Investors should wake up to Africa

Africa’s rise is increasingly taken for granted, but the corresponding quantity and quality of investment flows often don’t match up to the positive sentiment. Indeed, emerging market investors from Asia and public sector donors far outstrip traditional investors and businesses from OECD countries when it comes to recognizing the continent’s promise.

Africa’s strong economic growth of 5.6% in the past decade, which is forecast to continue until 2022, is clearly an attractive story. Though the primary sector of the economy, based on natural resources, continues to dominate exports, this isn’t the whole story. Telecommunications, audio-visuals, retail and other services contribute significantly to domestic growth. Specific examples of non-natural resource success stories include leather in Ethiopia, cars in South Africa, clothing in East Africa and films in Nigeria. Moreover, by 2050, Africa will probably have a labour force that is the youngest and most vibrant in the world.

There is another, less favourable, narrative on the African economy. Africa’s recent growth has not yet transformed its economic structure in a way that can support stable, quality jobs for the majority. Export revenues are still too reliant on natural resources: three quarters of sub-Saharan African countries draw half of their import revenues from primary products and depend on the global market for their industrial goods.  As a result, 50% of 15-24 year olds are unemployed; two-fifths of Africa’s women are out of a job; and only 1-2% of the population earns more than $20,000 a year.

This side of the story scares some investors, who are keen enough to make short-term investments, but less certain about much firmer, innovative “greenfield” investments in new ventures. Africa’s sovereign debt auctions raised $8 billion in 2014, and private equity investments into Africa reached $1.6 billion in 2013. But foreign direct investment (FDI), a more reliable measure of investor commitment, was below 4% of the global total in 2013 – less than Brazil, Chile or Belgium.

Outside of natural resources, it is developing economies from Asia, the Middle East and Africa itself, as well as public sector donors, who are breaking new ground in Africa. It was the Sudanese entrepreneur Mo Ibrahim whose faith in Africa’s telecom industry brought about the revolution that has since spurred further innovative technologies. Several years later, companies from developed markets are still conspicuous in their absence, with Nigeria’s telecoms sector dominated by firms such as Nigeria’s Globacom, South Africa’s MTN, the UAE’s Etisalat and India’s Airtel.

The world’s wealthiest investors are leaving investment opportunities on the table, failing to see the promise in Africa’s problems. Water, sanitation, power, transportation, health and education represent massive needs. The World Bank estimates there to be a $93 billion annual gap in infrastructure financing.  Although returns on infrastructure investment are four times as high as in developed economies, Africa’s infrastructure needs are being met mainly by China, India and other emerging market and public sector donors.

As another example, Asia and Europe are increasingly unable to allocate more land to agriculture or achieve further significant productivity gains. While Africa has 60% of the world’s arable land, FDI flows into Africa’s agribusiness are only 7% of the share for developing countries – well behind Asia, at almost 80%. Even local commercial banks shy away from agriculture except to support very large firms.

Investors need to put in the necessary effort to contextualize concerns such as the various conflicts in Chad, Mali, the Central African Republic, South Sudan, northern Nigeria, Somalia and Kenya. They must also develop their business strategies around the fact that Africa has a population smaller than India or China, but has 55 different regulatory regimes and thousands of ethnic groups and languages.

To further complicate the challenge, Africa’s regulations are changing. Responding to an improvement in democratic accountability, business and foreign investment rules are being reoriented to reflect the aspirations of the local population. To succeed, commercial strategies should be designed to benefit locals, and need to be risk-proofed against local sensitivities.

Mobilizing investment into areas of great need will create growth, diversify the economy and enhance Africa’s positive global contributions. That would provide jobs and social improvements for Africa’s growing population as well as significant profits for businesses. The alternative of a large population of unemployed young people and volatile politics is bad for business, bad for governments and an opportunity lost for us all.

Author: Ade Onitolo, Senior Consultant, IHS. He is participating in the World Economic Forum on Africa 2014 in Abuja, Nigeria. 

Image: A man arriving at the Nigerian Stock Exchange in Lagos April 8, 2014. REUTERS/Akintunde Akinleye