The Gulf state is ahead of the rest of the Middle East - and much of the world - when it comes to capitalising on Africa's investment opportunities. Still, some barriers remain, and African governments are working to encourage greater flows from the region and beyond
With its abounding natural resources, vast expanses of arable land, and evolving infrastructure, the African continent arguably presents a wealth of opportunity to global investors. Yet, despite gaping windows of opportunity, the continent has long been viewed as a Wild West by investors due to shaky governance and residual corruption.
That all seems to be changing. Last year, although the number of foreign direct investment (FDI) projects into Africa dropped by 16 percent to 602 in 2016, the total value of capital investment increased by 40 percent to $92.3bn, according to the 2017 Africa Investment Report by the UK Financial Times’ fDi Intelligence, published in August.
The UAE appears to be playing a leading role in sussing out opportunities. According to the fDi report, it was the second top investing country in Africa by value of capital investment in 2016, accounting for $11bn of capex (capital expenditure) giving it a 12 percent market share. It was second only to China, which had a 39 percent share and accounted for $36.1bn of capex in 2016. The report showed that UAE-led FDI rose a substantial 161 percent from 2015, when it pumped $4.2bn of capex into African projects.
Set against overall Middle Eastern investment into Africa, which totalled $15.7bn of capex in 2016, it is evident that the UAE is taking a large slice of the pie – despite a decline in the total number of individual FDI projects it was involved in that year, from 45 in 2015 to 34 in 2016. This suggests that the country is eyeing fewer, but larger, schemes.
According to the Dubai Chamber of Commerce and Industry, Dubai has been banking on Africa for some time. Non-oil trade with Africa has risen steadily by more than 700 percent since 2002. Says Dubai Chamber’s president and CEO Hamad Buamim: “Dubai is well positioned to take advantage of economic trends shaping Africa, given the fact that the emirate serves as a major hub for African companies that trade with the GCC and use the city as a strategic hub to access key growth markets in Asia and Europe,” he says.
A report, released this month, by emerge85, an economics laboratory that partners with Johns Hopkins University and UAE think tank the Delma Institute, supports this claim. Dubai is one of the few places able to facilitate business and logistics for the emerging African middle class, especially in Kenya, Nigeria, and South Africa.
Challenge or opportunity?
“From aviation, to food security, to humanitarian assistance, the relationship between the [entire] Gulf and Africa is multifaceted and full of growth opportunities,” says Joseph Dana, editor-in-chief of emerge85, which is partnering with the Delma Institute, citing rapid urbanisation and a population boom as reasons for why Africa is such a fertile market.
EY’s 2017 Africa Attractiveness report also indicated strong participation by the UAE in African investment, but said the drop in commodity prices has shrunk the number of projects the UAE is involved in. The number of UAE projects climbed 41 percent in 2015 but declined 30 percent in 2016, EY said. “Investment flows to Africa have been very dependent on commodity prices, and as commodity prices have cycled down over the last two to three years, in the absence of diversified economies, investment flows have tailed off,” says Dr. Greg Mills, director of the Johannesburg-based Brenthurst Foundation.
He added that perceptions of corruption and other such risk had dented investor appetite. “These remain high-cost and relatively difficult places to do business, where at least the perception, if not the reality of risk remains very high,” says Mills, who has co-authored a book, ‘Making Africa Work’, with former Nigerian president Olusegun Obasanjo.
However, experts at the Africa Legal Network (ALN)’s Africa: Bridging the Gulf conference in Dubai this month insisted that a trend of democratic reforms across the continent, surging demographics and an underdeveloped infrastructure system promise to make the climate more investor friendly.
Former Malian prime minister and ALN chair, Cheick Modibo Diarra, says that by far the greatest liability for investors on the continent has been political risk, but as institutions evolve, this is becoming a thing of the past. “The most common risk in Africa is political risk. Look at what happened in Kenya. That tells you that even now our judicial institutions have reached a level of maturity,” Diarra tells Arabian Business, pointing to Kenya's re-election of a sitting president in August.
The east African country ordered a new vote to be held within 60 days after the polls were found to be “neither transparent nor verifiable”. Says Diarra: “That tells you even in that area risk is dying out because our institutions are stronger.”
Gone are the days when companies ran the risk of contracts not being honoured, he adds. “Right now, those kind of risks are almost minimal in Africa. We overcame that long ago, there is a continuity of the state. Government can change but contracts are still binding.”
New legal frameworks have been put in place to safeguard against entire sub-regions being held responsible for corporate malfeasance of individual countries. “We have regional laws that make sure the whole sub-region doesn’t look bad to investors just because of one country,” Diarra says. “Everybody has to abide them.”
Karim Anjarwalla, managing partner of Nairobi-based corporate law firm, Anjarwalla & Khanna – which has an office in Dubai – agrees that the Africa of today is less risky than it was ten or 15 years ago. “I think African economies have grown tremendously, as have the opportunities and quality of governance. And although there have been setbacks, overall the quality of governance has gone up.
Atiq Anjarwalla, managing director of Anjarwalla Collins & Haidermota, says that while a slump in commodities prices means the African economy overall has contracted, the good news is that the diversified economies of east Africa, such as Kenya, Tanzania, Uganda and Ivory Coast have seen growth rates of 4-6 percent. This compares to Nigeria’s economy, which shrunk 1.6 per cent in 2016, due to 80 percent of their budget being dependent on oil, he says.
Historically perceived as fragile, governance is starting to improve, thanks to anti-corruption laws passed in South Africa and an anti-bribery bill in Kenya last December, among other examples. “These are seen as incremental steps in a longer journey. We’ve had a number of countries pass quite strong laws [to fight] corruption.
Of course, those laws will take a number of years to settle down,” Anjarwalla says.
As the rest of the world turns on around one and a half percent growth, growth in many African countries is sometimes in the double digits, exposing an economic dynamism resilient to the global downturn and commodity price slump.
Below are some of the emerging opportunities in Africa, as well as a reminder of some evergreen investment targets.
In a recent development, the Francophone countries, such as Cameroon, Democratic Republic of the Congo, Ivory Coast, Republic of the Congo and Senegal, are increasingly being viewed as dynamic and exciting for business, experts say.
“Sectors of interest include technology, financial services, agriculture and consumer-facing industries such as real estate, particularly around the development of shopping malls, which West African cities still lack,” says Roddy McKean, director at Anjarwalla & Khanna.
While it has traditionally been mainly French companies setting up shop here due to linguistic preferences, today, more and more multinationals are seeking opportunities in this emerging region. The Gulf, due to its experience building infrastructure at breakneck speed, has been at the forefront of this trend. Senegal has seen investment in infrastructure and real estate from Gulf investors. For example, Dubai’s DP World, the world’s third largest ports operator, has had a presence in Senegal since 2000. It runs the port of Dakar and opened a logistics free zone there in 2015 to support its port operations and attempt to transform Senegal into a regional logistics hub for West Africa.
This is almost a sideshow compared with the massive inward investment by Dubai-based developer, Semer Investment. On a plain dotted with prehistoric baobab trees, indigenous to the African savannah, a futuristic $2bn financial colony called ‘Diamniadio Lake City’ is emerging.
Branding itself as “the vibrant new heart of Diamniadio in Senegal, a city within the city and the capital’s jewel”, the high-end property is the largest urban masterplanned growth project of its kind in Sub-Saharan Africa and will include a new central business district (CBD) for Dakar, according to a press release announcing the scheme’s launch in March this year.
The project is intended to support the country’s 2035 vision to solve national challenges including sustainability, economic development, inward investment, capitalisation of resource-rich industries, population growth and employment.
Presented as a utopian city concept, Diamniadio Lake City is split into three zones including Dakar’s new business zone, a high-end residential district, and a luxury quarter for retail, entertainment and leisure, all incorporating the latest renewable energy technologies and eco-friendly construction materials.
The new district will act as a platform not only for Dakar, but for Senegal and neighbouring Sub-Saharan countries to flourish, Semer vice-chairman and CEO Diène Marcel Diagne said at the launch.
The construction phase alone created 45,000 jobs, the developer claims, as well as assisting Dakar’s ongoing efforts to deliver better transportation and connectivity while relieving congestion.
Sub-Saharan Africa attracted an additional $2.7bn in FDI from the GCC in the first half of 2015, the largest influx of capital in any year so far, according to Dubai Chamber figures.
The city – “a hub for work, living, dining, shopping, fitness, and leisure” according to its website – looks like part of an emerging effort by some African states to become the next Dubai.
North Africa has long been a favourite among Gulf investors due to cultural ties and opportunities in sectors as diverse as logistics, hospitality, retail and banking.
In the first half of 2015 the Gulf invested $2.7bn in sub-Saharan Africa, more than in any previous year, Dubai Chamber figures show, but, at the same time, the GCC invested nearly ten times as much in North Africa, demonstrating closer links with fellow Arab countries.
“Traditionally, Gulf investment has been spread across Africa but there has always been a special connection with the northern part of the continent,” says the emerge85’s Joseph Dana.
Gulf organisations provided $15bn for African infrastructure projects from 2004 to 2014, of which 65 percent went to North African countries, the Emerge85 report said in October.
“As economies in East Africa have strengthened in recent decades, we have seen a natural increase in investment flows to this area. I expect this trend will continue going forward but not necessarily at the expense of North African investment,” says Dana.
Investors are also returning to Egypt and Morocco, where a small but vibrant start-up scene is emerging after investors retreated amid political turmoil in the wake of the 2011 Arab Spring.
Both of these markets also dominate the private equity market, accounting for 81 percent of the value of all such deals in the region, according to the African Private Equity and Venture Capital Association.
East Africa is the “most appealing region” for non-commodity investment from the Gulf, not least because of its five hours flight time from the UAE. Once there, you have Ethiopia’s manufacturing industry; Kenya’s and Mozambique’s retail and tourism, and Uganda’s education sector being the biggest areas of interest, Dubai Chamber’s 2015 report claimed.
As the world’s fastest growing economy in 2017, according to the World Bank, Ethiopia is now very much coming on to people’s radar as a hub for manufacturing, as costs in Asia and China grow, says Anjarwalla & Khanna’s McKean. “With a population of over 90 million, cheap labour and a relatively stable political and social environment, Ethiopia is drawing significant attention from international investors, including from the Gulf and multinational corporations,” he says
Ethiopia, forging a destiny as Africa’s industrial power-house, is now cited as a top investment destination in Africa, due to its untapped potential in industries such as agro-processing, textiles, sugar, chemicals, metals and engineering.
Yet challenges remain, given immature legal and regulatory frameworks and some sectors, such as banking, simply not being open to foreigners. “[However,] Ethiopia’s government is actively seeking to improve the investment landscape by developing infrastructure and more efficient business registration processes,” McKean says.
Recent oil discoveries in Kenya, Somalia and other countries in the east may also disrupt the investment landscape, he notes. “The good news is that Kenya already has a diversified economy focusing on financial services, technology, agriculture, textiles and tourism. These sectors have prevented it from being reliant on a particular commodity and caught in the downward spiral of falling oil prices.”
Going forward, Karim Anjarwalla says far more investment in infrastructure is expected in Africa, by Gulf and other overseas investors. “I think you’ll see a lot of investment in infrastructure in the building of roads, ports, airports, health and water facilities what Africa lacks is basic infrastructure,” he says.
Gulf entities have invested around $30bn in Africa’s infrastructure projects over the last decade, according to Dubai Chamber. And the GCC’s expertise in developing airports, ports and communications networks is increasingly being enlisted by governments in the region.
DP World’s partnership with the Senegalese government to build the new logistics free zone outside Dakar is one such example. The free zone builds on the port operator’s World-Dakar Terminal, which stands as West Africa’s largest container terminal after the facility was expanded in 2011, doubling capacity to over 600,000 20-foot vessel capacity.
Abu Dhabi is also helping to plug the infrastructure gap, investing $16bn in transport projects across West Africa in 2014. The Kuwait Fund for Arab Economic Development invested in a $36m project to pave a highway in Senegal in 2015.
Yet some sectors are proving to be less lucrative for Gulf investors. UAE telecoms giant Etisalat is pulling out of Nigeria, losing its 14 percent telecoms market share after efforts by Etisalat Nigeria to renegotiate a $1.2bn loan with lenders failed, Hatem Dowidar, CEO of Etisalat International, told Reuters in July. The UAE-based telecoms operator generated a profit margin of about one percent in Nigeria, compared to 27 percent for Etisalat’s UAE operations, Reuters said.
Dubai in the Savannah
In the same way that Dubai is laden with tax-free incentives and free zones, so too are a number of African nations positioning themselves as regional hubs, leveraging the infrastructure or geographic advantages they have to offer.
“Dubai has become an interesting model for a lot of nations on the continent,” says Imad Mesdoua, senior Africa consultant at global risk consultancy Control Risks. “They are trying to leverage advantages they have at a regional level to make themselves more attractive to FDI.
“You also have nations putting in place very advantageous financial and regulatory incentives. You have a kind of emulation of the Dubai model,” Mesdoua says.
A Control Risks report ‘Dubai in Africa’ from January this year reported on Kenya’s Vision 2030 plan. “Infrastructure upgrades are again a major pillar of this strategy, with flagship projects under way for a new free trade port in Mombasa and a new East African railway,” it said. “The government has multiplied efforts to woo foreign businesses to locate their Africa headquarters in Nairobi and promote the capital’s fast-growing tech hub. In Cameroon, the government hopes to make the newly inaugurated deep-water port of Kribi a trading gateway for the entire west coast of Africa,” the report also noted.
Recalling the Gulf’s own construction boom, real estate was the top sector for capital investment in 2016, accounting for $36.5bn (or 40 percent) of announced FDI in the region, according to 2017 annual Africa Investment Report by the UK Financial Times’ fDi Intelligence
Then there is tourism. Based on 2017 data from STR, Africa currently shows 301 hotel projects in the pipeline, accounting for 57,011 rooms, with building hotspots in Egypt, Nigeria, Angola and Ethiopia.
Gold and grain
Looking ahead, Gulf investors should look to bio-agriculture, says Mali’s Diarra. “Right now, Africa is probably the place with the most arable land still available. And as the global population grows, food is going to become more of a problem,” Diarra warns. He says that the Gulf should team up with local farmers to seize opportunities presented by the burgeoning demand for bio and organic produce.
Investors from the Gulf should also continue making investments in gold, refocusing their sights on Mali’s abundant gold mines, which are second in the world for gold production. “I know that most of the gold that is extracted in the world transits through Dubai, and is big business. So why not go and invest in the mining business of gold in Mali?”
Paul Okaru, head of Dubai-based consultancy West Africa Advisory, agrees that Africa’s relative underdevelopment translates into significant economic potential for investors across a broad range of sectors. “Most African countries are still at an embryonic growth stage, so the sectors where we need investment are numerous: renewable energy, healthcare, pharmaceuticals, ICT and logistics – there are opportunities in all of these sectors.”
Diarra goes one step further, calling the continent the best-kept investment secret on the planet. “The opportunities are just limitless,” he proclaims. “Africa today is the only place you hear about double-digit growth. It really is the last frontier. But some people are still scared, people have been told about the risks, without being told that most of those risks can and have been mitigated a long time ago.
“It is the best kept secret that investing in Africa is profitable,” he adds. “Let’s not keep it a secret anymore, let’s let everyone know about it – let’s go and invest there.
“So what I suggest to investors in the Gulf is this: instead of relying on old narratives, just come and see for yourself.”