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The Scramble for Africa (but this time it’s on Africa’s terms)


Once regarded as the final frontier of international investment, Africa has slowly emerged as the hottest destination for emerging markets investors. In the space of a decade, Africa’s gone from being a hopeless case to a star performer. 

It wasn’t so long ago that Africa was widely held to be uncharted territory among international investors, drawing only the foolhardy or the foolish. Savvy investors stayed well away. Fifteen years ago, The Economist labelled Africa ‘the hopeless continent’. Fast-forward to 2015, Africa’s now the go-to destination for emerging market investors. If an investor’s not involved in Africa, the question is, “why not?”. And it’s not hard to see why.

Nowhere else in the world offers such high returns on foreign direct investment, says the US government’s development finance institution, the Overseas Private Investment Corporation. In 2014, eight of the world’s 20 fastest-growing economies were in Africa – and five of the top six economies were in Africa. Over the past decade, most African economies have achieved average growth of more than 5 percent – not bad at all at a time when the rest of the world was floundering. Other statistics indicate that Africa will be the fastest-growing continent by any measure over the course of the twenty-first century.

“In 2014, eight of the world’s 20 fastest-growing economies were in Africa”

 Not surprisingly, then, almost $90 billion of foreign direct investment found its way to Africa in 2014. Although the more developed economies of Northern Africa – notably Egypt, Algeria, Libya, Morocco and Tunisia – and South Africa are attracting the bulk of investors’ attention, the more intrepid are looking to Sub-Saharan Africa where the risks are bigger but, arguably, so too are the potential returns.

Despite heavy media focus on the scale of Chinese investment in Africa, it’s, in fact, Western companies that are leading the way. While the general preference among Chinese companies is to invest in developed market – investing in Europe and US, in particular, gives Chinese companies access to new technologies and high-end brands – Western companies traditionally tend to go after cost advantages, export platforms and consumer markets. And, aside from export platforms, this is pretty much what Africa offers.

Estimates put Western interests’ greenfield investment in Africa in 2014 at just under $50 billion, with the largest source region for investment – perhaps surprisingly – being France. In all, France spent over $18 billion in Africa in 2014, followed by Greece ($10 billion), the United States ($8 billion) and China ($6 billion), while Belgium, Canada, UAE and South Africa all invested $5 billion apiece. 

As with the sources of investment, there is huge diversity in terms of where Western companies are putting their cash. For instance, the $10 billion Greek investment was mainly put into a massive petroleum refinery in the North West Gulf of Suez in Egypt, whereas the $5 billion investment from Belgium was mainly directed at commercial real estate projects in Mozambique. Whereas Chinese companies’ greenfield investments in Africa in 2014 were primarily in the energy sector, US companies invested in a broad range of areas, including oil and gas, alternative energy, construction, communications, financial services and business services.

One of Africa’s main attractions is its huge reserves of natural resources. Throughout the continent, there’s an abundance of often still untapped resources – everything from oil, iron ore and platinum to copper, diamonds and gold – awaiting direct investment from overseas. It’s estimated that Africa holds 10 percent of the world’s oil and gas reserves, as well as incalculable hydroelectric power (little of which has yet been exploited). Only a tiny fraction of Africa’s arable land is currently being cultivated, while most of the world’s cultivable land is in Africa. It has other strengths, too, though. Almost 15 percent of the world’s population – around a billion people – is in Africa. When you compare this China, which accounts for around 19 percent of the world’s total population, the scale of opportunity for consumers goods – everything from banking to telecommunications – that Africa represents is evident. It’s a market already too great to ignore – but it’s getting even greater: it’s on course to double to two billion over the next 30 years (which is one reason behind investors’ interest in real estate and housing). The population is young, too – in fact, it has the youngest population in the world. Compared, for example, to 41 in Britain, the average age in Nigeria is just 18. It also has a comparatively cheap and educated labour force. In addition, it’s still largely undeveloped – compared to just under $9,000 globally, the average per capital income is less than $2,000 in Africa. The general expectation is for robust, rapid growth in the years to come. And this means even more lucrative opportunities to come.

While there’s no shortage of opportunities, investing in Africa can still be a daunting prospect.  To start, there’s no one Africa – it’s not a homogeneous entity. Unlike almost anywhere else in the world, it’s a market that varies massively by region. And that’s why veterans tend to talk in terms of countries or regions, not the continent as a whole. For instance, while the northern part of the continent resembles the Middle East in many ways – and in terms of oil reserves, in particular – South Africa, the most established market, has an almost European feel to it. The huge stretch of territory between these two areas is a different story altogether – much of Sub-Saharan Africa is still regarded as being the preserve of the gutsy or the reckless.

The obstacles and risks, particularly in the less developed markets, are typically not of the sort that Western investors are used to encountering. While disruptions like civil wars, piracy and kidnappings grab the headlines, there are other, more subtle challenges that aren’t uncommon. Often, government s themselves pose the biggest problems. Things like a lack of clear policy can make doing business complicated and frustrating. Another problem is inadequate (or non-existent) infrastructure – something as mundane as the inability to access electricity can derail an initiative in an instant. None of these, though, are insurmountable obstacles – rather, they can all generally be easily overcome by recruiting local, on-the-ground knowledge. The likes of Absa Capital, for example, have been helping Western investors navigate African regulation and bureaucracy for years.

These are real problems, but they shouldn’t be overstated. There is increasing stability of governance throughout Africa. Policies are firmer, trade is better and the overall business environment is more robust than it has ever been. Although things aren’t yet perfect, there is good reason for optimism.

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