AfCFTA: Setting up an African footprint

Berna Botha, Business Executive, SoluGrowth, South Africa.

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• The African Continental Free Trade Agreement (AfCTFA) has sparked renewed drive and energy for trading and investing in Africa, yet extending or establishing a footprint on the continent still has its challenges.
• Regulatory reform is taking place, but is still slow, necessitating a keen understanding of the country’s legislative requirements and business culture.
• Tax matters can be complex and infrastructure challenges shouldn’t be underestimated.
• Safety, sustainability and skills development should form part of an organisation’s planning for expansion on the continent.
• Partnering with a company that has a deep knowledge of the country’s specialised nuances will enable smoother, swifter growth.

The African Continental Free Trade Agreement (AfCFTA) represents an exciting time in Africa’s economic development. Companies throughout the continent are actively seeking collaborations to leverage the tariff reduction, trade facilitation and regulatory measures the agreement puts in place to boost value-added production and trade across all sectors of Africa’s economy.

We at SoluGrowth are already supporting such collaborations. For example, we are collaborating with a company in Zambia to enable its partnership with government and other private investors that will develop agricultural hubs, green cities and much-needed roads. Collaborations like this represent enormous opportunities for established African businesses and new market entrants. But despite the renewed drive and energy that AfCFTA has sparked, extending or establishing a footprint on the continent – whether in services or manufacturing – still has its challenges.

AfCFTA is driving reforms in regulations and government requirements that should improve the speed of execution when setting up and kicking off major development projects, like the one in Zambia. It should also become easier to establish offices and make trade agreements. For the time being, though, many requirements remain challenging and bureaucracy remains slow across much of the continent. Organisations with an appetite to grow into Africa will need patience, and a professional services partner that understands the country’s legislative requirements and business culture.

Another challenge is the fact that many financial, government and revenue services processes are still very manual. You still need a human being to physically carry documents between bank branches, revenue service offices, registrars and so on to get your business set up and registered, and to operate effectively. But the truth is this isn’t a uniquely African challenge – several European countries still have very manual processes, too. In Africa, as in Europe, digitalising these processes presents an opportunity to automate and modernise.

Tax matters can also become complex, as issues such as withholding tax must be accounted for. But most African nations have dual or double tax agreements in place to avoid double taxes (and to combat tax avoidance). As such, it would be worthwhile to engage with a partner who can examine which locations have dual tax agreements, and how to maximise these, when expanding your footprint.

Furthermore, companies should not underestimate the challenges raised by a lack of infrastructure, and especially energy availability and connectivity. While Africa’s infrastructure deficit is visibly being addressed in countries like Egypt, it is unwise for organisations to expect developed-economy availability of WiFi and electricity. When developing your African expansion strategy, plan for limitations on infrastructure and consider including renewable energy sources as backup for your office.

Nigeria, Ghana, Ethiopia, Kenya and South Africa are noted for implementing ambitious renewable energy development policies. South Africa, for example, amended Schedule 2 of the Electricity Regulation Act in January 2023 to “exempt generation projects up to 100MW in size, from the NERSA licensing requirement…”. This, and last year’s tax incentives for private rooftop solar installations, have supported the installation of solar panels that now generate 5 200MW of electricity for households and businesses. Though the tax incentives weren’t extended in the 2024 Budget Speech, installing private solar generation capability can not only help to keep operations running smoothly, but contribute to environmental, social and governance (ESG) reporting requirements.

And, finally, safety considerations and sustainable business practices are key. Because so much of Africa’s population still lives in poverty and political instability remains a concern in many countries, one of the AfCFTA’s most important goals is socio-economic empowerment and inclusion for the continent’s people – AfCFTA is expected to lift up to 30 million people out of extreme poverty by 2035. But this change will not happen overnight and companies operating on the continent should not be ignorant of the safety challenges generated by extreme inequality and poverty. It will be necessary to understand the safety issues unique to the country you wish to operate in, and plan to mitigate these risks.

It is also for socio-economic reasons that implementing sustainable business practices will be so important. Many African nations are still developing policies and regulations to enforce sustainable business practices – from environmental protection and climate change policies through to social impact and what this should look like for local communities. But to ignore the international transformation of business practices to be more environmentally and socially sustainable just because the laws are not yet written would be a mistake. Successful African businesses will be sustainable businesses.

Financial reporting, at least, should be a straightforward matter. Most of the continent conforms to IFRS, which makes financial reporting – and sourcing the necessary skills to report accurately – easier. The challenge lies in finding experienced talent. African universities are producing enough, good graduates but these graduates often lack the experience of applying their theoretical knowledge in the workplace. This is simply because opportunities in developing countries are often limited.

Yet, engaging with a partner that can provide IFRS experienced support and skills transfer to inexperienced graduates will help to resolve this challenge. How to provide proper reporting that will ensure your investors, shareholders and other stakeholders have a good idea of what the business’s profitability is, should be clear enough. Internal controls must be of a high standard and external audits will be key to provide confidence in the accuracy of your financial reporting.

Proper budgeting and project accounting, forecasting and cashflow management, and obtaining special clearances that are often needed to make international payroll payments, could all prove tricky, though. Many of the necessary back-office and administrative skills to support these functions are expensive and considered scarce. Fortunately, Africa is home to a young, vibrant population – making highly trainable, junior labour easy to find.

SoluGrowth intends to discuss Africa’s skills challenges – and how AfCFTA could address these – as well as the ESG opportunities that expansion in Africa can represent in later instalments of this AfCFTA series.

AfCFTA remains the African Union’s flagship project in achieving the goals laid out in Agenda 2063 “The Africa We Want”. The energy and drive to make the most of the opportunity is palpable across the continent, making this the best time to invest in your African footprint.