What are the current and future roles of natural resources in attracting FDI inflows to Africa?
Many of the large gains in FDI inflows to Africa during the five year period to 2014 have been into the extractive industries, in particular, Zambia and Mozambique in Southern Africa; Uganda and Tanzania in East Africa and the Republic of Congo and Chad in Central Africa.
The reliance of many African economies on the extractive industries, which have been heavily impacted by the low commodity and oil prices linked, inter alia, to the slowdown of the Chinese economy, has negatively impacted on FDI inflows to the continent during the past few years. This is reflected in the fact that FDI inflows to developing economies increased by 2%, to US$681.0 billion, during 2014, however, FDI inflows to Africa remained unchanged at US$53.9 billion during this period and declined by 4% during 2013 in comparison to the prior year.
When considering the impact of the current low commodities price on investment into Africa, it is important to note that the value of announced greenfield FDI projects to African in the mining, quarrying and petroleum industries, increased by a massive 259% from US$6.1 billion to US$22.0 billion during 2014. This trend supports the view that natural resources continues to be a vital element in Africa’s attractiveness as an FDI destination.
It is interesting to note that while a large portion of the US$88.0 billion value of announced greenfield FDI projects to Africa is in the extractive industries, the most notable being a greenfield investment in the oil and gas industry in Angola amounting to US$16.0 billion, a significant portion of the announced greenfield investment is into the manufacturing and services sectors. This is an important trend, as many African countries seek to diversify their economies away from an over-reliance on the extractive industries.
While FDI inflows to African countries with exceptional mineral or oil and gas resources continued in 2014, there has been a shift in investment into other sectors such as services and manufacturing in recent years. The African countries that are weathering the reducing FDI inflow storm the best – global FDI inflows declined by 16% during 2014 – are those that have a focus on manufacturing or services. Examples of this trend are:
- Morocco in North Africa, which experienced increased FDI inflows of 9% during 2014 and whose economy is quite diverse with exports comprising of electrical and electronic equipment (16%), textile related items (10%), fertilisers (8%) and phosphates (4%);
- Rwanda in Central Africa, which experienced increases in FDI inflows during 2014 of 4%, and whose economy is largely agricultural with a particular focus on tea and coffee;
- Kenya in East Africa which achieved increased FDI inflows of 96% during 2014 and whose major exports comprise tea, horticulture, manufactured goods and coffee; and
- Ethiopia in East Africa which experienced increased FDI inflows of 26% and whose main exports comprise of coffee, tea, mate and spices (22%); oil seed (18%); edible vegetables (15%) and live trees and plants (5%).
What else is important?
The other important consideration for potential investors are the political landscape and business environment. The political situation incorporates political stability and security factors. The business environment includes factors such as infrastructure, corruption, onerous regulations, taxation regime and the conduciveness of the regulatory environment to the starting and operating of a business in that jurisdiction.
As can be seen from the reduced FDI inflows to North and West Africa, armed conflict, political uncertainty and security threats are the biggest deterrents to FDI inflows to Africa, regardless of the quality of a country’s geological base.
Countries that are politically stable and that have better infrastructure, lower levels of corruption and business environments that are more conducive to investment as well as a more diversified economy, do attract higher levels of FDI.
Consider the following: the five top recipients of FDI inflows in Africa during 2014 were South Africa, in Southern Africa, with FDI inflows of US$5.7 billion; Congo, in Central Africa, which achieved FDI inflows of US$5.5 billion; Mozambique, in Southern Africa, at US$4.9 billion; Egypt, in North Africa, at US$4.8 billion and Nigeria, in West Africa, which achieved FDI inflows of US$4.7 billion.
South Africa, with its more diversified economy, achieved the highest FDI inflows in Africa in 2014 and also achieved good effective rankings of 61% in the World Bank Ease of Doing Business Survey (“Ease of Doing Business Survey”), 2015 – a decrease from 77% in the World Bank Ease of Doing Business Survey, 2014 – and 62% in the 2014 Transparency International Corruption Perception Index (“CPI”).
Congo, which is hugely dependent on its oil resources, achieved extremely low effective rankings of 7% in the Ease of Doing Business Survey, 2015 and 13% in the CPI.
Nigeria, with a largely oil based economy, and Mozambique, which is heavily resources dependent and has huge gas potential, not scoring much better at 11% and 30%, respectively, in respect of the Ease of Doing Business Survey, 2015 and 22% and 32%, respectively, in the CPI.