Localisation improves Africa’s access to mainstream supply chains
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The future of business on the African continent is in the hands of small and medium enterprises.
These businesses are likely to lead the economic recovery on the African continent, but until they can secure a genuine foothold in corporate value chains, the sector is likely to be dominated by a handful of players who had an early-mover advantage and access to finance.
"So, how do we make sure that Africa’s SMEs get into the supply chains and get the help that they need to become the large corporations of the future,” asks The Money Show’s Bruce Whitfield.
On a global scale, the pandemic has affected all businesses, with the largest impact falling on the shoulders of SMEs struggling with cash flow constraints.
As a result of the disruption in global supply chains, multinationals and large corporates have relied on localised supply chains in order to avert value chain disruption, says David Mparutsa, Head of Enterprise and Supply Chain Development at Absa Corporate and Investment Banking.
If you look globally, SMEs contribute up to 66% of GDP and this is in developed nations. Yet, in emerging markets, they only contribute about 33% of GDP.David Mparutsa, Head of Enterprise and Supply Chain Development – Absa Corporate and Investment Bank
So, there’s a long way for us to go but I am certainly pleased with the efforts that I am seeing on the continent in the respective countries that we operate – in terms of how governments are going about getting SMEs involved in mainstream supply chains as well as how corporates are also taking similar tasks.David Mparutsa, Head of Enterprise and Supply Chain Development – Absa Corporate and Investment Bank
Who are the key players driving this process?
In many economies, governments are attempting to put some legislative frameworks in place that support local manufacturing and procurement to ensure that they are able to ringfence a certain percentage of that procurement for designated suppliers in the SME sector.
Large corporates understand the importance of using procurement as leverage for economic growth.
For this reason, these large entities have implemented their own internal policies that support procurement from locally owned entities.
Does it need to be regulated, legislated and controlled by government?
Mparutsa's answer? Regulation is indeed important in getting enterprises to start thinking consciously about the importance of procurement. However, legislation must happen on one condition – it cannot be restricted.
The legislation has to be inducive to goods and services that are available within that country or where there are efforts being made to develop specific industries. Then, the corporates can come in and play their part on the back of that with their own policies.David Mparutsa, Head of Enterprise and Supply Chain Development – Absa Corporate and Investment Bank
Leaders in localisation on the African continent
Botswana is a leader in progressive advances in terms of doing business in Africa. The country's focus on localisation which was accelerated by COVID-19 supply chain interruptions has shifted the focus of government and the private sector to capacitating local suppliers to ensure that they will be less vulnerable in future.
Instead of depending on imported goods and services, Botswana has focused on an import substitution programme to ensure local manufacturing and provision of services.
"I’ve definitely seen Botswana as leading the race outside of South Africa in terms of driving the localisation agenda," says Mparutsa.
We then also have companies that have got very strong policies around supporting citizenship owned companies and getting them involved, not in terms of just supplying small scale goods and services but actually being involved in the mainstream services. Those types of contracts which were previously done by foreign-owned entities are now being given to local contractors.David Mparutsa, Head of Enterprise and Supply Chain Development – Absa Corporate and Investment Bank
The future is now - transitioning from traditional banking
How big a task is that transformation of an economy, asks Whitfield.
Policymakers have realised that instead of externalising all of this money, we could be growing our own.
It is an absolute massive shift. Once the policies have been set and corporates have bought into it, you actually have to go through the process of making sure that local companies, local contractors actually have the skill to be able to perform in those contracts.David Mparutsa, Head of Enterprise and Supply Chain Development – Absa Corporate and Investment Bank
He says that some of these local companies have had to work with existing foreign-owned companies to get to the right level of skilling in terms of being able to execute those contracts.
In addition to this, local contractors also require financing to be able to execute those contracts and, what the bank typically finds is that a lot of these SMEs lack strong balance sheets to be able to access mainstream bank financing.
So, the banks have to come in and look at different and innovative ways of funding some of these local companies that are now in access to supply chain or procurement opportunities.David Mparutsa, Head of Enterprise and Supply Chain Development – Absa Corporate and Investment Bank
Is a revolution is coming?
While there is no magic wand that can be waved at the small business sector, the bank believes that there is a revolution of sorts taking place on the continent.
Corporations are really starting to relook at their role, in terms of supporting the growth of the continent. Financial institutions are looking at innovative ways of providing financing and non-traditional ways of providing that financing.David Mparutsa, Head of Enterprise and Supply Chain Development – Absa Corporate and Investment Bank
From a revolution point of view – Mparutsa says that the bank has found that certain countries have insisted that certain goods can only be supplied, manufactured or grown by local SMEs.
"This is some of the right kind of thinking around revolution which is actually going to get Africa into the right place,” Mparutsa concludes.
For data-driven insights that match foresight with sustainable possibilities, re-visit our Absa Insights page regularly to listen to thought-provoking conversations with Absa Corporate and Investment Banking sector experts in the Absa Insights podcast series.