Business Today

Land of Opportunity

Sugan Palanee | Print Edition: May 29, 2011

The global investment paradigm is shifting from 'should one invest in Africa' to 'managing the risk of not being in Africa'. Africa appeals to potential investors for a host of reasons. Not surprisingly, natural resources have been the catalyst for Africa's growth. The continent has the widest range of minerals, from gold, platinum and diamonds to chrome, coal, cassiterite and coltan.

The continent has grown steadily at about 5.6 per cent between 2001 and 2008, thanks to a combination of structural economic and political reforms, stable macroeconomic conditions and increased foreign direct investment inflows - which quadrupled from just over $50 billion in 2003 to over $200 billion in 2008 - mainly from emerging economies.

At the World Economic Forum, discussions revolved around how 40 African multinational corporations, labelled as African Challengers, outperformed the Nikkei 225, DAX 30 and the S&P 500 on revenue and profit margins between 2003 and 2008. The largest proportion of African Challengers is in information and communications technology, financial services and logistics, besides mining and natural resources. In short, investment opportunities in Africa are not just in natural resources.

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Where most people see problems, the African Challengers saw opportunity. For example, even in Africa's largest economy, South Africa, at least 40 per cent of the population has no access to banking. In Nigeria and Kenya - the powerhouses of west and east Africa, respectively - the figure is much higher, over 70 per cent. So, in Kenya, for instance, Safaricom, as Vodafone is known there, developed a product, M-Pesa, to distribute banking services on mobile phones. The service has since been introduced in South Africa and Tanzania.

With less than five per cent of Africa 's population having access to the Internet, innovative investors filled a lacuna to grow brands such as Celtel, which was taken over by Zain (whose Africa operations Bharti Airtel subsequently bought). Another African success story is South Africa's MTN, which grew into a pan-Middle East and Africa phone operator. Kenya Airways, Ethiopian Airlines, RwandaAir and Air Namibia are growing airlines purchasing several aircraft and introducing new routes within Africa, and between Africa and Europe.

Other sectors ready for investment include infrastructure, energy, agriculture, real estate, tourism, construction, education and healthcare services. Infrastructure alone is expected to attract billions of dollars per year over the next 10 years. Poor food security in Africa has seen companies investing in innovative farming technologies and agro-processing. For instance, Rwanda benefited with Starbucks assisting coffee farmers.

There is an increasing preference for value-adding investments - that is, investment that brings benefits to the locals as opposed to extraction and export of raw material. However, countries such as China have successfully increased their presence in Africa through a careful alignment of their own interests with the challenges facing African governments. Most of China's FDI in Africa is led by state-owned enterprises, and involve an exchange of infrastructure development in return for mineral rights. For all its challenges, Africa presents the most sustainable economic outlook.

The author is Senior Managing Partner, Ernst & Young, Africa

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