Africa’s large companies ‘can drive growth’

Large private companies have been identified as essential drivers of economic growth in Africa as they contribute more to employment and tax revenues, a McKinsey study released on Monday shows.

Presenting the report findings at the Africa CEO Forum in Abidjan, Ivory Coast, Johannesburg-based McKinsey senior partner Acha Leke said emerging economies with consistently high growth rates had twice as many large companies as other economies.

“As GDP growth recovers in many parts of the continent, large companies have considerable potential for value creation,” Leke said. “We estimate that more than half of the 345 large companies in Africa could increase their revenues collectively by more than $550bn by 2030 with ambitious strategies to access new markets, strengthen productivity, and increase operational efficiency.”

McKinsey data shows that at least 345 companies have annual revenues of more than $1bn in Africa and about 40% of them are headquartered in SA. Of the 147 large companies in SA, 118 are home-grown with the rest foreign owned. This suggested an opportunity to expand the corporate footprint in other African countries, Leke said.

Africa’s economic progress slowed after 2010 due to a confluence of factors ranging from waning demand for commodities to deteriorating economic fundamentals in the continent’s largest economies. Oil price shocks presaged a longer-term decline in other commodities that affected additional African countries such as SA.

The value of African commodity exports fell from $256bn in 2010 to $147bn in 2019, and the continent’s share of global commodity exports declined from 7% to 4%. Declining foreign direct investment (FDI) also added to economic deceleration on the continent.

After quintupling to peak in 2008, FDI flows into Africa declined in 31 of Africa’s 54 countries, falling fastest in Nigeria and SA, the two largest economies.

The continent’s net external debt, while low by global standards, has increased by 24 percentage points to 57% of GDP by 2019, signalling a deteriorating economy. During this time, debt-servicing costs doubled, and current-account balances halved, making it harder for African governments to invest in growth.

Research shows that just three years later, in 2022, the region’s average debt-to-GDP ratio stood at 67%, a further deterioration triggered by increased government spending during the pandemic, weak management of public finance, and high inflation.

This is why the report highlights the importance of growing the number of large companies across the continent, to an annual revenue of $1bn, to drive wealth, job creation and economic growth.

Leke said the success and growth of these companies would have positive knock-on effects among the myriad small and medium-size enterprises that participate in their supply chains and support the majority of jobs on the continent.

According to the report, 52 of the continent’s $1bn–plus companies are state-owned enterprises (SOEs).

These SOEs operate in all major sectors on the continent, but 70% of the revenues they generate come from just six subsectors: oil and gas, mining, retail and consumer goods, financial services, manufacturing, and telecommunications.

Africa CEO Forum president Amir Ben Yahmed said the growth in number and size of African companies was crucial to minimising the impact of foreign crises on the continent’s markets. Crises including accelerating inflation, depreciating exchange rates, rising interest rates and slow growth faced by African states could be countered by the emergence of a new generation of African companies with annual revenues greater than $1bn, Ben Yahmed said. “These companies will become symbols of resilience and innovation in key economic sectors including agriculture, energy, artificial intelligence and transportation. This number must be increased from 300 to 3,000 to truly transform the continent.”

He said African governments had a central role to play in ensuring successful partnerships between the state and the private sector.

But the performance of large companies in Africa varied dramatically between 2015 and 2021. McKinsey data shows that Africa has lost 16% of its businesses with revenues exceeding $1bn and that one-tenth of the loss was due to exchange rate effects, resulting in a net decrease in large companies.

Leke said almost 50% of the large companies that closed, were acquired, or had declining revenue were in the services sector, with 19% in extractive industries and 18% in manufacturing, construction, and utilities.

In comparison, Latin America had a 31% increase in large firms since 2015, and China and India, respectively, attracted 57% and 30% more companies with revenues of more than $1bn.

“Nonetheless, the continent’s large companies in aggregate grew revenues by 4.9% annually on average from 2015 to 2021,” Leke said.

Certain types of companies performed better than others, “specifically SA companies increased revenues at an average rate of 5.5% a year, and North African companies by 4.4% a year”, he said.

Companies should work more closely with governments and policymakers, in the same way businesses came together to support governments during the Covid crisis in countries like Nigeria and SA, Leke said.

AT LEAST 345 COMPANIES HAVE ANNUAL REVENUES OF MORE THAN $1BN AND 40% OF THEM ARE HEADQUARTERED IN SA

GROWTH OF THESE COMPANIES WOULD HAVE POSITIVE KNOCK-ON EFFECTS AMONG A MYRIAD SMALL AND MEDIUMSIZE ENTERPRISES