Africans Investing in Africa:  The New Engine of Africa’s Growth

15th August 2016

By Samuel Nwanze, Director, Finance & Investments, Heirs Holdings

 

Never have the stars been more aligned for African businesses as they are now.

 

Rising disposable incomes, a young and talented population, growing urbanization, and an increasingly robust business climate have all combined to produce an emerging middle-class that is poised to drive consumption, innovation, industrialization and trade.  Global investor confidence in Africa is higher than it has ever been. A survey conducted by the African Private Equity and Venture Capital Association confirms that Africa is set to become one of the most popular destinations for investments, especially as growth in more mature markets like China and Brazil slows down. Indeed, PwC predicts African agriculture booming into a $1trillion industry by 2030 as the fate of the often overlooked sector turns and it begins to attract deep investments particularly in Zambia, Botswana, South Africa and Tanzania.

 

While local and global investors are similarly lured into Africa by the current set of conditions – peace and stability, sustained economic growth, a ballooning youth population, and a rising consumer class – investors, especially from South Africa, Kenya, Nigeria and Namibia, lead the pack.  It would surprise most to learn that the greatest source of investment in African economies is not the United States or China but actually South Africa. Even as more American, European, and Asian businesses acquire leading African businesses, Ernst and Young reports that intra-African investment into new projects has grown by 32.5 percent since 2007, which is four times faster than investment flows from developed economies. As most African economies grow by an average of 5-6% per year, African firms are riding high on this momentum and aggressively expanding their enterprises across the region.  During this year’s World Economic Forum on Africa in Rwanda, African business men and women sitting on various panels repeated a shared sentiment: Africa is less risky now in terms of politics, trade and governance, and offering rates of returns far more appealing than what can be realized in developed economies.

 

In a joint publication by the Tony Elumelu Foundation and Brenthurst Foundation titled ‘Africans Investing in Africa’, the phone provider giant, MTN and the supermarket chain Shoprite, both of South African origin, are profiled as leaders in intra-Africa commerce. Nigerian-headquartered United Bank for Africa (UBA), which has expanded into 18 other African countries, building over 160 business offices, is also profiled. UBA expects to increase its revenue generation from the rest of Africa (outside Nigeria) from 24 percent to 50 percent in the coming years. Dangote Cement is also featured and its rapid $5 billion expansion project from Nigeria into 13 other African countries is comprehensively analysed. ‘Africans Investing in Africa’ chapters and case studies demonstrate the diversity of sectors that are engaged in cross-border economic activity across the continent, while emphasizing the importance of Africans investing in the continent to build stronger diplomatic, political, and cultural ties.

 

Beyond this optimism, there remains vast untapped opportunities in Energy/Power, Heavy Industry/Manufacturing, Transport, and Healthcare caused by high operating costs, limited infrastructure, lean access to finance and a myriad of other constraints that restrict investments in these transformative sectors. According to the World Bank, intra-African trade costs are around 50% higher than in East Asia, and are the highest of intra-regional costs in any developing region.

 

It is impossible to sustain economic growth and attain shared prosperity without advancing intra-regional trade, commerce and investments. This is possible only by eliminating obstacles that thwart private sector growth and competitiveness and prevent more private sector participants from investing in critical sectors. Addressing the following factors will enable African governments and private sector overcome the key challenges in investing in Africa:

 

1) Infrastructure reform: Africa has never had an infrastructure base appropriate for its needs. During the colonial era, transport routes were overwhelmingly extractive: designed to move primary commodities to ports. Infrastructure development will drive trade, spur industrialization and create new economic opportunities that allow more African economies achieve shared prosperity. The good news is that development finance institutions including Afrexim and AFC have recently funded several infrastructure projects across the continent, but more investments to bridge Africa’s infrastructure gap of $90b a year, are critically needed.

 

2) Expanding access to finance: Analysts from PwC Advisory recommend that new funding models such as public-private partnerships (PPPs), export credit agencies (ECAs), private equity, as well as alternative mechanisms such as Pension funds, Sovereign wealth funds and insurance funds should be exploited to access financing for new projects. This is in addition to funding from Development Finance Institutions (DFIs) and International Development Agencies (IDAs). For example, Development Partners International (DPI), is a private equity firm that has made notable investments between US$20m –US$100m across growing economies and sectors in Africa.

 

3) Enabling environment for business: The private sector has the most capital to drive the African economy. There is so much global private capital seeking investment destinations. But as we know global private capital goes to where it is most welcome. Therefore, the challenge before all African governments should be how to ensure that they create, improve and strengthen the enabling environment in order to attract and retain these investments. For example, ease of capital remittances and the presence of a fair regulatory framework in a country will greatly attract external investments.

 

4) Deepening the African Capital Markets: A key way to deepen African capital markets is by encouraging privatized and systemically-important companies to list on the stock exchange. The assessing and listing of these strategically important entities will help to broaden the stocks available on the exchange, which will further propel and drive the economy. Regional stock exchanges should strive to attract new listings, generate greater liquidity, and attract the right profile of institutional investors through effective regulation and the right set of incentives.

 

5) Freer regional trade: Priority should be given to solving non-tariff barriers ranging from prohibitive transaction costs to complex immigration procedures, limited capacity of border officials and costly import and export licensing procedures.

 

The private sector has the most critical role to play in Africa’s transformation. African governments must strive to create a business climate that is conducive to investments, and both African and foreign investors should be encouraged to more actively explore opportunities on the continent.

 

Africa will rise, not by charity or aid, but by investments and trade. The time to invest in Africa is now.