For more than 30 years, governments and international development organizations have followed the same recipe for formalising the world’s informal economy; enacting new legislation and regulations or abolishing those that get in the way of the process.
Yet despite their efforts, 93% of the world’s informal employment is still found in emerging and developing countries, with 85.8% of employment in Africa considered informal. In Kenya, sub-Saharan Africa’s fifth-largest economy, the informal sector – commonly referred to as Jua Kali – is the country’s main job creator. According to the 2019 Economic Survey by the Kenya National Bureau of Statistics, Jua Kali was responsible for 762,100 of the 840,600 new jobs created last year. The ‘gig economy’, a new concept in developed markets, has been the norm in developing economies for decades.
By 2035, Africa will contribute more people to the workforce each year than the rest of the world combined. By 2050, the continent will be home to 1.25 billion people of working age. In order to absorb these new entrants, Africa needs to create more than 18 million new jobs each year. Given the urgent need to provide jobs and livelihoods to Africans, it is time to examine the conventional wisdom that informal markets must transition into formal markets. Development finance institutions (DFIs) and private investors in African markets can play a critical role in both advancing Africa’s gig economy and changing the narrative that growth in informal markets is incompatible with sustainable development.
Across African markets, companies are pioneering business models that bridge the formal and informal sectors; in these models, each company is a formal entity but can mobilise large numbers of informal actors in their supply chains or service delivery. While this has been done in dairies in Kenya and at coffee and cocoa outgrowers across the continent and in other sectors for nearly a century, the penetration of mobile phones has enabled a new breed of African companies to monetise their ability to organize and inject trust into fragmented informal markets. However, unlike Uber or Airbnb, which disrupted largely formal sectors, many of Africa’s new ‘gig economy’ firms are writing the rules for whole new industries in local markets.
Perhaps the most high-profile example is Safaricom’s M-PESA. Since its launch in 2007, M-PESA, a mobile payments system developed by Kenya’s largest telecoms operator, has enabled millions of informal sector workers to move money at lower cost, which has provided a significant boost to the Kenyan and Tanzanian economies. Another, more recent example, is Nigeria’s Cars45, operated by Frontier Car Group. Nigeria’s $12 billion used car industry is largely informal and characterised by distrust, a lack of standardisation and the absence of a structured dealer network. Cars45 facilitates the buying and selling of used cars by pricing and rating their condition transparently and conducting online auctions. Many sectors throughout the continent remain highly informal and would benefit from these types of bridges into formality. These ‘bridge companies’ are going to define the future of employment in African countries.
DFIs are ideally placed to invest in bridge companies in African markets, given their long presence and in-depth engagement with local financing environments. The International Finance Corporation (IFC) and the UK’s CDC Group already invest in technology-enabled start-ups, and others, including OPIC, are adapting their strategies to be able to do so. Many of the continent’s most promising technology-enabled bridge companies are starting to raise funding large enough to attract the attention of DFIs. Frontier Car Group recently raised $89 million, Kenya’s Twiga Foods raised $10 million, and Nigeria’s Kobo365 has raised $6 million. Overcoming a dearth of funding remains one of the highest barriers for African entrepreneurs, and the development impact of investing in those that improve employment is enormous.
The gig economy comes with limitations. Lack of legal rights, limited career progression, stagnant pay and a lack of benefits are just some of the issues that will need to be addressed in an ‘Uberised’ world. These challenges, plus the day-to-day economic uncertainty, make the informal sector far worse in amny ways than the formal. Bridge companies – because they are registered, and have a public brand and centralised management – can be pressured into addressing issues around workers’ wellbeing. Studies into the financial behaviors and needs of low-income families by BFA, a consulting firm specialising in financial inclusion policies, found that workers often aspired to ‘gig economy’ jobs but hated casual labour (such as waiting on a corner to be hired for the day) because of the lack of reliability and predictability.
The future of work is changing and the mass job creators of today will not be able to meet the needs of tomorrow’s workforce in the same way. Bridge companies are pioneering new ways of injecting efficiency and higher productivity into traditional informal markets. Investing in this trend is critical to solving Africa’s pressing job creation need.
By Aubrey Hruby
Laura MacLean and Michael Burgess of Holman Fenwick Willan assess what the future holds for lawyers and their commercial clients in Africa in the New Year.
With Africa’s leading economies being resource led there can be no doubt that the hammer blows presented by one of the steepest falls in commodity prices as well as the oil price collapse have hit all leading markets hard. Now, the real question for the world’s second largest continent is whether 2017 will mark the year that governments and business across the continent shake off these setbacks, with a stabilising oil price and other commodity prices rebounding.
This article looks across a number of key sectors of African economies and considers the outlook for 2017.
2017 may well be the year commodities markets turn around from recent years of poor overall performance. With the World Bank raising its 2017 forecast for crude oil prices, and gold prices looking to hold or gain consistently, the potential advantage to African economies is clear -Africa is a resource-rich continent, from crude oil, coal and iron to gold, copper and many other precious and minor metals. But there remain significant questions including whether Africa can overcome the challenges it has faced, such as supply chain consistency and foreign exchange restrictions.
There has already been significant investment in the African economy by a number of the major trading houses. However, poor infrastructure and other issues have also caused some projects to falter. Consistent, reliable supply chains will be necessary if there is to be a genuinely significant jump in production of, and revenue from, African natural resources.
Whilst newcomers to the commodity markets have a more robust appetite for risk than some of the more traditional players, it is yet to be seen whether there is sufficient liquidity in the markets as a whole, and sufficient confidence in pricing, to justify the level of investment which will be required to overcome these challenges.
Doubtless for the strong-minded, there are opportunities to be taken, but sound analysis and management of the legal and other risks inherent in opportunities is a must.
OIL AND GAS
The African oil and gas industry has suffered considerably since the oil price slump in mid-2014: low oil prices have resulted in a cut in exploration and exploitation activities causing considerable delay, abandonment or cancellation of projects – as has been seen across the globe. Offshore projects have been hit especially hard, for example, in Nigeria, Angola and Ghana.
However, brighter days may lie ahead. If the implementation of the OPEC production cut can be combined with improvement of regulatory frameworks, as it is hoped will be the case, the much needed investment in the sector across the continent may return.
The firm commented on the progress made in East Africa towards reforming the oil and gas sector’s legislative and regulatory framework in our previous ALB article East Africa modernises its upstream oil and gas sector.
Reforms anticipated in South Africa and Nigeria are also awaited with interest. If pursued, such reforms could lead to the separation of oil and gas regulations from mining regulations in South Africa and increased certainty with regard to the sector’s regulatory regime in Nigeria through the passage of the Petroleum Industry Bill into law.
Optimism in 2017 for the industry in Nigeria, historically Africa’s biggest oil exporter, is enhanced by a reduction of security concerns.
Investors who have previously considered postponing ventures in the country will be encouraged by the government talks with militants to end crude pipeline attacks. Over several months in 2016, these attacks contributed to seriously reducing Nigeria’s output by 700,000 barrels per day. It is worth noting, however, that security remains a concern for investors across the continent.
Significant growth in demand for major infrastructure spending is expected in 2017, particularly in the renewable arena, as well as spending on conventional energy, airports, oil and gas and road infrastructure. This increase in demand will, however, face a number of significant economic and structural challenges.
The continent remains subject to domestic price inflation, as well as pressure from the recent low commodity prices and continued inadequate foreign exchange availability, which were touched on at the beginning of this article. These factors are highly likely to impact on project implementation and progress throughout the year. Additionally, the cost of tendering for projects is likely to remain high, due to lengthy tender processes resulting from inexperienced teams of government and quasi-government entities procuring projects.
Whilst many government agencies may not be geared for the anticipated increase in construction activity, (which may in turn result in continued bureaucratic problems for contractors, particularly in relation to the applicability of VAT, withholding tax and import duties to construction works and the ease of obtaining the required construction permits), it is evident that the appetite for work is there.
What remains to be seen is whether the construction industry’s enthusiasm for certain sectors, such as oil and gas and ports and terminals, is reflective of a general increase in willingness to do business on the continent.
Here again, there are opportunities for major infrastructure work for those who are able to take the time to analyse the risks, build the relationships and work through the issues.
For example, there is progress which Tanzania and Uganda are making with plans for construction of the 1,443 km Hoima-Tanga crude oil export pipeline (due for completion in 2020), the potential modification of the Tanzania-Zambia 1,710 km Tamza crude oil pipeline (or construction of a parallel gas pipeline) and the anticipated comprehensive upgrades to the Tanzania-Zambia Railway.
The railway network is also receiving a substantial boost in West Africa with the construction of a 3,000km long railway connecting Benin, Burkina Faso, Niger, Ivory Coast, Ghana, Nigeria and Togo. The project is set to complete in 2021.
PORTS AND TERMINALS
Opportunity in Africa in the ports and terminals sector is rife. Already at the start of 2017, Ghana opened a public tender for the development and operation of a new integrated container and multipurpose terminal in the port of Takoradi. Similarly, South Africa has requested proposals to develop a new terminal at Port Elizabeth and Kenya has launched the construction of a USD 3.4 million cruise ship terminal at the port of Mombasa in order to grow the country’s tourism revenue.
Notably, the Nigerian Export Processing Zones Authority has also granted a licence to the USD 2.5 billion Badagry Free Trade Zone and mega port project, marking a milestone in its development.
River ports and inland rivers to sea transport networks are another, often overlooked, area of potential growth. These require far less investment than maintaining road and rail networks and can be of particular use when cheaply transporting mining produce from isolated areas to the coast.
Competition in Africa is rising with both international shipping lines and terminal operators looking to increase their holdings. Pacific International Lines recently announced it wanted to invest in Africa and was considering terminals in Nigeria and Tanzania. All these recent announcements indicate that 2017 is set to be an exciting year in the ports and terminals sector and demonstrate the availability and willingness of foreign investors to engage in projects where the environment is right.
For the maritime sector, security has also been an issue. The release of 26 seafarer hostages in October 2016, the last remaining victims captured during the darkest days of the Somali piracy era, represented a symbolic victory in the fight to eradicate a peril that has plagued the Horn of Africa for nearly a decade.
Whilst progress has been made, security issues remain a constant threat to new investment on the African continent. The significant reduction in piracy off the East coast gives more confidence to vessels calling at North and East African ports, especially Mombasa and Dar es Salaam, and we may yet see a further contraction of the High Risk Area in the Indian Ocean in 2017.
In the Gulf of Guinea, security also remains a relevant issue. Marine kidnap for ransom is as prevalent as ever with the International Maritime Bureau reporting 34 kidnapped seafarers in 2016. The challenges of improving stability and security to secure outside investment will certainly remain in 2017.
A new year is a time to be optimistic and we hope that this optimism bears fruit in increased and enhanced business opportunities across Africa. It is important to note, however, that some of the countries where the best opportunities lie have challenging business environments.
With anti-corruption measures still being a work in progress in some cases and some bureaucratic hurdles still existing, working closely with local advisors and experts with an understanding of industry norms is the best advice to those wishing to invest.
The authors wish to acknowledge contributions from Sarah Taylor, Richard Booth, Richard Neylon, Matthew Gore and Alex Stoughton, all of Holman Fenwick Willan, to this article.