Is Africa's investment dream still on track?

It was the new bright spot for global investors, but widespread falling GDP growth and decreased commodity prices has meant Africa's dream of attracting billions of dollars of investment from the GCC is taking longer to realise than anticipated. But ahead of the Arabian Business Africa Forum, stakeholders argue serious returns are there to be made
Agriculture is estimated to account for 32 percent of Africas GDP and employ 65 percent of the continents workforce.
By Sarah Townsend
Sat 21 Jan 2017 01:33 AM

In 2015, Malian businessman and former interim prime minister Cheick Modibo Diarra told Arabian Business: “When it comes to investment…Africa really is the last frontier. Be it agriculture, energy production, extraction of gold and diamonds, or oil and gas, we have a lot of opportunities and a young workforce that understands how business works.”

He was speaking at a time when interest in Africa among Middle East investors was on an exciting upturn – Gulf airlines were launching new routes to the continent, Dubai Chamber and other organisations were opening outreach offices in African cities, and consultants’ phones were ringing off the hook with enquiries about markets beyond the traditional Gulf investor heartlands of Egypt and Morocco, to sub-Saharan African countries such as Kenya, Uganda and Tanzania.

Two years later, economic uncertainty, low oil prices and currency fluctuations have taken their toll, with take-up of African opportunities slower than predicted.

This has not dampened demand among Gulf investors, analysts insist. “I can assure you that virtually every major and minor company out of the GCC is continually looking at Africa,” states Indian businessman Sanjeev Gupta, who founded steel products company Liberty House Group and is also executive director of financial services at the Africa Finance Corporation.

Gupta is due to participate in a panel discussion at the Arabian Business Africa Forum, to be held at the Conrad Hotel Dubai on January 25. The forum, being held in association with Invest Africa, will bring together a host of regional and international speakers and panelists who will examine the investment opportunities, risks and forecasts for the continent.

Ivory Coast is the world's largest exporter of cocoa, which makes up 15 percent of the country's GDP and 40 percent of its exports.

Other speakers include Stallion Group chairman Sunil Vaswani and Ashish Thakkar, CEO of Mara Group, both of whom have created billion-dollar companies through investments in Africa.

Middle Eastern foreign direct investment (FDI) into Africa has held up despite turbulent macroeconomic conditions. For example, the GCC is an important source of capital inflows into infrastructure.

The latest African Economic Outlook from the Organisation for Economic Cooperation and Development (OECD), published in 2016, said the most important emerging investors were Bahrain, Qatar, the UAE, China and India, and that Middle East investors were “leading the way”, having injected more than $100bn into African infrastructure over the past decade.

The report noted that Africa’s economic growth remained resilient in 2015 (2016 figures are not available) amid a weak global economy and lower commodity prices. Real GDP grew by an average of 3.6 percent, higher than the global average of 3.1 percent and more than double that of the Euro area, making Africa the second fastest growing region in the world, behind East Asia, that year.

Overall capital investment declined 24 percent to $66.5bn in 2015, according to the latest annual Africa Investment Report by the Financial Times’ fDi Intelligence in 2016, however, investments from the Middle East rose. The UAE was the fifth top investing country in Africa by capital expenditure, pumping $4.2bn into FDI projects during 2015. The UAE was also the fourth top investing country by project number, investing in 45 projects in 2015 – a 41 percent rise from the previous year.

Agility Africa CEO Geoffrey White.

The Middle East overall was the second top investing region with $11bn of capital investment, behind Western Europe with $30bn. Examples of Gulf investments in Africa include Saudi Prince Alwaleed bin Talal’s African hotels portfolio held by Kingdom Africa Management (KAM); Kharafi Group’s hotels in Gambia and South Africa; Dubai-based Al Futtaim Group’s ownership of Kenyan automotive distributor CMC Holdings; Etisalat’s telecoms operations in Nigeria, Morocco and elsewhere, and UAE private equity investor Abraaj Group’s $3bn of interests in various sectors across African markets, including healthcare, mining and dairy.

Abraaj Group CEO Arif Naqvi said on the sidelines of the World Economic Forum last week that Africa was core to the firm's investment strategy, as it bets the continent's rising middle class will consume more goods.

Naqvi said he continues to believe in the opportunities the continent offers.

"It's the consumption-driven economies that we focus on a lot," he said. "In those economies, as people emerge into the middle classes and move into cities, they're going to want more product, more infrastructure."

He noted there could be short-term problems in particular countries due to currency fluctuations or other things, but said the long-term trend of increased consumption would not stop.

In 2016, UAE-based solar energy developer Phanes Group signed a deal to build three 100MW solar plants in Nigeria, and Dubai’s Dodsal Group said it was in talks with banks to raise a further $300m for gas exploration and production activities in Tanzania after making a major natural gas discovery in the Ruvu Basin.

UAE-based DP World is tapping into African markets with operations at the Port of Djibouti.

However, FDI figures for 2016 are unlikely to be as rosy. The World Bank estimates that average GDP growth in sub-Saharan Africa decelerated to 1.5 percent in 2016, the lowest level in two decades, as exporters adjust to low commodity prices. The figure is forecast to pick up to 2.9 percent in 2017 and recover to 3.6 percent in 2018.

As fDi Intelligence Intelligence notes in its introduction: “After the breakneck growth rates that characterised much of Africa’s first decade in the 21st century, we are entering a more sober period.”

Gupta says: “Generally, the macroeconomic environment in Africa has been affected by low commodity prices, weakening currencies, political turmoil and inflation. Those African countries heavily reliant on commodities (such as Nigeria, Mozambique and Angola) have suffered sluggish growth but those which are not (including Kenya, Mauritius and Ivory Coast) have maintained decent growth and investor dialogue.

“So, the overall growth story remains, but deal closure is always difficult in times of structural uncertainties amid global volatility.”

Frank Braeken, non-executive chairman of Democratic Republic of the Congo-based agribusiness Feronia, and a former vice-president of Unilever Africa, says: “My concerns about the exuberant expectations [many overseas investors held] two years ago were that it could only end in a degree of disappointment.

Jameel Ahmed heads up research at FXTM.

“There are obviously tremendous opportunities in Africa – particularly around large-scale infrastructure in the energy, utilities, telecoms, agriculture and oil and gas sectors – but people thought it would be easy. They have since discovered that capturing the opportunities is harder than they imagined.”

There are several reasons for this, Braeken, who will also be a panellist at the Arabian Business Africa Forum, says. “There was a feeling among Gulf investors that money solves anything. They thought that if you’d raised the capital, the project was 50-80 percent complete. This is not the case. It’s about an ability to execute the project on the ground. If there are practical barriers to this, no amount of money will solve it.”

Successful implementation requires a thorough understanding of the regulatory frameworks, he explains. In many African countries, these are improving and are more predictable than they were – the continent accounted for the highest number of reforms worldwide in the World Bank’s latest Ease of Doing Business report, with five African countries listed among the top 10 improvers globally – but challenges remain in supply chain logistics, such as “getting stuff in, getting stuff stored and moving stuff around”, according to Braeken.

There are also challenges in building a skilled workforce – the bigger number of high-calibre businesses in Africa means firms are competing for a scarcer pool of resources – and in obtaining quality data to make informed business decisions. Many of the reports on which companies base their strategies are out of date, he argues.

Morocco's Noor 1 solar farm is 1,112 acres big.

Africa Finance Corporation, a development finance institution, is working with Dubai bank Emirates NBD to issue a $150m sukuk to invest in African infrastructure at the end of this month. Its president and CEO, Andrew Alli, agrees that there is substantial interest among Gulf-based investors in the fields of African transport, ports, power, and, in the past 12 months, fast-moving consumer goods (FMCG) and financial services, “but this interest does not always translate into actual investments”.

This is in part due to investor wariness, he says. “First, Gulf investors are interested in infrastructure but today there is more money available than there are bankable projects. We have seen some crazily unrealistic expectations of possible returns. People think they can get 30 percent from infrastructure projects when emerging markets offer more like the mid-teens to early-20s.

“Second, people from the Gulf just don’t have the networks to figure out who are the right partners. This is a gap that the Africa Finance Corporation is trying to bridge.”

When Arabian Business spoke in 2015 to Atiq Anjarwalla, managing partner of Dubai-based law firm Anjarwalla Collins & Haidermota, which has a practice in Kenya, he lamented that negative stereotypes of corruption and political instability were deterring Gulf investors.

Speaking last week, he maintains that sadly the “status quo prevails” and political risk is still viewed as an issue. However, the prevalence of forums and events to discuss such challenges has grown and the landscape is more transparent, he says.

Africa's oil and gas sector is attracting foreign investor interest even in highly remote locations.

Even in a low-growth environment, there are plenty of opportunities, analysts say. The World Bank noted that while South Africa and oil exporters experienced a slowdown, activity in non-resource intensive countries, including agricultural exporters and commodity importers— has remained robust.

Logistics giant Agility’s African business is developing a network of logistics distribution parks across the continent to help the flow of regional trade.

“Agility has been working in Africa for over 60 years, so understands the environment and the market opportunities," its CEO Geoffrey White says.

“As the developed world markets experience continuing slower growth and contracting market demographics, Africa offers an attractive alternative. With strong economic growth averaging 5 percent and a growing, working-age population, there is rapidly expanding consumer demand in African markets.

“Growth is being driven by development of increasing oil and gas resources and the growing demand for agricultural output to meet global demand growth. Africa is becoming an increasingly important component of the world’s economy and a market businesses cannot afford to ignore.”

Andrew Alli of Africa Finance Corporation.

Much of the new oil and gas resources being discovered in Africa are commercially viable even at $50 per barrel, White, who will speak at the Arabian Business Africa Forum, claims – a compelling proposition as the world’s major oil exporters struggle to cope with the low oil price environment.

“This sector is attracting significant FDI even in the most remote locations,” he says. “The energy-related resources that have been found in over half of African nations mean that Africa now holds 10-15 percent of global energy resources.

“These are not just enough to power African growth, but will establish Africa as a major future exporter of energy to the Far East and India.”

Braeken advises Gulf investors to invest in “anything related to import substitution”. “You read about how African imports of food and produce – maize, grains, palm oil – is around $35bn-$60bn a year. That is an astounding amount given the amount of greenfield and arable land in Africa. It also shows there is demand at an import-level price point."

The same is true of FMCG – there is a gap for manufacturing of such products.

Braeken says there is also opporutnity in market consolidation. “What is striking in the African market is that you see lots of smaller companies worth $10m, $15m and so on, but not many large [African] companies. So there is value in seeking economies of scale and resolving talent acquisition issues.”

Anjarwalla highlights other growing opportunities, such as airports, ports, refineries and industrial zones. And Jameel Ahmad, vice-president of corporate development and market research at FXTM, notes that the region is becoming increasingly interested in learning how to trade the financial markets, presenting further opportunities for GCC investors.

“Nigeria has been seen for a while as a high potential market for the FX industry, while South Africa has recently emerged and some brokers are beginning to turn their attention towards Ghana.”

A section of Kenya's Standard Gauge Railway.

He adds that, while Africa is facing headwinds from a stronger US dollar, this is an advantage for Gulf investors whose currencies are pegged to the dollar.

An important development for prospective investors to follow is the anticipated signing of the Tripartite Free Trade Area (TFTA) between member states of three African regional economic communities to create a free trade area between 26 countries from Cape Town to Cairo. The agreement would create a combined market of around 625 million people, with clear advantages for Middle East-Africa bilateral trade. But while the agreement has been signed in principle, it has yet to be ratified and negotiations are ongoing.

“It’s always a positive when nations and trade blocks seek to harmonise and facilitate. But the perennial issue of poor roads, rail and aviation connectivity, coupled with countries’ divergent views on tariffs, labour laws and taxes means real-life collaboration and trade will be elusive in the short term,” Gupta says.

In April, Dubai Chamber is to publish its 2015-16 figures for UAE-Africa trade and investment volumes, which grew by 11 percent in the five years to 2014/15. In 2014, the UAE was Africa’s 19th biggest export destination, with 1.1 percent of Africa’s total world exports, and it will be interesting to see how the figures have evolved over the past 18 months.

Greenfield land presents huge opportunities.

As Geoffrey White highlights, Africa has strong underlying economic fundamentals and many constraints to investment are “old-fashioned perceptions now out of date”. The perceived risks of doing business in Africa are often much higher than the reality.

However, it is clear that practical hurdles remain when it comes to executing projects, and Gulf investors must be sharp, informed and well-connected to succeed. Says Gupta: “Smart thinking will dictate to many whether Africa can be ignored or engaged with.

“Structural issues like currency devaluation, forex availability and challenging infrastructure hurdles will not go away any time soon. How to manage those issues and create sustainable business models will separate the men from the boys.

“It’s not for the fainthearted but it can be done.”

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