Africa Land of Risk and Opportunity: Creating an Enabling Environment

Russell Duke

Russell Duke

Some may wonder why Africa has often been described as the land of risk and opportunity over the past decade or so and why many forward thinking international companies are increasingly focusing on Africa. Here is an illustration of the state of Africa in numbers drawn from various published sources: Africa’s total consumer spending in 2020 is estimated at $1.4 trillion.

  • Africa has 15% of the World’s population at 1 billion and is still growing
  • With its young population, the number of Africans of working age is estimated at 1.1 billion by 2040, implying a very large labour market and market for goods and services
  • 128 million Africans are buying consumer goods, only 13% of the population, implying significant potential for growth
    Africa’s total GDP in 2020 is estimated at $2.6 trillion. In 2008, it was $1.6 trillion, roughly the size of Russia or Brazil, suggesting exponential growth.
  • The annualized GDP growth forecast is estimated at 5.5% up to 2017
  • 6 out of 10 of the World’s fastest growing economies are in Africa
  • 27 countries are now classified as mid to high income

Despite these promising numbers, we view infrastructure development as still unacceptably slow and insignificant. It must accelerate and the answer lies partly in creating enabling investment environments to promote private investment.
In one of their reports on “Mapping Support for Africa’s Infrastructure Investment” published in May 2012, The Organisation of Economic Cooperation and Development (“OECD”) noted that Infrastructure development is critical for Africa’s economic growth and poverty reduction. We fully agree. The OECD report also notes a significant funding gap to fulfil the continent’s infrastructure needs, which cannot be met by current official sources of funding alone, which have predominantly been Governments, donors, development finance institutions and development agencies. The report says that, historically, the role of private investment in African infrastructure has been limited, particularly due to the weak enabling environment that underpins infrastructure development. We share the same view.

In one of our previous articles, we noted that Africa requires $650 billion over the next 5 years or annual investment of at least $130 billion. More private sector participation is needed if to achieve investment at that scale, but the environment must be enabling.

Enabling investment environment
Liquidity is drying up and without an enabling environment to attract new and innovative sources of capital, Africa will continue to struggle to attract significant private capital for infrastructure investment. A number of emerging economies such as China, India and the Arab countries, have been increasingly active in Africa’s infrastructure sectors over the past few years. For example, China is said to have outpaced the World Bank as the leading funder of Africa’s infrastructure in the past few years.

No doubt China contributed significantly on a global scale, with China Exim Bank having funded about $670 billion over the past 2 years alone, compared to the US Exim Bank’s $600 billion over its 81 years of existence. However, various published reports now indicate that China is pulling back from the amount of and type of financing it will provide to Africa.  China is said to be refocusing on other areas and continents from a policy perspective.  Going forward, if the reports materialise, most of China’s investment in Africa will potentially be resource and commodity based projects that provide a benefit and export to China. This means that other much needed social and economic infrastructure such as passenger rail, roads, power, hospitals, etc. will mostly be left out in the coming years if there is no demonstrable benefit to China.  Some reports also indicate that China is starting to look more at construction and short term financing simply to receive the work rather than long term financing required for Africa’s infrastructure. This means that once they build a project, the host government must have a way to refinance the project.  An example is the situation with Ghana related to the gas field where it may not be able to repay the Chinese Development Bank’s loan following construction completion and the construction loan being due.

Tchareva

Tichareva

So what does an enabling environment look like to attract new sources of capital? The OECD report notes that an enabling environment encompasses the policy framework; regulations that include tariff setting and procurement; and sound public institutions for the management of infrastructure systems. Development partners can leverage private investment both by strengthening the enabling environment and using financial instruments to mitigate investment risks. We have seen many examples of poorly run state owned companies in many African countries. We have also seen the lack of understanding in the market of the various financial instruments that can assist in managing and mitigating risk. All these are stumbling blocks that militate against sustainable development.

Factors such as political instability, weak public administration, unreliable legal frameworks, corruption, the low capacity of project promoters, bankability of projects, lack of long-term financing, and insufficient resources for project preparation are all cited as factors that militate against development. For fragile states, peace and security are prerequisites for improving the enabling environment. In Nigeria, the 2015 elections were delayed due to issues of security but the smooth transition of administration that has taken place following the peaceful and democratic elections has at least ensured that peace and stability prevails in this young democracy, which lays an excellent base to address all the other issues for increased private sector and foreign direct investment. We have witnessed similar developments in many other African countries where democracy, peace and stability are taking centre stage.

Regional integration
When it comes to regional integration, the OECD research shows that there is often disconnect between country and regional priorities, lack of co-ordination and capacity among partner government ministries and regional communities, and inadequate country systems.

If we all agree that the ultimate goal should be sustainable growth and poverty reduction in Africa, as opposed to simply increased private investment, then if the later leads to the former, it certainly calls for regional integration and enhanced dialogue among African governments, the private sector, development agencies, development finance institutions and civil society. A platform such as that provided through New Partnership for Africa’s Development (“Nepad”), the planning and technical body of the African Union, is an important platform in achieving this. Nepad was one of the drivers of the launch of the Continental Business Network (“CBN”) by global and African CEOs on the side-lines of the World Economic Forum on Africa in Cape Town, South Africa, on 1 June 2015 to fast track high level private sector investment into Africa’s regional infrastructure. We view this as a step in the right direction to achieve regional integration.

Nepad recognises that infrastructure inefficiencies in Africa are costing Africa billions of dollars annually and are stunting growth. For example, in South Africa, the continent’s second largest economy, growth has been revised downwards by both the Central Bank and the IMF to below 2% in 2015 and over the next few years partly due to power constraints, having grown by 1.5% in 2014, down from 2.2% in 2013. This is simply not sustainable and extra ordinary solutions are required in mobilising funding resources and design and implementation resources from the private sector for accelerated infrastructure development.
National Standard’s Africa operations are managed out of Johannesburg, South Africa by Michael Tichareva, Principal and Managing Director of National Standard Finance Africa and Kajiya Kantumoya, Director of Investments for Africa.

Russell Duke is Chairman & Managing Principal at National Standard Finance, LLC. Mr. Duke can be reached at RDuke@NatStandard.com.

Michael Tichareva is Principal & Managing Director of Africa operations at National Standard Finance, LLC. Mr. Tichareva can be reached at MTichareva@NatStandard.com.
The website can be accessed here: www.NatStandard.com

 

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2 Comments
  • Alex Smith

    Oh, yes! Africa is like a magnet for foreign investors. And now private equity in Africa is increasing too. It’s a fact! And investors give preference different regions of Africa. I recently read that the investment fund Hermes-Sojitz invest $ 3 billion in projects in West Africa. There’s already built a high-tech fish processing plant. Soon the first shopping malls and a 65-floors skyscraper will be built over there

  • Iheonunekwu Joseph Nwabueze

    THANKS TO JONATHAN FOR SACRIFICING POWER FOR PEACE AND GROWTH> Factors such as political instability, weak public administration, unreliable legal frameworks, corruption, the low capacity of project promoters, bankability of projects, lack of long-term financing, and insufficient resources for project preparation are all cited as factors that militate against development. For fragile states, peace and security are prerequisites for improving the enabling environment. In Nigeria, the 2015 elections were delayed due to issues of security but the smooth transition of administration that has taken place following the peaceful and democratic elections has at least ensured that peace and stability prevails in this young democracy, which lays an excellent base to address all the other issues for increased private sector and foreign direct investment. We have witnessed similar developments in many other African countries where democracy, peace and stability are taking centre stage.

    BLACK PEOPLE RAN SOUTH AFRICA DOWN< WHY: Nepad recognises that infrastructure inefficiencies in Africa are costing Africa billions of dollars annually and are stunting growth. For example, in South Africa, the continent’s second largest economy, growth has been revised downwards by both the Central Bank and the IMF to below 2% in 2015 and over the next few years partly due to power constraints, having grown by 1.5% in 2014, down from 2.2% in 2013. This is simply not sustainable and extra ordinary solutions are required in mobilising funding resources and design and implementation resources from the private sector for accelerated infrastructure development

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