Big private companies have been identified as essential drivers of economic growth in Africa as they contribute more to employment and tax revenue, according to a McKinsey study released on Monday.
Presenting the report’s 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 have 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,” said Leke. “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 revenue of more than $1bn in Africa and about 40% are headquartered in SA. Of the 147 large companies in SA, 118 are home-grown while the rest are foreign owned.
This suggests an opportunity to expand the corporate footprint in other African countries, said Leke.
Africa’s economic progress slowed after 2010 due to a confluence of factors including waning demand for commodities and 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. The continent’s share of global commodity exports fell from 7% to 4%.
Declining foreign direct investment (FDI) worsened economic deceleration on the continent.
After quintupling to peak in 2008, FDI flows into Africa fell 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, rose 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 was 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 in 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 will have positive knock-on effects for the many small and medium-size enterprises that participate in their supply chains and support the vast 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 big sectors, but 70% of the revenue they generate comes 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 growth in number and size of African companies is crucial to minimising the impact of foreign crises on the continent’s markets.
Ben Yahmed said the continuing state of crises — including accelerating inflation, depreciating exchange rates, rising interest rates and slow growth faced by African states — can be countered by the emergence of a new generation of African companies with annual revenue of more than $1bn.
“These companies will become symbols of resilience and innovation in key economic sectors, including agriculture, energy, artificial intelligence and transportation,” said Ben Yahmed. “This number must be increased from 300 to 3,000 to truly transform the continent.”
He said African governments have a central role to play in ensuring successful partnerships between state and private sector.
But the performance of large companies in Africa varied dramatically from 2015 to 2021.
McKinsey data shows that Africa lost 16% of its businesses with revenues exceeding $1bn and that a 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,” said Leke.
He 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”.
Leke said companies should work more closely with governments and policymakers in the same way businesses came together to support governments during the Covid-19 crisis in countries such as Nigeria and SA.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.