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Africa: Harnessing the Opportunities While Minimising the Risk

With Africa set to be one of the world's fastest-growing economic zones, businesses need to be aware of the unique risks of investing in the region, according to delegates at the recent Cape Town Doing Business in Africa 2014 conference.

Photo: Great opportunities, high risks: The African investment conundrum. (Shutterstock.com)
Great opportunities, high risks: The African investment conundrum.
Photo: Great opportunities, high risks: The African investment conundrum. (Shutterstock.com)
Great opportunities, high risks: The African investment conundrum.

Africa is now playing in the big league. That was the message from the first US-Africa Leaders' Summit, held recently in Washington.

Africa has traditionally been perceived by the West as a recipient of aid, a source of mineral commodities and a high investment risk. This view, though, is rapidly changing, with international companies now queuing up to do business with a continent that is home to seven of the world's 10 fastest-growing economies.

Africa is now receiving attention from many global corporates, especially those looking for new market opportunities in the oil, gas, mining, agriculture and construction sectors. There is also growing interest in the African consumer market, particularly in terms of telecommunications and IT.

According to Jim O'Neill, a Bloomberg economist, even though Africa's combined annual GDP may only amount to about US$2 trillion – comparable to that of India or Russia – the continent is still viewed as the global investment darling, attracting rising interest among foreign investors. Foreign direct investment (FDI) into Africa grew by 9.6% in 2013. It is forecast to exceed $60 billion in 2014.

This sense that the continent is now an inclusive part of the global economy was summed up by President Obama at the recent summit. He said: "I do not see the countries and peoples of Africa as a world apart; I see Africa as a fundamental part of our interconnected world."

China is now arguably the dominant influence in African investment. China-Africa trade is valued at more than $200 billion, making the mainland by far Africa's largest trading partner. If Hong Kong and mainland businesses are eyeing overseas markets for expansion, then they would do well to bear in mind the African opportunity. Any such investors, however, also need to understand the challenges of operating in this high-risk region.

According to Janine Myburgh, President of the Cape Chamber of Commerce and Industry, the activities of the financial sector represent a litmus test for levels of investment in particular markets. Speaking at the Opening the Doing Business in Africa conference, she said: "Local and international banks are increasingly focused on the opportunities African growth could give them. As ordinary workers in African countries gain access to basic banking facilities, and the emerging middle classes access more sophisticated financial services, it will lead to greater spending and consumption, as well as further economic expansion.

"The financial institutions now seem more committed to Africa, with more banks now opening in multiple countries. Cross-border banking will have significant benefits for those companies looking to expand their African operations."

Myburgh also emphasised the changes that mobile technology is bringing to the wider African economy. Citing M-Pesa, Kenya's innovative cellphone-based money dispatch system, which has enabled more than 40% of Kenya's GDP to be transferred around the country's mobile network, she said: "It is clear that, if you are looking to reach the African consumer, you must seriously factor in mobile opportunities." Underscoring this, it is predicted that, within five years, virtually every African adult will have a mobile phone.

Despite the opportunities, however, Myburgh cautioned that doing business in Africa is not all plain sailing, with investors needing to be aware of African countries' business-environment challenges. She said: "We must put pressure on our governments to take a business-friendly approach when drafting or revising policy."

Overall, Myburgh said there is one big obstacle standing squarely in the way of enticing investment into Africa – the continent's unenviable reputation for tolerance of corruption at both a public and private level. Urging businesses to take a strong line, she said: "There is also a lot of work to be done on improving Africa's governance institutions. Policy and regulatory reforms, have, however improved and are complementing the continent's internal dynamism."

While balancing opportunity and risk is crucial to any successful business strategy, this seems especially the case of Africa. In light of this, Myburgh advised that companies look beyond the opportunities and understand how to navigate the continent's diverse challenges by means of a carefully-planned risk-management process.

Global business meets African business

Africa's growing middle class is changing its traditional patterns of consumption, leading to diversification of the continent's economies. Although natural resources remain central to Africa's wealth, a number of key industries – notably retail/wholesale, manufacturing and services – are developing rapidly in the continent's key growth markets, Nigeria, Ghana, Kenya, Angola and Mozambique. Firms that invest prudently in those industries, as result, can expect good returns.

According to Jacyntha Twynham, Senior Manager at WESGRO, the Western Cape's trade-promotion agency, Africa has been catching up with other major regional markets in recent years, such as South East Asia. Sub-Saharan Africa is now forecast to outperform all other global regions, with predicted economic growth of 5.3% in 2014 (global average: 3.6%). The table below indicates Africa's projected economic growth rates (in a global context) to 2017.

Chart: Global economies, 2010–2017
Chart: Global economies, 2010–2017

An increasing number of international companies are now targetting the African, lured by the widely-touted prospects for growth. Chinese construction companies, for example, have been engaged in several development projects on the continent.

Twynham, though, advised investors to take a case-by-case approach when planning investments in Africa. She said: "When considering the African markets as potential export destinations, businesses need to be aware of each country's development curve. Each market is different – there are countries at various different growth phases. Investors need to avoid thinking of Africa as one big homogeneous market. They need to be aware of state-level initiatives when looking at the continent."

Analysing the specific market opportunities in Africa, Twynham cited Mozambique, Angola and Kenya as among the fastest-growing economies in Africa in terms of consumer products. These economies are moving up the value chain, ensuring there is more disposable income and consumer demand for sophisticated products is growing.

Twynham said that Kenya is currently importing large volumes of products for use in its booming construction industry. For Mozambique and Angola, with their large oil, gas and mining industries, Infrastructure development is key and is driving growth while also providing business opportunities. International companies can take advantage of these lucrative supply chains, she said.

Meanwhile, Kenya and Zambia are importing machinery for use in manufacturing, such as agri-processing equipment, and systems used in construction and civil engineering. On the other hand, in West Africa – Nigeria and Ghana – the emphasis is on products imported for the oil and gas sector, as well as in construction.

Lack of, or inadequate, infrastructure and power is often cited as a constraint (or risk) when doing business in Africa. Many entrepreneurial construction and engineering companies, however, have turned this infrastructure deficit into a business opportunity. This has seen them position themselves as providers of essential infrastructure, including road and rail links, and port facilities.

Twynham also said there is a strong market for retailers/wholesalers in Africa's fast-growing economies.

In terms of global FDI into Africa, Twynham said that the top recipients in 2013 – in descending order by value of FDI – were Egypt, Morocco, Nigeria, South Africa, Tunisia, Algeria and Angola. The main sectors attracting global FDI into Africa were coal, oil and natural gas (37% of projects) followed by real estate (16%) and metals (15%).

Twynham maintains there are now many financial and business-service companies – banks, consultancies, IT firms, mobile telecommunications companies – all investing in Africa. These companies, she says, are looking to service the continent's fast-growing industries and take advantage of the increasing numbers of middle-class consumers needing financial and business services. According to Financial Times data, of the top 10 global companies investing in Africa from 2003-2013, seven were banks, with financial services accounting for 16% of the total capital expenditure of FDI projects into Africa over that period.

A 2013 report by Ernst & Young South Africa, Doing Business in Africa: From Strategy to Execution, breaks down the top sub-Saharan investment destinations into four key areas – financial services, agriculture, power and transport. The top three African markets for financial services are South Africa, Mauritius and Nigeria; the top three for agriculture investment are Nigeria, Ethiopia and Zambia; the top three for power are South Africa, Nigeria and Tanzania; and the top three for transport are Nigeria, South Africa and Kenya.

Success factors: Mitigating risk and managing diversity

Africa's positive growth path is almost a given, but the business opportunities represented by the African markets should not obscure the inherent complexity and risk in the continent. Neither are the markets uniform in their degree of risk or the types of challenges encountered by stakeholders. Above all, local knowledge and awareness need to be key parts of a company's strategy.

In line with this, the legal and human-capital frameworks that businesses operating in Africa need to factor into their strategy to make the risk more manageable were the subject of the second part of the conference.

For his part, Lodewyk Meyer, a Director of Norton Rose Fulbright, a multinational law firm, explained the key legal and regulatory challenges associated with dealing with the multiple jurisdictions in Africa. He emphasised that Africa is not a homogeneous unit when it comes to the law and that "local legal knowledge is key".

In total, there are 55 countries in the continent and five distinct jurisprudence systems. Every country has its own legal regime and there is no one size fits all approach. The legal regime in East Africa, he explained, for example, is very different from that of West Africa, while North African states follow Arabic law. He said: "Identifying the legal risks informs your decision-making and helps you manage transactions and deal with counterparties appropriately."

Furthermore, the legal and regulatory environment in some countries is complex and ever-changing – with Meyer citing Nigeria, in particular, in this context. To mitigate the legal risks, he said it is advisable to use a legal team that has specialist knowledge of any given country's commercial law and regulatory issues, as well as a deep appreciation of the norms and cultural contexts that prevail. He cautioned against the "suitcase law" approach, whereby lawyers jet off to draw up contracts in countries whose legal systems they are not familiar with.

According to Meyer, transacting with governments also requires compliance with local procurement acts. This, he said, can be onerous and it is important for companies to identify any risks with their legal teams.

He also said it is wrong to assume, as some corporates do, that if there is not a sophisticated Westernised-style legal system in place in an African country then that the country must be "lawless". This is not the case, with many countries having common-law systems that go back centuries. The legal principles, he cautioned, are there, it's just a matter of identifying them, making it essential to partner with local lawyers when doing business in Africa.

Reputational risk

Given the diversity of Africa's markets, understanding local labour law is also of paramount importance for many companies. Nicolette Nicholson, Head of Legislation at CRS, a South African human-resources and payroll consultancy, warned about the contractual and reputational risk of doing business in Africa in terms of people management.

Businesses often fail in Africa because they have reputational risk, meaning they are perceived not to honour their obligations to their employees or because there is a poor relationship with their human capital.

Establishing the reputation of a new business in Africa can be a difficult task and requires close attention to the management of human capital. Labour legislation is complex in many African contexts and employer-employee relationships need to extend beyond purely contractual and statutory agreements, said Nicholson. She indicated that an approach that focuses on fostering positive personnel relations often helps reduce the company's reputational risk.

Firms that genuinely invest in people tend to achieve the greatest rewards in Africa. Expanding on this, Nicholson said: "In Africa the most valuable asset a business can have is trust, not money. There need to be excellent communications between management and employees in order to mitigate any reputational and contractual risk. African cultures tend to be focussed on the needs of the collective – the group – unlike Western culture, which rewards independence and aggressive individualism."

Citing examples of common HR pitfalls, she cautioned that business owners need to gain a detailed understanding of the local labour legislation – such as the various laws surrounding employee remuneration and leave – before they enter into any contract.

She said: "Non-compliance with local labour policies is more likely to make your business fail than the market, competition levels or low revenue streams."

Providing access to the markets for foreign-national employees and managers is not always straightforward in Africa. JB Cronje, a Researcher with the South African non-profit organisation TRALAC (Trade Law Centre for Southern Africa) tackled the legislation surrounding – and challenges posed by – foreign nationals temporarily working in Africa and their cross-border permit requirements.

The traditional thinking of many African immigration authorities is that every person who crosses a border is a potential immigrant – hence the need for any business to get professional advice on the correct types of temporary visas or work permits required. For most African countries, cross-border movement is a source of revenue. With visas costing up to $1,000 in the SADC region, companies should consider hiring local labour wherever feasible.

Photo: Twynham: ‘Africa catching up’.
Twynham: 'Africa catching up'.
Photo: Twynham: ‘Africa catching up’.
Twynham: 'Africa catching up'.
Photo: Myburgh: ‘business friendly’.
Myburgh: 'business friendly'.
Photo: Myburgh: ‘business friendly’.
Myburgh: 'business friendly'.

Foreign entities are often frustrated by the lack of harmony between the various regional economic communities in Africa and Cronje urged companies to be aware of national legislation relating to foreign-national temporary workers. Various states and their regional economic blocs are negotiating easier facilitation of the temporary movement of business people in Africa in order to create regional value chains. Improved regional integration could create better networked markets with reduced barriers, but the legislation is not yet in place in many countries. Companies seeking to do business in Africa need to be aware of the specific trade agreements in force in each state they wish to operate in.

Overall, Africa possesses a huge variety of natural resources and represents a vast number of opportunities for international companies. While risk shouldn't rule out many of the continent's possibilities, it needs to be managed prudently. Investing in Africa is not for the faint-hearted. Those looking for high returns, in particular, need to understand the higher risks inevitably involved.

Mark Ronan, Special Correspondent, Cape Town

Content provided by Picture: HKTDC Research
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