Friday, January 14, 2011

Africa: Can the Interest in Africa Sustain Investment Flows?

Nelly Nyagah - TradeInvest Africa - 11 January 2011


2011 holds a lot of promise for Africa with investment flows expected to pick up. Micheal Lalor, a director at Ernst & Young SA, tells us what the key considerations for investors should be in the face of the upcoming polls and also where to start if you are planning an African foray.

Ernst and Young recently launched Africa Interactive, a map-based software tool that will enable your clients to easily access crucial information that they need to make informed business decisions. Is accessing reliable and up-to-date information on Africa still a real challenge for international investors?

Once one starts digging a bit, there is actually a large quantity of Africa-related data available. The challenge more often is that the data is fragmented across various sources and so can be difficult to collate and present in a coherent and meaningful way. Africa InteractiveĆ¢„¢ has a two-fold capability to help our clients address this challenge. First, it provides an information portal, aggregating a range of indicators, indices and other data from various sources together for easy access. Second, we have found that the visual presentation of the information via the map-based interface is intuitive for most people and provides a commonly understood reference point for discussion on investment decisions. Having said this, Africa InteractiveĆ¢„¢ is only a tool. It is most effective when incorporated into a facilitated workshop-type environment, in which we can more actively work with our clients to shape the information that is most relevant to them and to stress test their thinking and strategies for Africa.

There are existing complexities to doing business in Africa despite the current positive outlook. How has Ernst & Young positioned itself to help clients deal with challenges such as the vast geography, the different market sizes and business regulations?

Having access to credible and meaningful information is one thing, but business is conducted physically in and across Africa. Our response to the ever increasing interest in and investment by our clients into and across Africa has been to transform our organisation across the sub-Saharan region from a confederation of individual practices (still the prevailing professional services model) to a single integrated African firm, which operates as one business across the continent. What this means for us internally is a single governance and management structure for Africa, a single, harmonised partner compensation system across the entire region, and greater mobility by people and teams across the region. For our clients, this means that we are not only able to provide first-hand knowledge and experience in addressing business challenges across the continent, but are also able to provide a strongly co-ordinated pan-African service via a single point of contact. In this way our clients do not have to deal with various people in different countries and we can ensure a consistent standard of quality across the continent.

What are the top issues that potential investors should take into consideration before venturing on the continent?

Despite the unprecedented interest and excitement about Africa's growth prospects, the continent remains a challenging place in which to do business. Perhaps the most obvious point is that although 'Africa' is often lumped together in comparisons with emerging markets like India and China, it is, of course, not a country but a continent. At a broad level, the sheer size and diversity of the continent is daunting. The continent comprises over 50 different countries with 50 different sets of rules, regulations, stakeholders and market dynamics. The complexity of navigating so many different markets is compounded by the fact that very few of these individual markets are likely, in and of themselves, to provide the kind of scale, in the shorter term at least, that makes them economically viable - in sub-Saharan Africa, it is arguably only South Africa and perhaps Nigeria as standalone markets that currently offer any kind of prospect of reasonable and sustainable scale for many companies.

We would therefore recommend a thorough process of fact-based due diligence on different markets, starting with sector-specific tax, legal and regulatory factors (which are often material enabling or constraining factors in the African context), but also not necessarily restricting the process to national data and boundaries. The scale opportunities may sometimes be in focusing, for example, on urban conglomerations or corridors, cross-border economic blocs, cultural groupings and consumer sub-segments.

Because of the imperative to both manage complexity and achieve relative scale across the region, we would also recommend the early development of a regional operating model that ensures effective and integrated management of the portfolio of African markets (even if this is conceptual at first, it will help inform future investment decisions). In other words, it is often more about the ability to effectively manage across boundaries; management of the entire African network becomes more important than managing the individual countries.

Critical questions about how sustainable Africa's growth is over the long-term have been raised. What factors can make the growth performance sustainable?

Given the troubled history of many African countries post-independence, scepticism is perhaps understandable. However, to address the question of sustainability one needs to appreciate the longer term process of economic reform that has occurred across much of the continent since the end of the Cold War. Inflation was brought under control, foreign debt and budget deficits reduced, state-owned enterprises privatised, regulatory and legal systems strengthened, and many African economies were opened up to international trade. This considerably improved business environment, combined with a sustained commodity boom and infrastructure investment, all contributed to an average annual growth rate of about 6% in sub-Sahara Africa between 2002 and 2008. Although there was a dip in 2009, as a result of global recession, growth remained positive, and the IMF's most recent forecast is for 5% growth in 2010 and 5.5% in 2011. So the economic foundation for sustainable growth has been laid; from a purely economic perspective, and with the continuing demand for Africa's resources, infrastructure investment, growing consumerism and urbanisation, and a rapidly developing tertiary sector, we certainly don't see the steam running out.

However, the critical factor in ensuring long term sustainability of economic performance will be ongoing political reform and good governance. The annual Ibrahim Index of African Governance, which provides a comprehensive analysis of the quality of governance across the continent, shows a steady improvement over the past decade. This reflects a significant decline in armed conflict and an increase in political liberalisation. In this regard, 2011 may be the watershed year that indicates just how sustainable Africa's growth really is, because of the number of important democratic elections being held across sub-Saharan Africa. These include Benin, Uganda, Chad, Madagascar, Zambia, Cameroon, the DRC, Liberia, Gabon, and, perhaps most importantly, Nigeria. There is also the referendum in southern Sudan on independence.

What investment trends can we expect to see in 2011?

In the decade between 1998 and 2008, FDI into Africa quadrupled. There has been a dip in the last 2 years, but not to the extent that some may have expected, given the global economic recession and challenges in the Euro zone in particular.

In 2011, we anticipate that investment flows both into and across Africa will pick up. Our experience from our client base across most countries is an overwhelming interest in investment opportunities in Africa.

The interest in Africa from emerging markets such as China and India are well documented, but we are also seeing increased interest from countries like Brazil, Russia, Malaysia, South Korea and the UAE. Similarly, despite the continued economic slowdown, we also anticipate significant increases in private investment flows from some of the developed markets, perhaps most notably from large US-based multinationals - Wal-Mart, Coca Cola and IBM are among those that have recently announced substantial investment into Africa. These kinds of investments will also help accelerate the ongoing diversification beyond commodities to infrastructure, retailing, telecoms and financial services.

Again though, political risk will remain a key consideration for investors for a long time to come, so this optimism is underscored by the hope that the election processes mentioned earlier will run smoothly and continue the positive trend of ongoing political reform.