

Case study: Chinese infrastructure investment— the “Angola Mode”

Increased investment in infrastructureThere is an undeniable link between the development of Africa’s infrastructure and investment by global players in the extraction of Africa’s resources.

The rise of the Chinese and Indian economies has fueled global demand for petroleum and other commodities. Africa is richly endowed with these resources, and this has resulted in the continent receiving unprecedented investment flows to improve its infrastructure. Investment targets include hydropower, roads, railways, hospitals and schools.

According to the World Bank, China is now the largest contributor to infrastructure projects in Africa. It estimates that China's funding for roads, railways and power projects peaked at $7 billion in 2006, up from $1 billion in 2003. The bulk of those commitments were to Nigeria, Angola, Sudan and Ethiopia, all of which are rich in oil or nonfuel natural resources.65 Although this infrastructure development is primarily due to China’s interest in securing key resources, the same infrastructure will unlock complementary industrial capacity.

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By 2005, Chinese companies had been contracted for 722 turnkey infrastructure projects across Africa. By mid-2006, total China Export Import Bank concessional and non-concessional loans for infrastructural development in Africa, excluding projects in the petroleum and mining sectors, reached $12.5 billion.

This financing is broken down into the following sectors: electricity (34 percent), transport (33 percent), information and communications technology (17 percent), water (2 percent) and general (14 percent) (see Figure 9).67

Recently, a lot of infrastructure investment has been directed at Kenya as China and Japan battle for access to East Africa’s growing market. Kenya, the gateway to landlocked neighbors such as Uganda, Rwanda, Burundi and Ethiopia, is reaping the benefits.

Figure 9: Chinese infrastructure investment in Africa (2007)

Water

ICT

General

Transport

Electricity

34%

33%

14%

17%

2%

Source: Isaac Idun-Arkhurst, "The Impact of the Chinese presence in Africa"

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35

36

6

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In Accenture’s view, the growth potential of a country can be gauged not only by its material assets and resources but also its talent and human capital. It is talent that acts as a catalyst for economic growth and development. GDP growth is thus in part fueled by positive changes in the creation of talent within a country.

However, many multinationals list talent as their greatest challenge when it comes to doing business in Africa.68 Difficulties include low literacy levels, lack of specific or job-related skills, and the large-scale emigration of skilled workers. The good news is that many aspects of the talent situation in Africa are improving. For instance, the rate of labor force participation has increased by 17 percent since 200069 and Africans are enrolling in tertiary institutions in great numbers. Increased literacy levels are the foundation of these changes (see Figure 10 for a snapshot of literacy levels across Africa). Despite these

advances, African workers are cheap compared to their counterparts in Central Asia, Latin America and Eastern Europe. An additional positive aspect is that the growth in certain African countries is actually reversing the brain drain. Africa could indeed be on the brink of a talent revolution in which key skills are inexpensive and readily available.

Malcolm Gillis, former president of Rice University, puts it well: “Today, more than ever before in human history, the wealth—or poverty—of nations depends on the quality of higher education. Those with a larger repertoire of skills and a greater capacity for learning can look forward to lifetimes of unprecedented economic fulfillment. But in the coming decades the poorly educated face little better than the dreary prospects of lives of quiet desperation."70

The market for talent in Africa is maturing quickly. Rapid growth in the rate of labor participation and tertiary enrollments are offsetting low literacy rates and the large-scale emigration of skilled workers.

Dimension 3: Talent

Figure 10: Literacy levels as a percentage of total population

Low (<60%)

Medium (60% - 75%)

High (>75%)

No Data

Literacy Levels as a percentage of total population

ChallengesAfrica has long trailed the developed world in terms of economic growth, in large part because it lacks the trained talent required to drive such growth. In terms of talent, Africa faces three major challenges: low literacy levels, a lack of skills, and a long-term “brain drain.”

Historically low literacy levelsWithout basic literacy and education, people are not eligible for skilled jobs and cannot provide value to the global economy. Although large improvements are being made on this front, Africa still has one of the world’s lowest literacy rates.

Figure 11: Adult literacy rates

0

10

20

30

40

50

60

70

80

90

Africa North America

South America

Asia Europe

100%

1985-1994 1995-2004 2005-2008

Literacy rates refer to the proportion of a nation’s inhabitants that are able to read and write. Literacy is a prerequisite for participating in skilled jobs and the economy in general.

Source: UNESCO Institute for Statistics

Source: UNESCO Institute for Statistics

Country Figure Rank

Zimbabwe 90.7% 1

South Africa 86.4% 2

Equatorial Guinea 85.7% 3

Kenya 85.1% 4

Lesotho 84.8% 5

Namibia 84.0% 6

Republic of Congo 83.8% 7

Libya 82.6% 8

Swaziland 81.6% 9

Botswana 81.2% 10

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0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2005 2006 2007 2008 2009 2010

Sub-Saharan Africa Latin AmericaNorth Africa Eastern Europe Asia

Figure 12: Net emigration (per thousand people)

Source: U.S. Census Bureau, International data base

Lack of income-earning skillsFormal education constitutes only a part of a person’s potential ability to earn an income. Vocational skills are arguably the most important element in a person’s actual capability to complete job-related tasks. Unfortunately, Africans have been slow to gain many of these skills.

One of the major challenges Africa faces is the availability of experienced managers. Managerial skills are critical for African business to function efficiently. Many companies that expand into Africa hire expatriate managers who are responsible for training a local incumbent. As more and more companies expand into Africa and train local people, the shortage of indigenous managerial skill will gradually ease.

The African brain drainThe brain drain, or large-scale emigration of skilled individuals out of their country of origin, is a perennial problem for developing countries. From an African perspective, the brain drain is particularly concerning: Without its most educated people, Africa will find it hard to achieve the growth it seeks.

Many developing regions share this challenge. However, when one looks at the net emigration figures, it is clear that Africa, in particular Sub-Saharan Africa, fares better than other regions. In fact, the number of Africans leaving Sub-Saharan Africa is notably less than the number of natives leaving Latin America, Asia and Eastern Europe.71

It was estimated by the United Nations Development Program that the brain drain costs Africa roughly $4 billion annually, as it must employ expatriate workers to perform tasks that its emigrants could have done.72 This inevitably places a large strain on developing countries.

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Key factors for growthHowever, there is also evidence to suggest that positive change is occurring at a rapid rate, including increasing labor participation, growing education and literacy levels, maturing skills, and, most interestingly, evidence of a “brain gain.”

Increasing labor force participation at low costThe cost of labor is a significant factor for investors to consider. The average worker in Africa, costing roughly US$135 per month, is less than half as expensive as the same worker in regions such as Central Asia, Eastern Europe, Latin America and the Caribbean.73 As a result, Africa is now being viewed as a low-cost destination for manufacturing, customer service, and many other labor-intensive jobs.

0

5

10

15

20

25

30

35

40

45%

2007 2008 2009 2010

The 2010 Talent Shortage Survey Results, published by Manpower Incorporated, suggest that there has been a major reprieve from the talent shortage in South Africa’s labor market.

In 2007, the same survey revealed that 39 percent of the employers surveyed had difficulty filling skilled positions. This figure has dropped significantly to 16 percent in the 2010 survey results.

Case study: Employers finding it easier to fill skilled positions in South Africa

Figure 14: Labor force participation (millions)

Figure 13: Percentage of employers that had difficulty filling skilled positions

2000 20060

50

100

150

200

250

300

350

400

Sub-Saharan Africa North Africa

Source: African development indicators (2008-2009)

Source: Supply/Demand, 2010 Talent Shortage Survey Results, Manpower Inc. (2010)

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Figure 15: Compound annual growth in tertiary enrollments (1975-1995)

0%

2%

4%

6%

8%

10%

12%

14%

Sub-SaharanAfrica

Middle East andNorth Africa

High-Income Countries

Latin Americaand Pacific

Labor force participation has increased by a significant 17 percent since 2000,74 and is attributable to a number of factors, such as an increase in the number of women joining the labor market. This positive trend is set to continue as urbanization speeds up, industries mature and skilled resources return home.75

Of the employed African workforce, more than 36 percent76 are considered to be youths (under age 25), which means that the African labor force is highly sustainable. Indeed, while many developed regions of the world saw their rates of labor participation shrink between 2008 and 2009, North Africa and Sub-Saharan Africa experienced an increase of 0.4 and 0.2 percentage points respectively.77 In comparison, the European Union saw a retraction of 0.4 percentage points.

Growth in education and literacy levels“Education is the most powerful weapon which you can use to change the world.”—Nelson Mandela

Formal education in most African nations is a priority for both donor organizations and governments. Governments have realized that one of the major keys to economic growth is an educated and skilled workforce. Accordingly, they have introduced measures to increase the number of schools and tertiary institutions, and to improve access to them.

Likewise, the advent of distance-learning programs and institutions has given many African people access to world-class education. Distance learning is increasingly important as it can reach students in remote areas and address the higher education needs of adults.

Africa’s compound annual growth in tertiary students since 1975 is a significant 12 percent compared with Latin America’s 4 percent and the 3 percent of high-income countries over the same period. This means that there are almost nine times as many students currently enrolled in tertiary institutions as there were in 1975.

While recent developments in communication technology and IT have vastly improved the technical aspects of distance education, the economic viability of such education is still an issue in many countries because of costly and extensive infrastructure requirements.78

As a result, educational institutions are playing a much broader role across the continent. As Vartan Gregory, president of the Carnegie Corporation of New York, puts it: “With the fastest-growing rates of university enrollment in the world and research demonstrating higher education's positive impact on economic growth, poverty reduction, national health and governance, Africa's universities are making an increasingly critical contribution in helping to shape the discussion about the continent's future.”79

Tertiary enrollments in Africa more than tripled between 1991 and 2005, one of the highest regional growth rates in the world. Higher education has never been as important to the future of Africa as it is right now. While education cannot guarantee rapid economic development, sustained progress is impossible without it.80 Although Africa is building on a low base, its increase in tertiary enrollments paints a promising picture of the future.

Source: IBRD, Authors' calculations

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Every day in Africa, more than 3,000 children under age 5 die from malaria—a devastating statistic that illustrates why the continent urgently needs to increase the number of frontline health care workers. More than 85 percent of Kenya’s nurses are enrolled nurses, unable to obtain the advanced training needed for a registered nurse diploma that would enable them to combat the spread of diseases such as malaria, AIDS/HIV and tuberculosis. Although there are nearly 20,000 enrolled nurses waiting to upgrade to registered status, Kenya has the resources to train only 100 registered nurses a year using traditional classroom methods. At that rate, it would take literally hundreds of years to certify 20,000 enrolled nurses. To address this crisis, the African Medical and Research Foundation (AMREF) teamed with Accenture and the Kenya Nursing Council to develop a revolutionary e-learning program to enable Kenya to train and certify these 20,000 nurses in just five years.

Under the five-year program, Accenture is donating $2.9 million to AMREF to develop and implement an innovative e-learning program to address Kenya’s critical nursing shortage. The donation consists of a $1.7 million contribution by the Accenture Foundations, along with $1.2 million of in-kind services that include 14,500 hours of donated time from Accenture Learning BPO Services professionals. The funding from the Accenture Foundations is providing for the

program management, staffing and administrative needs of the program; PC infrastructure for the training centers; and orientation/training for the mentors who support the nurses during training.

AMREF is on schedule to achieve its goal of certifying nearly 20,000 registered nurses by 2011. Four modules consisting of 143 hours of training have been developed and deployed. The help desk and learning management system have been rolled out. More than 100 e-learning centers —many in the remotest areas of Kenya—have been established to deliver the e-learning centers training, and 27 nursing schools have also implemented the program.

“This program is not only going to drastically improve the health system in Kenya, it is also going to be replicated by other countries—and the positive impact on Africa’s health system will be enormous," says Peter Ngatia, director of learning systems for AMREF.

Case study: Kenyan nurses: e-learning

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Increased skills development There is no doubt that technical and vocational education and training are important for Africa’s development.81 As such, African countries are working toward improving the quality and skill levels of their labor forces. A major incentive has been their increasing recognition that superior technical and vocational skills are crucial to enhancing competitiveness and contributing to social inclusion, decent employment and poverty reduction.82

With the influx of former expatriates and foreign direct investment into Africa, its people are in a position to receive vocational training from some of the world’s most skilled individuals. For instance, TechnoServe, a United States-based, nongovernmental organization, recently called for small- and medium-sized food processing companies in Tanzania to submit applications for a technology and business skills transfer initiative with the world’s sixth-largest food

processor, General Mills.83 The program is part of General Mills’ corporate social responsibility efforts and is one of many examples of global companies transferring skills to Africa.

Generally, investing in knowledge and skills is seen by many governments as the cornerstone of developing an employable and globally competitive workforce. A skilled and knowledgeable workforce improves the investment climate because it creates an attractive economic environment.84

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In the past, vocational programs across Africa have suffered from a combination of under-financing, poor design and weak links to labor markets. Deep spending cuts in the region during the 1980s and 1990s further compromised quality in vocational education. However, there are signs of a renewed focus on vocational skills development.

Vocational education is undergoing major reform in many African countries, including Cameroon, Ethiopia and Rwanda, to name just three.

Four ministries in Cameroon have developed a sector-wide vocational training plan. Ethiopia has ensured that new curricula have been drawn up

and qualification systems have been restructured to match skills development with the needs of the labor market. And Rwanda has created a workforce development agency to coordinate and facilitate private sector involvement.85

In addition, Morocco has its own vocational education ministry and national office, which creates syllabuses adapted to trainees’ general education levels. Morocco's vocational schools have achieved good results, with more than half of graduates finding a job within nine months. The vocational system is expanding as the government seeks to foster the skills needed by new sectors such as vehicle manufacturing, aeronautics and agro-industry.86

In addition to this, there are are also signs that vocational education is reemerging as a priority in development assistance. Several countries, notably Germany and Japan, have been giving precedence to the sector when granting aid.

Case study: Vocational skills development

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Evidence of “brain gain” “Just as waves of expats returned to China and India in the 1990s to start businesses that in turn attracted more outside talent and capital, there are now signs that an entrepreneurial African diaspora will help transform the continent,” reported Newsweek International.87

Economists are analyzing the positive impacts of the skills flowback into Africa in what can be seen as a reversal of the brain drain. For one thing, when people leave their country of origin, many later return home after having learned valuable new skills.88 Likewise, large numbers of skilled workers return to their countries of origin after having received higher education.89 Such temporary migration helps local business activities by enhancing skills and increasing the amount of money flowing back into the country from migrants.90

The return of skilled workers to Africa has also fueled higher levels of entrepreneurship.91 Certain African economies such as Ghana, Nigeria, Botswana and South Africa have recently experienced an unprecedented brain gain. In 2009 alone, Nigeria experienced the return of 10,000 skilled professionals.92

According to research on staffing by Heidrick & Struggles and the Economist Intelligence Unit, South Africa ranks number 23 in the 2008 Global Talent Index for 2012, one position up from last year. This means that South Africa is the 23rd most popular destination for skilled workers. Egypt, the second-highest ranked African country, also moved up one position to number 24 (ahead of Brazil); whereas Nigeria slipped one position down to 28. The highest-ranking emerging countries remain China (6) and India (10).93

In South Africa, Research International analyzed the responses of 1,192 people, of whom 34 percent were South African citizens living abroad. A significant 81 percent of these respondents intended to return to South Africa, which most still considered their home. Furthermore, a considerable one in three people wanted to return to start their own business.94

Even before they return home, migrants generate large amounts of money for their native economies. In fact, the International Organization for Migration estimates that, of the $444 billion paid in remittances by migrants, $338 billion was received by developing nations.95 Interestingly, most African migrants move to other African countries, thereby keeping their skills within the continent.96

Global economics dictate that an unconventional approach to training migrants actually can make good business sense. In essence, countries that seek migrants to perform specific jobs can save money by delivering training to those prospective employees within their home countries, before they have actually migrated. A case in point is the United Kingdom health system, which faces severe staff shortages and is attracting nurses from developing countries. It costs the UK far less to train nurses in Zambia, for example, than it would to train them in the UK.97

Several years of relative political stability and growth are the major factors behind the return of skilled professionals to Africa. The return of those scattered in the African diaspora will gather momentum as growth and stability continue.

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After decades during which a brain drain robbed Africa of many of its most talented workers, decisions by thousands of highly educated professionals to come home reflect a more optimistic vision of the future. The global economic recession has accelerated this brain gain for Africa, with many skilled professionals returning from developed economies.

Nigerians who left their homeland to seek riches abroad are increasingly returning as Africa's biggest oil producer rides an energy bonanza that is opening up unprecedented opportunities.

Skilled Nigerians and Africans from countries like Kenya, Ghana and Angola began returning in significant numbers some years before the global economic recession.

Nigeria’s telecommunications, banking and energy sectors are growing at double- and sometimes even triple-digit rates. This growth generates attractive opportunities for skilled individuals.98

The African Diaspora Initiative, which works with the Nigerian government to encourage the return of its people, estimated that in the past seven years,

7,500 Nigerians have come back to work in growth industries such as finance, telecommunications and IT. Some estimates are even higher: WazobiaJobs.com, a recruitment portal for West Africa, estimates 10,000 skilled Nigerians have returned in the past year.99

Case study: Nigeria’s brain gain boom

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7

Figure 16: Foreign direct investment by country (US$ millions)

Low (<$200m)

Medium ($200m-$2,000m)

High (>$2,000m)

No data

Country Figure Rank

Nigeria 20,279 1

Angola 15,548 2

Egypt 9,495 3

South Africa 9,009 4

Libya 4,111 5

Tunisia 2,761 6

Algeria 2,646 7

Congo 2,622 8

Sudan 2,601 9

Morocco 2,388 10

Foreign direct investment refers to the sum of all the foreign assets invested into domestic structures, equipment and organizations (it excludes investments made on stock exchanges).

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Financial rules and systems can be a boon for developing regions such as Africa. For example, new regulatory frameworks create financial ecosystems that encourage the efficient allocation of capital to areas in which it will be most valuable, and that encourages foreign direct investment. Furthermore, the regulatory environment directly affects consumers’ propensity to save, invest and incur debt in the form of loans. In sum, it is the regulatory framework that protects consumers and businesses alike, thereby encouraging freely flowing capital and, ultimately, an increase in private consumption. Such changes in the way capital is managed can, in fact, lead to positive GDP growth.

However, it cannot be ignored that, in general, African financial systems are small, or that many financial institutions have barely penetrated their markets. Likewise, raising capital in Africa can be a daunting task for many businesses, owing to the perception that large-scale African investments are risky. Access to capital is also hampered by the lack of domestic stock exchanges.

At the same time, in recent years Africa has seen its financial markets deepen, increase in sophistication and efficiency, and in general become more stable.100 Furthermore, financial markets are liberalizing, with better governance and policies to protect capital, while regional trading

blocs such as the Common Market for Eastern and Southern Africa (COMESA), have acted as catalysts for making positive and standardized regulatory reforms. As a result, foreign direct investment is increasing, often linked to trade for Africa’s resources (see Figure 16 for a snapshot of foreign direct investment by country).

An added factor that must be acknowledged is the positive impact of innovative financial solutions being offered through mobile channels. These solutions are opening up banking services to more of the population, and thereby stimulating the formation of private capital.

Due to regulatory reforms, growing foreign direct investment, shrinking debt and burgeoning intra-African trade, Africa’s business climate is steadily improving.

Dimension 4: Capital

Source: African Statistical Yearbook

ChallengesEven with these promising developments, the size, scope and maturity of African financial systems present challenges.

African financial systems are small in both absolute and relative termsThe wealth managed by medium-sized banks in continental Europe or the United States outstrips the total GDP of some African nations.101

African financial institutions have low levels of market penetrationIn many African states, fewer than one in five households has access to formal banking services such as savings accounts and credit. African banking institutions have therefore not been able to benefit from economies of scale, and, subsequently, banking in Africa is comparatively expensive.

High costs of raising capitalDecades of political instability and volatility in Africa mean that financial institutions and policies have been in a continuous state of flux. As a result, capital markets in Africa are still in their infancy. Because of this immaturity, raising capital in Africa is often a costly and risky exercise.

Key factors for growthDespite these challenges, there are several encouraging signs that the continent offers increasingly good prospects for investors. These signs include more robust financial systems, high returns on invested capital, and, as a result, a rising tide of foreign investment.

Increasing maturity of financial systemsIn the past, Africa’s lack of regulated financial systems hindered its growth. As Michael Klein, World Bank/IFC vice president for financial and private sector development, observes, “Economies need rules that are efficient, easy to use, and accessible to all who have to use them. Otherwise, businesses get trapped in the unregulated, informal economy, where they have less access to finance and hire fewer workers, and where workers lack the protection of labor law.”102

The scramble for Africa’s resources is changing things by forcing the continent to integrate with the global economy. As a result, many countries in Africa have had to build financial institutions such as credit registries and create legal and regulatory frameworks that protect investors and competing companies alike.103 This revision of regulatory frameworks is providing a much more attractive business climate in many African nations.

Senegal, Burkina Faso and Rwanda are three countries that have made particularly large progress in reforming business regulation. Senegal has made it easier to start a business, register property and trade across borders.104 Burkina Faso introduced a new labor code and reforms that make it easier to register property, deal with construction permits and pay taxes.105 Rwanda, likewise, was very active in making reforms, ranking as top reformer in the World Bank’s Doing Business 2010 report—the first African country to ever top this list. As a result of these reforms, Rwandan entrepreneurs now need only to complete two procedures and wait three days to start a business. In addition, imports and exports are more efficient, transferring property takes less time, investors have more protection and a wider range of assets can be used as collateral to access credit.106

“With more reforms of business regulations in Africa than in any previous year, we are seeing many countries get inspiration from their neighbors about how to reform. Increasingly, countries in the region are committing to reform agendas that make it easier to do business,” writes Sabine Hertveldt, coauthor of the World Bank Doing Business report.107 Indeed, such reforms have led to real improvements in the development of African nations’ financial sectors as measured by standard indicators of financial intermediary development.108

While the pace of transformation has varied and restrictions remain in place in some countries, progress in liberalizing financial markets has been extensive throughout Sub-Saharan Africa.109 In fact, Sub-Saharan countries have made a significant 67 reforms.110 In general, the liberalization of financial markets involves the dismantling of prohibitive controls by:

• Granting central banks more autonomy

• Liberalizing interest rates

• Moving to more indirect monetary policies and away from direct government involvement and regulations

• Restoring bank solvency through restructuring

• Improving supervision of banks

Such dismantling of prohibitive financial controls has been shown to have a positive effect on an economy.

Increasing market penetrationAnecdotal evidence suggests that the unbanked and low-income groups in Africa represent a significant opportunity for banks. In the opinion of Brian Richardson, cofounder of cell phone banking group Wizzit, “There is R12 billion [approximately $1.6 billion] under the mattresses of low-income households.”

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Financial service providers are starting to reach these households. M-PESA, a mobile banking provider in Kenya, has shown how technological advances and innovative ways of offering low-cost financial products can increase the penetration of payment services into African markets.111 In South Africa, the four largest banks and the post office have launched a low-cost banking solution for low-income individuals. This joint venture, the Mzansi account, was well received and, in a mere 18 months, a staggering 3.3 million new accounts were opened.112

Improving governance and policies for the security of capitalThe formation of regional trade blocs has paved the way for strong economic policies and governance on a regional level. These regional arrangements are designed to benefit member states by increasing the market size as well as the predictability, stability and transparency of the region.

Donald Kaberuka, the president of the African Development Bank, commended the Southern African Development Community (SADC), COMESA and the East African Community (EAC) for providing a platform for economic integration among regional economic communities in his address at the Development Bank’s annual conference in August 2009.113

Africa has also made significant progress in monetary stability and in the private ownership of banks. In fact, today most African banking systems are dominated by privately owned domestic or foreign financial institutions.114 Furthermore, African governments have taken a number of steps toward improving their image and offering increased incentives and institutional support to foreign firms investing in their countries. For instance, investment promotion agencies in African countries provide information and initial contacts as well as other support to such firms.115

High average returns on investment Despite the high costs and risk associated with investing in Africa, the return on investment is generally good and outstrips what is achievable in many other markets. In fact, an article in the Harvard Business Review recently noted that the average annual return on investment in Africa is between 65 to 70 percent, which is higher than in most countries, including China.116

Likewise, subsidiaries of foreign banks in Sub-Saharan Africa show a higher return on assets and equity than subsidiaries of the same banks in other regions of the world.117 A study of close to 1,000 publicly traded companies in Africa between 2000 and 2007 found that their annual return on capital was on average 65 percent higher than that of similar firms in China, Vietnam and India. In addition, their median profit margin of 11 percent was higher than that of similar companies in Asia and Latin America.118

The current rate of return in Africa is more than 30 percent, compared to the 10 percent and 15 percent obtained in Europe and the United States respectively. This makes the continent the fastest-growing region in the developing world, according to Caroli Omondi, acting chief executive of the Africa Trade Insurance Agency.119

While it is important to note that investments in Africa do carry a higher risk compared to other regions, Jens Schleuniger, manager of the DWS Invest Africa LC Fund, believes that markets are overstating Africa's political risk. Consequently, he suggests that investors should choose Africa over China in order to benefit from undervalued stocks.120

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Accenture recently studied global companies with 2009 market capitalizations exceeding $1 billion. In looking at their growth performance over the last 10 years, we found that African companies are growing faster than their peers in the rest of the world.

For example, in 2004, there were 53 companies in Africa with a market capitalization of greater than $1 billion. They came from only four countries: South Africa (42), Morocco (6), Egypt (3) and Nigeria (2).

In 2009, there were 99 such companies in Africa, an increase of 84 percent, as compared with global growth of only 53 percent. The African companies came from nine countries: South Africa (63), Morocco (11), Egypt

(11), Nigeria (9), Botswana (1), Gabon (1), Kenya (1), Mauritius (1) and Senegal (1). These companies also came from 50 industries in nine sectors.

Our analysis also revealed that large African companies grew at a compound annual growth rate of 10 percent over five years, as compared with the 7.2 percent achieved by a list of large companies in the rest of the world.

While they still account for only 2 percent of this list, large African companies like MTN, Standard Bank and Shoprite continue to dominate their industry sectors in Africa.121

Case study: Large African companies are growing faster than their peers elsewhere

Increasing foreign direct investment into AfricaStronger confidence in Africa’s financial systems is also reflected in the quintupling of private capital inflows from 2000 to 2007. These flows partly reflect improved fundamentals in many African countries, such as macroeconomic stability and fiscal discipline,122 and they partly reflect the global race for Africa’s resources.

Indeed, foreign direct investment into Africa has risen sharply. Over the past decades, China has become an influential player in Africa’s economy and development. As China’s economy has continued to grow, it has become clear that it increasingly needs to secure reliable sources of supply to support future development.123

When it comes to attracting foreign direct investment, many African countries have the major advantage of abundant natural resources. About 85 percent of the world’s new oil

reserves found between 2001 and 2004 were along the west and central coasts of Africa.124 Indeed, a large and increasing share of foreign direct investment into Africa has been in the extractive industries, in particular, oil.125

Africa is also fast becoming a major location for Chinese construction and engineering projects. In 2006, a massive 31 percent of China’s offshore contracted projects were based in Africa.126 Outside of the resources sector, private Chinese companies have been investing heavily in textiles, services, agriculture, processing and manufacturing.127

Figure 17: FDI inflows into Africa (US$ per capita)

Source: African Statistics Yearbook (2009)

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China is seizing the opportunity in Africa. In 2006, China provided more than $8 billion in loans to Sub-Saharan Africa, primarily for infrastructure. In 2007, through its China Development Bank and Export Import Bank, China pledged to provide up to $20 billion for trade and infrastructure in the form of soft loans over the next few years, and so created the China-Africa Development Fund.134 Chinese/African ties go deeper than simple direct investment. China is now seen as a major market financier, investor, contractor, builder and donor.135

Between 2001 and 2006, Africa’s exports to China rose by an average 40 percent, with its imports rising by 30 percent. This growth far outstripped the global growth rate of a mere 14 percent.136

Figure 18: BRIC exports to Africa (2007) (US$ billion)

Brazil India China Russia0

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Source: African investment by BRIC countries, David Barlett (2009)

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China's bilateral trade with Africa in 2008 amounted to around $100 billion.128 Chinese companies who led the charge include Zonghui Mining Group, which has invested $3.6 billion in copper mines in Zambia, Industrial and Commercial Bank of China, which holds a 20 percent stake worth $5.6 billion in South Africa’s Standard Bank, and China National Petroleum Corporation, which is involved in oil exploration, production, and infrastructure in Chad and Niger worth in excess of $5 billion.129

Chinese investment inflows into Sub-Saharan Africa have largely been directed at large-scale infrastructure projects. Nigeria has received the bulk of Chinese investment in Sub-Saharan African infrastructural development.130 These investments amounted to $7.24 billion in 2009.131 In Liberia, China’s investments reached a total of $9.9 billion.132

Despite the worldwide financial crisis, in the first half of 2009 China grew its investments in Africa's non-financial sectors by a staggering 78.6 percent, reaching $875 million.133

Case study: China’s foreign direct investment into Africa

As shown in Figure 18, China was the largest exporter to Africa compared to other BRIC nations, with an estimated $35 billion in exports in 2007. Although China has a massive African footprint, one cannot ignore the investment being made by other Asian countries, including Singapore, India, Malaysia, the Republic of Korea and Taiwan. As the Asian manufacturing industry explodes and the global scramble for resources intensifies, the capital flows into resource-laden Africa should increase too.

Developing Asia has, however, only recently become a significant source of foreign direct investment into Africa. Europe and the United States remain the largest investors, each contributing some 37 percent of Africa’s total foreign direct investment.137 India is also investing heavily in Africa. Bank of Baroda, for example, has a large presence on the continent, particularly in East Africa, and recently opened its first West African branch in Ghana. In

addition, credit lines are increasingly being offered by Indian institutions to counterparts in Africa, such as the recent $14.5 million line from Indian Exim Bank to Gabon for a housing project.138

Although extractive industries are traditionally given the most focus, manufacturing and services also attract foreign investors.139 In fact, China’s foreign direct investment in manufacturing exceeded investment in resource extraction by a significant 68 percent (see Table 3).

Table 3: China's investment and FDI flows by sector in Africa

Sector/Industry Number of projects Investment value (US$ millions)

Agriculture 22 $48

Resource extraction 44 $188

Manufacturing 230 $315

Services 200 $125

Other 3 $6

Total 499 $682

Source: Nordiska Afrikainstitutet, Uppsala (2009)

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With the flow of foreign capital into Africa continuing to grow, the continent has been very successful in decreasing its debt over the last decade, as shown in Figure 19. China has played no small role in this, writing off the debt of 31 African nations to the tune of $1.3 billion.140

Growing intra-African tradeAfrica has fostered a number of formalized trade blocs that have been the catalyst for loosening trade restrictions between member states and the global economy in general. Economic integration into trade blocs increases the potential for growth because it supports the better allocation of capital between investment opportunities.141 Likewise, it encourages economies of scale by putting into place common standards and regulations. It also increases liquidity and allows for better risk management by ensuring a wider selection of financial instruments with different risk/return profiles.142

In 2008, COMESA extended its free trade zone to include the EAC and SADC. It now comprises 19 member states and more than 400 million people (see Figure 20).143

And as described above, capital flows and foreign direct investment into Africa have increased substantially in recent years, helping to integrate Africa into the global economy. With this integration, African states have had to tackle their financial challenges head-on to encourage further global participation in their economies. This is demonstrated by the significant number of regulatory reforms made in Africa recently.

In sum, Africa’s financial systems have both broadened and deepened over the past years,144 brought about by improvements in the macroeconomic and regulatory environments, and encouraged by the inflow of capital resulting from the worldwide scramble for resources.

Figure 19: Africa’s outstanding debt as percentage of GDP

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Figure 20: Intra-COMESA trade (billions USS$)

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1997 1998 1999 2000 2004 20062005 20082007200320022001

Source: COMESA COMSTAT database

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Increased innovation leads to an increase in GDP by impacting gross investment and private consumption. For example, as we will show, demand for mobile telephony (driven in part by a lack of fixed lines throughout Africa) has led to wider investment in wireless communication infrastructure and services. African consumers have flocked to mobile phones, and penetration levels in nearly all countries have risen sharply. This consumer demand has opened the door for a wide range of companies to invest in innovative solutions such as mobile banking, which are bringing accessible financial services to the unbanked, and thus driving an increase in Africa’s general economic activity.

In the past, Africa’s woes, including geopolitical instability and general poverty, made it an unsuitable incubator or recipient of innovation. Africa’s lack of talent also contributed to the problem. These factors, in turn, affected Africa’s economic performance, since productivity improvements are often driven

by innovation, and by innovative technologies in particular.145

However, there are now signs that Africa is not only capable of receiving and adapting innovations made elsewhere, but of creating its own. For example, the strong adoption of mobile technologies is in turn spawning a flood of new business models and products that are being exported. While such mobile technology has allowed Africa to overcome its relative lack of fixed information and communications technology (ICT) infrastructure, new undersea cables provide cheaper, faster connections with the outside world. Another example of the power of innovation is the growing business process outsourcing industry in various African countries, which is wholly dependent on technology. Together, all of these factors present a tremendous opportunity for innovation and technology adoption to drive future growth in Africa.

Innovation has come to Africa, bringing stronger growth and unlocking new areas for development.

Dimension 5: Innovation

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Figure 21: Snapshot of networked readiness by country

ChallengesThe challenges to innovation in Africa include the difficulty of maintaining and upgrading infrastructure investments, a relative shortage of skilled talent, and the lack of a widespread culture of innovation.

Maintaining new investmentsAny new investment in infrastructure should be accompanied by a commitment to maintain and upgrade that investment to support continuing growth. Such required maintenance takes the form of capital, processes, equipment and people. For example, if there is an investment in new solar power technology, local or affordable skilled maintenance labor as well as equipment should be ensured, as the cost of importing labor and materials from the developed world will reduce the long-term viability of the investments.

Educating skilled talentIn order to reap the benefits of the innovative technologies being installed in Africa, the right talent is required. Ghana is anticipating the landing of the West Africa Cable System in 2011, which will dramatically increase its bandwidth and is expected to be a boon to the local business process outsourcing industry. Unfortunately, infrastructure is not the only barrier to the development of Ghana's ICT industry—the skilled labor force in the country is very small compared to countries making big headway in the industry.146 As such, alignment of policies across different dimensions, from education to infrastructure, is paramount to ensuring the maximum benefits from any investments in innovation.

Creating a culture of innovationEven though there has been an increase in the tools and resources available to African companies, such as accessible information and communication, unique challenges still remain. The development of mobile banking in Africa is a model for the way in which a new technology can be used to address an old problem—in this case, how to make affordable banking services available. It is important for this culture of innovation to be fostered and supported.

Low (2.44 – 2.99)

Medium (3 – 3.26)

High (above 3.28)

Data not available

World Economic Forum – Networked Readiness Index

Country Score (out of 7) Rank Mauritius 4.07 1

South Africa 4.07 2

Egypt 3.76 3

Botswana 3.72 4

Senegal 3.67 5

Morocco 3.59 6

Nigeria 3.45 7

Namibia 3.44 8

Kenya 3.35 9

Libya 3.28 10

Compiled by the World Economic Forum, the Networked Readiness Index measures the propensity for countries to exploit the opportunities offered by information and communications technology. It is a composite of three components: the environment for ICT, the readiness of the community to use ICT, and, finally, the usage of ICT. Globally, Denmark has the highest score (5.85), while the global average is 3.95.

Source: World Economic Forum, The global information technology report 2008 – 2009 (2008-2009)

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Key factors for growthThe role of ICT in driving innovation is well recognized. Accenture High Performance Business research has clearly demonstrated this link at the corporate level,147 and it seems to hold true at the national level as well.148 This linkage is supported by the African experience: While Africa lags behind in terms of fixed-line telephony, new technologies and business models are circumventing market inefficiencies and institutional bottlenecks. The number of such applications in Africa is rising exponentially, with e-banking setting the pace and other services such as e-health, e-education, and e-government following closely.

Improving infrastructure for ICTAfrica has experienced a dramatic improvement in its technology infrastructure. One example is the way in which wireless communication has overcome the low penetration

of landlines. A look at Figure 22 illustrates how mobile technology has leapfrogged fixed-line communication and given millions of people access to an efficient means of communication.

Such infrastructure development in support of increasing consumer demand is vital to ensuring that the benefits of innovation can spread throughout African economies. Indeed, as wireless networks mature, so do the services consumers can use. For example, relatively cheap smart phones are now available in many African countries—increasing the number of people accessing the Internet via mobile phones.

The benefits of such advances are sometimes seen in unlikely places. Studies show that South African farmers with mobile access to market prices realize 30 percent higher profits than those who do not have this access. These kinds of market efficiencies are then reflected in cheaper consumer prices, completing the beneficial economic cycle.

Indeed, the many challenges unique to Africa—huge distances, widely dispersed populations, and little existing telecommunications infrastructure—have conspired to create an environment in which wireless will flourish.149

Another big shift in infrastructure is occurring with the installation of new undersea fiber-optic cables. While the wireless infrastructure is connecting people within most countries, there is a lack of connection between Africa and the rest of the world. However, the new undersea cables that will connect Africa to the globe are creating a new set of opportunities.

Figure 22: Market penetration: users per 100 people

Fixed telephone linesMobile cellular subscriptions

2008200620042002200019980

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Source: ITU World Telecommunication / ICT database

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Source: Steve Song http://manypossibilities.net

Figure 23: African Undersea Cables (2011)

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By the end of 2011, Africa will have access to broadband capacity estimated at 10 terabits/second, compared with the 80 gigabits/second that was available at the end of 2008.

This growth in bandwidth will be delivered by the following cables: Seacom (1.28 terabits/second), GLO-1 (640 gigabits/second), TEAMS (120 gigabits/second), EASSy (1 terabit/second)150, MainOne (1.92 terabits/second) and WACS (3.8 terabits/second). Together, these new cables will increase the bandwidth between Africa and the rest of the world by more than 120 times in little over three years. The cables will also greatly reduce the cost of telecommunication.

This will enable countries that hitherto have relied on expensive data communication to join the broadband revolution. As was said at the recent landing of EASSy in Tanzania: "Today we are witnessing an historic event because through this technology Tanzania is now open to the world for business as better communications will facilitate more trade with other countries.”151

Case study: Real broadband comes to Africa

Lastly, infrastructure improvements have been facilitated by a shift in government policy toward these initiatives. For example, Rwanda offers concessions for setting up ICT businesses in the country, while Kenya has abolished sales tax on computers and new mobile phones. Kenya also allows businesses to write off bandwidth purchases in the hope of dominating the regional Internet market—a move that may prompt other countries to take similar action.152

These improvements in the information and communications technology infrastructure are making it both possible and affordable for Africans to embrace new technologies, and use them to transform both business and social life.

Technology adoptionThe revolution of the information economy that occurred during the 1990s had comparatively little impact in Africa. As the world’s technology and communication links continued to proliferate, African countries and companies either could not afford to

make the necessary investments or their governments did not support these initiatives.

There is evidence that this is beginning to change. For example, the number of Internet users in Africa has grown strongly in the last decade. In 2000, Africa had only around 5 million Internet users. By 2009, the number of Internet users had grown to 67 million, which represents 6.8 percent of the total population.153 This number is projected to rise, with the number of broadband connections projected to increase from 2.7 million in 2007 to 12.7 million by 2012.154

Another area that has seen significant growth is mobile phones. In 2003, Africa had 50 million mobile phone users. By 2008, the number had grown to nearly 350 million, reflecting a compound annual growth rate of 48 percent.155 In 2009, another 75 million phones were added, bringing the total number to 425 million. This equated to a mobile phone for four out of every 10 Africans, and by 2012, that ratio will be six out of 10.156

Figure 24: Mobile subscribers in Africa (millions)

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Source: Africa Mobile Factbook 2008, Africa and Middle East Telecom

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Africa’s phenomenal growth rate in mobile subscribers far exceeds growth in all other global regions. In fact, between 2001 and 2006, the number of mobile subscribers in Africa grew at nearly double the rate seen in Asia (see Table 4).

This growth is important as there is a proven link between mobile phone penetration and GDP growth. A recent study found that with every 10 percent increase in mobile phone penetration, a country's GDP increased by 0.6 percent.157 While there is not a direct causal link, there is a very strong correlation between mobile penetration and GDP growth. Thus, Africa’s continued high growth rate in the adoption of mobile phones is likely to indicate continued economic growth.

The increase in mobile phone penetration is also leading to an increase in the revenues of providers. The mobile communications markets of Kenya, Tanzania, Uganda and Rwanda earned combined revenues of $2.62 billion in 2008 and are expected to earn $8.99 billion in 2015.158

Africa’s massive take-up of mobile phones is also generating investment. Africa's telecom sector will have secured private investments of more than $70 billion by 2012, surpassing the $55 billion promised by investors at a United Nations-backed meeting

in 2007.159 For example, Bharti Telecom Ltd., India’s largest mobile carrier, recently bought the African operations of Kuwait-based Zain Telecoms for $9 billion. With deals of such size, the growth and revenue opportunities in Africa are significant. According to Bharti's chairman, Sunil Mittal, "We are excited at the growth opportunities in Africa, the continent of hope and opportunity.”160

Africa’s growing network infrastructure and a population that is becoming used to technology is also spawning a viable business process outsourcing (BPO) industry. With large populations fluent in English, French and Portuguese, Africa has much to offer. This language advantage, combined with the low cost of African labor, makes some African countries attractive for large outsourcing businesses.

This growth in outsourcing is partly driven by future demand, since it is predicted that by 2030 there will be a global shortage of 200,000 to 500,000 BPO workers.161 This shortfall presents immense business opportunities for African countries that can supply the required skilled labor. Some countries have already recognized this: Kenya, Uganda, Tanzania and Rwanda have each developed national BPO strategies and have begun to implement them.162

As a result, the East African BPO market is expected to grow from $485 million to $1.9 billion—or annual growth of 25 percent—over the next five years.163 In Kenya, BPO is one of the six pillars of economic growth in the country’s 2030 vision. The Ugandan government is actively encouraging outsourcing through tax incentives, cyber laws, infrastructure investment and IT education—all with the aim of creating 20,000 outsourcing jobs.164 It is forecasted that Rwanda's BPO industry will grow by 89.4 percent to $274 million by 2020, up from $29 million in 2009.165

In other parts of Africa, BPO has also experienced growth. Ghana wants to create 40,000 jobs by 2015, with a longer-term goal of earning $1 billion a year from the industry. Ghana also plans to build technology parks across the country.166 In the South African province of Gauteng, the BPO sector is expected to be worth more than $1 billion in 2010 and to grow by between 9 percent and 14 percent per year to 2014. The total South African BPO market is currently estimated at $1.6 billion.

Table 4: Annual average growth rate in mobile subscribers, 2001 – 2006

%

Africa 50.9

Asia 27.2

World 23.1

Americas 20.1

Europe 17.4

Oceania 11.9

Source: Africa Mobile Factbook 2008, Africa and Middle East Telecom

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R&D of innovative productsEven though Africa is achieving economic growth, the business environment is still challenging and presents its own particularities. Importantly, though, Africans are coming up with innovative business solutions to their challenges.

Mobile banking is a good example. The proportion of Africa’s population that is unbanked is estimated to be 75 percent.170 For the unbanked, it is impossible to gain interest on savings, often more expensive to get access to capital (if it can be accessed at all) and, most importantly, very difficult to move small amounts of money between people and regions. Hard cash is thus widely used, but that presents its own problems. In the words of a Standard Bank executive: “Cash as we know it is clunky, easy to steal, not always available, dangerous and expensive to move, and difficult and time-consuming to exchange."171

As demonstrated by the economist Hernando de Soto, access to capital

and financial services is the key to economic growth both in advanced economies and in the developing world.172 As such, Africa’s lack of access to capital and financial services is a key barrier to development.

African businesspeople have risen to this challenge by pioneering the use of mobile telephones to provide low-cost financial services. These developments are creating new markets and driving growth. The Bill and Melinda Gates Foundation observes, “Mobile banking services have various benefits to the population, including increased productivity and capital flows, helping to manage cash flow as well as enhancing management of erratic incomes.”173

The use of a branchless mobile banking service was pioneered in Kenya by Safaricom Ltd., a subsidiary of Vodafone Group PLC, with its M-PESA offering. M-PESA was developed in partnership with the United Kingdom-based Department for International Development between 2003 and 2007. It allows customers to send money to each other using text messages. The

money can then be withdrawn from a Safaricom agent in cash.

There are now more than 6 million users of the service in Kenya alone. Since its introduction in 2007, 38 percent of Kenyan households include at least one M-PESA user. By contrast, only 22 percent of adults have bank accounts. M-PESA has the potential to enhance growth by allowing routine transactions to be processed more quickly and reliably. When capital is allowed to move around Kenya this efficiently, it facilitates economic activity that might not otherwise occur. It also serves as an example of collaboration between companies, nongovernmental organizations and governments: a model that could redefine the rules of how business works in Africa.

Innovative solutions are also being found to address problems in health care. Accenture Development Partnerships (ADP), Accenture’s not-for-profit division, was involved in a program in Kenya called Phones for Health (P4H).

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Kenya has emerged as a key growth area for BPO. The size of the Kenyan BPO market doubled between 2005 and 2007 and now includes several call centers, back-office providers and software development companies. The Kenyan call center market is projected to grow 20 percent every year up to 2013 to be worth nearly $20 million167, and the overall BPO sector has the potential to generate Ksh45 billion (approximately $600 million) and 20,000 direct jobs by 2014.168

Already Kenyan call centers operate at a lower cost than those in India or the Philippines and, with the landing of several undersea fiber-optic cables, infrastructure costs will likely drop even further.169

Case study: BPO in Kenya

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While the mobile banking phenomenon has its roots in Kenya, which now has more than 6 million mobile banking users, it has been exported across—and beyond—the continent.

There are now similar services in Tanzania, Uganda (where 70 percent of the population is under- or unbanked)174, Rwanda, South Africa, Sierra Leone and Somalia. The technology has also been exported to Afghanistan and will soon launch in India.

Additionally, companies such as Nokia are building a network of money agents that will enable subscribers to conduct transactions using any network in the world.175

In Rwanda, a mobile money transfer solution can also be used to buy airtime. According

to Rwandian officials, in the near future customers will be able to use their phones to purchase credits for electricity usage, pay for taxi fares, purchase groceries and, potentially, buy airline tickets.176 In South Africa, usage of First National Bank's eWallet mobile banking solution has increased 239 percent in the six months since its launch. The largest growth has occurred in cities, where users are sending money to family in rural areas.177

Also, more services are continually being added, thus providing further value. For example, a new micro insurance plan uses M-PESA to offer Kenyan farmers protection against bad weather.178

Case study: Mobile banking

P4H is a unique public-private partnership consisting of mobile phone operators, handset manufacturers, consulting and technology companies, ministries of health, global health organizations and international partners. It aims to develop and deploy appropriate, sustainable information technology solutions and leverage mobile phone technology to strengthen health systems in the developing world.

P4H has developed an integrated set of standard information solutions to support the scale-up of disease surveillance and other health programs, leveraging the growing mobile phone infrastructure, which, unlike IT infrastructure, is accessible and affordable for the majority of citizens.

Another important area for innovation is agriculture, and in Africa there is an increased focus on local solutions to food scarcity. One such approach is the use of mobile phones to link Kenyan farmers with solar-powered

weather stations and an insurance company. This mobile banking product allows farmers to insure themselves against bad weather by paying an extra 5 percent when purchasing seeds, fertilizers and pesticides at local agricultural supply shops. If the harvest fails owing to bad weather, the farmer is reimbursed and can plant again.179

In a similar vein, the government of Cameroon, through the Institute of Agricultural Research for Development, has put high-yield seedlings at the disposal of farmers nationwide, with the aim of boosting agricultural productivity. Such innovations and inventions, a government official said, are in line with the government's resolve to maximize its resources and in so doing curb food crises and insecurity.180

Increasing the yield that farmers can achieve will have a big impact. According to Dr. Jonathan Lynch, a scientist working in Mozambique, this could be critical: "In Mozambique,

where we work, 70 percent of the population are subsistence farmers....if we can improve their yield 10 or 20 percent with better seed...they can even sell some of their crop and begin to climb out of this poverty trap."181

Global business models have also undergone innovations to improve benefits to local communities and businesses. According to a study conducted by the World Business Council for Sustainable Development, this drive can be attributed to a number of factors, such as the need for companies to break out of mature market sectors, the improvement in conditions in many developing countries, changed public expectations of corporations, and the fact that aid and investment are beginning to reinforce one another. According to the study, an innovative operating model should focus on core competencies, encourage partnerships across sectors including government and nongovernmental agencies, and localize value creation.182

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Internet kiosks that provide access to online services are being implemented in Kenya, Nigeria, Rwanda and Zambia. The kiosks are mobile, cost-effective and can be recycled. They operate on a satellite connection and solar power. In this way, they enable ordinary people to obtain and share information crucial for education, agriculture and food security, health and the environment, and communications and e-government.

The kiosk is designed to promote entrepreneurship and electronic service delivery within rural and urban settings, and in turn, help facilitate the growth of e-commerce, e-education, e-health, and e-government.183

Case study: Solar-powered Internet kiosks

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Although the future is uncertain, it is expected that emerging markets like Africa are changing the balance of economic power and present a tremendous growth opportunity. Although the continent still faces significant challenges and the cost of doing business remains prohibitive in many cases, there is no doubt that Africa is currently experiencing positive changes in the dimensions of consumers, resources, talent, capital and innovation. These changes are generating considerable growth already, and Accenture believes that this growth should strengthen.

Africa’s potential for growth is particularly relevant now as global business begins to come out of recession. Identifying and securing sources of new growth are top priorities for companies at present, and much of this new growth will come from emerging markets. Companies that establish their positions in places like Africa during this period of rapid growth will find themselves at an advantage while competitors struggle to gain a foothold.

Africa represents a business opportunity for companies in search of new markets to power their pursuit of high performance. Businesses can generate profits and create the potential for long-term growth by tapping into Africa’s large and increasing consumer market, vast wealth in natural resources, expanding labor pool, increasing capital flows, and its new readiness to innovate. However, our analysis also suggests that any strategy for business success in Africa must be finely tuned to an understanding of the characteristics and growth dynamics of each specific African market.

Africa today has many clear similarities with China and India in the 1990s. There is a window of opportunity for first movers to grab a share of this growing market, but how long the window will remain open is unknown. Businesses not planning and acting now will miss the boat—as so many did when it came to China and India.

Historically, Africa has been a vulnerable marketplace owing to the classic third-world challenges of war, famine and disease. This picture is starting to change as significant improvement in all five key dimensions indicates that Africa is a rising star with significant growth potential.

The race is on...

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AcknowledgementsWayne Borchardt acknowledges the contribution of Pieter Becker, David Porter and François Spies for compilation of this report. At Accenture Research, Philipp Merkofer and his team furnished background research and helped build a database of information and case studies.

Special thanks are owed to our colleagues Matthew Robinson, Henry Egan, Clemence Grasset, Michelle van Zyl, Tlangelani Mageza, Louise Temkin and Daniel Huedig, who provided valuable advice and input.

If you would like more information, please contact:

Wayne BorchardtSenior Executive, Accenture wayne.g.borchardt@accenture.com +27 21 408 1312

Accenture, its logo, and High Performance Delivered are trademarks of Accenture. This document is produced by consultants at Accenture as general guidance. It is not intended to provide specific advice on your circumstances. If you require advice or further details on any matters referred to, please contact your Accenture representative.

Glossary Please note: Throughout this document, $ refers to US dollars unless otherwise specified.

Some common abbreviationsBPOBusiness process outsourcing

BRICBrazil, Russia, India and China

COMESACommon Market for Eastern and Southern Africa

EACEast African Community

ECOWASEconomic Community for West African States

GDPGross domestic product

GNIGross national income

ICTInformation and communication technology

R&DResearch and development

SADCSouthern African Development Community

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56. PR Newswire Europe (September 30, 2009).

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176. Daudi K. Musoke, “Over Rwf60 Million Moved in 'Mobile Money' Transfers by MTN in Rwanda,” The New Times (March 9, 2010).

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178. “Savings and the Poor: A Better Mattress,” The Economist (March 11, 2010).

179. Anjali Nayar, “Mobile Phones Bring Insurance to Kenyan Farmers,” Reuters (March 12, 2010).

180. Godlove Bainkong, “Agric Productivity—Improved Seedlings to Boost Yields,” Cameroon Tribune (March 30, 2010).

181. Gregory M. Lamb,”How Science Could Spark a Second Green Revolution,” The Christian Science Monitor (April 6, 2010).

182. World Business Council for Sustainable Economic Development, “Doing Business with the Poor: A Field Guide,” (2004).

183. “Solar-powered Portable Kiosks Bring the Internet to Rural Africans,” http://hopebuilding.pbworks.com/Solar-powered+portable+kiosks+bring+the+internet+to+rural+Africans (May 2010).

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About AccentureAccenture is a global management consulting, technology services and outsourcing company, with more than 190,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.58 billion for the fiscal year ended Aug. 31, 2009. Its home page is www.accenture.com.

Accenture has had a presence in South Africa and Nigeria for more than 30 years. Accenture has a wealth of on-the-ground experience, from having worked in 38 African countries and enjoying an established presence in nine countries across North, West, East and Southern Africa.

About this studyThis study was prepared from sources and data which Accenture believes to be reliable but it makes no representation or warranty, express or implied, as to their accuracy or completeness. Any figures and statistics used in this study were up to date at time of writing and are subject to change without notice. The views and opinions expressed in this publication are those of Accenture only and do not necessarily reflect those of any of the companies researched or surveyed or any other third party referenced in the report. Such opinions should not be construed as providing professional advice, recommendations or endorsements, or relied upon as such. Neither Accenture nor its employees accept responsibility for any loss or damage arising from reliance on the information contained in this publication.

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