Foreign Direct Investment in Africa
The rest of the world is taking note of the fact that African countries are trying to improve their business environment as a strategy to attract more Foreign Direct Investment (FDI). One of the key investment drivers is the increasing prevalence of peace, democratic elections and improved governance.
The World Bank ‘Doing Business In’ Survey for 2012 – seen as a benchmark for rating the world’s business environments – tracked Morocco as the top reformer globally during the survey period, with Sao Tome and Principe, Cape Verde, Sierra Leone and Burundi also among the top 10 reformers. Changes in domestic policy in these countries improved the process of dealing with construction permits, protecting investors and paying taxes, among other areas.
The African Development Bank (AfDB), International Monetary Fund (IMF) and other multilateral institutions have done their share by working with investors and recipient governments to improve Africa’s business climate.
Rapid urbanisation on the continent demands that governments and cities become globally competitive in the Global Cities space. The biggest need for infrastructure exists in power, transportation (roads, rail, ports, etc), hospitals and schools. The current spend on infrastructure in Africa is about US$45 billion a year. About US$90 to US$100 billion a year is needed, which is a huge funding deficit. This means there are substantial opportunities for the private sector to either invest alone or in partnership with government.
Africa’s resources are in demand! This is not only restricted to the extractive industries such as mining, and oil and gas. Agriculture is a dominant economic sector in Africa, and concerns around global food security make the continent’s fertile, uncultivated land an enormously important resource.
Through the phenomenal rate of urbanisation, Africa has a growing population of very young, ambitious, often well-educated, globally minded people who are increasingly moving into middle-income brackets.
Internet users have increased, while the telecommunications sector has seen the number of cellphone users on the continent grow from 11 million in 2000 to almost 400 million today. Undersea data cables are currently being laid at an unprecedented rate, providing exponential bandwidth growth which will drive communications and internet access, particularly through mobile devices.
The banking industry is expanding with growing income levels, increased urbanisation and imperatives of financial inclusion.
To demonstrate that successful projects can be undertaken in African countries, the AfDB has raised its capacity to finance private enterprises and Public-Private Partnerships (PPPs).
Where is FDI going?
FDI into Africa peaked during 2008, then subsequently declined as a result of the global financial crisis.
Of all the FDI targeted at developing countries last year, Africa garnered an estimated 12 percent. According to the most recent data compiled by the United Nations Conference on Trade and Development (UNCTAD), the biggest inflows during 2010 (most recent complete data) were directed to oil-rich economies (Algeria, Angola, Egypt, Ghana, Nigeria and Libya). In general, the countries receiving the lowest amounts of FDI also recorded the highest volume of outward investment.
FDI inflows totalled US$55 billion in 2010, of which 30 percent went to North Africa and another 27.5 percent flowed into southern Africa. According to the World Investment Report 2011, the extent of intra-regional FDI in Africa is limited. Judging from data on FDI projects, intra-regional FDI accounts for only five percent of the total in terms of value and 12 percent in terms of number.
Who wants to invest and in what?
There are several sectors looking to Africa for opportunity. These include companies operating in mature economies with low or no growth, that need to find new ways to grow, companies operating in the high-growth Brazil, Russia, India and China (BRIC) markets, looking to fuel their growth, companies looking for intra-Africa trade opportunities and companies already operating in Africa that are looking to expand their footprint on the continent.
There is a need for personal banking services, small and medium-size business financing, micro-finance, development finance and opportunities for trade finance houses.
The food and drinks sector needs to expand to keep up with the rapid rate of urbanisation and the needs of this growing middle class, as does the retail sector. Formal retail penetration is among the lowest in the world throughout most of Africa, providing significant opportunities for the sector.
Considering investing in Africa?
When considering the opportunities and challenges in Africa, it is important to remember:
Africa is a continent and not a single country. There are 55 countries at different stages of development with different agendas. However, the majority of these belong to regional groupings, which implies different cross-border arrangements between states, depending on membership of these groups.
Africa is not isolated and is rather, an integral part of the global interconnected world. This implies that, whatever happens, the global economy affects Africa, and issues in the developed world impact Africa.
The key issue here is the risk/reward balance which investors need to understand. Investment-grade countries like South Africa, Botswana and Namibia might offer lower returns than seen elsewhere on the continent, though this is associated with a lower risk. Other countries with higher risk like Nigeria, Tanzania and Kenya could offer higher rewards in return.
Regardless of who the investor is, Africa continues to offer numerous opportunities in the post-global financial crisis world, though the options are as varied as the countries themselves.
About David Okwara
Africa, Africa brief, Africa challenges, Africa opportunities, African countries, agriculture, Angola, challenges, development, East Africa, economic growth, economy, Ethiopia, financial services, Foreign Direct Investment, foreign investment, GDP, Ghana, infrastructure, KPMG Africa, opportunities, private equity, sub-Saharan Africa, urbanisation