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Ray of hope for African FDI?

This is Africa, May 1, 2012

By Wendy Atkins
Cashless smart card system at Sandton station in Johannesburg
After a decade of accelerated growth, investment into Africa declined steeply during the recession. But the signs are that activity is picking up and investment into the continent is returning.

According to UNCTAD’s 2011 World Investment Report, global FDI rose moderately to $1,240bn in 2010, but was still a full 15 percent down on the pre-crisis average. By contrast, global industrial output and trade had already climbed back to pre-crisis levels. However, UNCTAD estimates that figures for 2011 will show that global FDI has recovered to hit $1,400bn–$1,600bn, and will be back to its 2007 peak by 2013.

The report confirms that in 2010 Africa’s FDI contracted, suffering a 9 percent drop to $55bn. The primary sector, especially the oil industry, continued to take the lion’s share of funding. This helped Ghana to develop as a major host country, while Angola and Nigeria experienced a downturn in FDI. Investors are becoming increasingly discriminating, according to UNCTAD, with recent political unrest making some nations less attractive. It says: “Although the continuing pursuit of natural resources, in particular by Asian TNCs, is likely to sustain FDI flows to sub-Saharan Africa, political uncertainty in North Africa is likely to make 2011 another challenging year for the continent as a whole.”

Attractive proposition

In contrast, Ernst & Young’s 2011 Africa attractiveness survey reveals that in the past decade the continent has enjoyed a considerable boost from an increase in inward FDI. This has seen the number of new projects funded rise by 87 percent, from 338 in 2003 to 633 in 2010. It is also positive about Africa’s prospects: “Despite a drop in investment in the last couple of years following a peak in 2008, Africa has remained an attractive investment destination throughout the global downturn and has managed to maintain its relative share of global investment flows as a result. Strong growth in new projects into Africa is expected from 2012 with FDI inflows forecast to reach $150bn by 2015.”

Dr Frank-Jurgen Richter, founder and chairman of business strategy specialist Horasis, thinks the investment future is bright. He says: “Africa’s proportion of FDI inflows to developing countries went down by 12 percent to 10 percent [in 2010]. However, this trend was reversed the next year with an increase in FDI.

“Intra-Africa FDI contributed significantly to overall FDI. From North Africa, Libyan Africa Portfolio Fund for Investment (LAP) has invested substantially in the region. Egypt is also a major investor in Africa’s infrastructure and telecoms sector. Morocco and Tunisia are also major investors in the region,” he adds.

Africa is also seeing a shift in investment patterns, with FDI shifting from predominantly Western European and US sources to the Middle East and Asia. “In the past decade, South Africa, Egypt and Nigeria have accounted for nearly 60 percent of overall FDI in Africa,” says Dr Richter.

“There is increasing investment in sectors such as manufacturing, resource extraction and infrastructure, particularly by the growth economies of China, India, South Korea and Malaysia.” - quote Dr Frank-Jurgen Richter, Horasis

New opportunities

As investor confidence returns, firms are renewing their interest in the region. For example, workspace provider Regus says it is in the process of strengthening its African offering of 29 centres across 14 countries. “As the world of work becomes ever more integrated and mobile, and companies more agile, we expect demand for our services in Africa to grow throughout the rest of 2012 and beyond, and we will continue to expand our network accordingly,” says Celia Donne, regional director, Regus.

“This growth will come from a revolution in how corporate Africa approaches work; an increased demand from SMEs and start-ups; and a cultural change, with workers no longer wanting to sit in an office like their parents did.”

Economic and demographic changes are also having an impact on companies’ decisions to invest in the continent. French smart card firm Gemalto, which has offices in South Africa and Senegal as well as a new base in Gabon, has been attracted by the continent’s growing interest in initiatives based on smart card technology. “Governments have realised the benefits of deploying smart card-based ID and official documents,” says Kristel Teyras, Emea marketing and communication manager, Gemalto.

“If we look at eID and eHealth cards, countries such as Morocco, Algeria, Mauritania, Mali, Senegal, Nigeria, Sudan, Ethiopia, Kenya, Tanzania, Angola, Mozambique and South Africa have all deployed – or are about to deploy – eID and/or eHealth cards. As for ePassports, Algeria, Morocco, Mauritania, Chad, Sudan, Nigeria and Zimbabwe have already rolled out – or are about to roll out – the technology.”

Pent-up demand

Telecoms giant Vodafone, which has a 65 percent stake in major African mobile network operator Vodacom, has also benefitted from economic and demographic changes. “There is high pent-up demand for mobile communications services, particularly as there is very little fixed-line infrastructure. Mobile penetration is still relatively low and GDP growth is higher than in the more mature markets of Western Europe,” says a Vodafone spokesperson.

“Vodacom is well-positioned in Africa and South Africa is an ideal base from which to expand into sub-Saharan Africa. Outside South Africa, Vodacom’s blended (pre-pay and contract customers) SIM penetration is only 26 percent and the population in these markets is forecast to grow by 18m in the next five years, representing a huge growth opportunity.”

According to the spokesperson, smartphones are also boosting market growth prospects: “We are seeing very strong data growth potential as new, lower cost smartphones come onto the market. At Vodacom, mobile data revenue is growing at 38 percent year-on-year and data usage is growing by 44 percent. We already have nearly 11 million data customers and are meeting significant customer need in a continent with very little fixed-line infrastructure.”

Vodacom has certainly benefited from its investment in Africa: its cash flow has more than doubled in the past two years, and it is now the third largest contributor of operating free cash flow in the Vodafone Group.

While the global economic uncertainty has caused some companies to scale back their plans, Vodafone has maintained its commitment to Africa. The spokesperson says: “Vodafone took the conscious decision during the economic downturn to maintain its level of investment in improving the speed and capacity of our networks worldwide, including Africa. At Vodacom, network investment continues to be a major focus with ongoing upgrades to its networks supporting the 41 percent increase in its data customers during its last reporting quarter, ending December 31, 2011.”

Stability is key

Although many investors remain upbeat about the continent’s prospects, political instability and sovereign debt crises still have the potential to derail FDI investment. “The changes in Egypt, Libya and Tunisia have already affected intra-Africa FDI from these countries,” says Dr Richter at Horasis. “Political instability will significantly affect inward FDI, which will have a cascading effect on the middle class.”

Countries that are particularly attractive to investors include those that are rich in minerals. Nigeria, South Africa, Kenya, Morocco and Ghana all feature strongly in certain firms’ investment plans. This is reflected in the demand experienced by Regus. Ms Donne says: “East Africa has seen the greatest increase in demand for Regus. Our centres in Kenya and Tanzania have had double the average number of enquiries in the first three months of 2012 compared with the same period in 2011.”

“Africa remains one of the most promising locations in which to invest in the long-term,” says Dr Richter. “The World Bank predicts a 5.3 percent growth in Africa this year and 5.6 percent in 2013. This makes it the most attractive FDI destination after Asia. Most African currencies have gained momentum and appreciated compared with the US$ during 2011, showing the strength of the economies of many African countries.”

Andrew McLachlan, vice president business development: Africa and Indian Ocean islands, of hotel group Rezidor, agrees: “The countries and regions we are focused on today are all forecasting positive GDP growth and the cities or locations we have targeted are still suffering from an under supply of quality hotel rooms, which is good news for us as we plan to grow our brands in these markets.”


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