Emerging investors in Africa: AfricansPosted on Monday, July 9th, 2012 by McGroarty, Patrick (The Wall Street Journal, from Dar es Salaam) in News
As U.S. and European companies retrench from their efforts to bankroll projects across Africa, a group of investors is quickly emerging to pick up the slack – other Africans.
Even as overall foreign investment into Africa has contracted, a cohort of homegrown companies has mounted an unprecedented expansion drive. Investment between African countries has almost doubled in the past five years, to 13% of new projects started on the continent last year, according to a report on foreign direct investment released Thursday by the United Nations Conference on Trade and Development.
The companies behind those investments are chasing high growth rates in fast-developing markets, many of them buoyed by resource exports. Oil in Angola and Nigeria, copper in Zambia and coal in Mozambique have each attracted tens of billions of dollars over the past decade. Over the period, the continent’s supermarket chains, construction companies and banks have expanded rapidly.
South Africa’s Shoprite Group raised $1 billion in bonds and new stock in March to fuel expansion into markets including Nigeria and the Democratic Republic of Congo, adding to the 223 stores in 16 countries it already has outside South Africa. The Nigerian industrial conglomerate Dangote Group spent $93 million on a majority stake in a South African cement maker in 2010 and $400 million to build a cement factory in Zambia in 2011. Togo-based Ecobank Transnational Inc. was the second-biggest investor in Africa over the past decade in terms of new projects; the bank now operates in 32 African countries.
China has maintained its position as the continent’s top investor, pumping $56.4 billion into sub-Saharan Africa since 2005, the Heritage Foundation says.
The U.S., Europe and other developed countries have sent less money to Africa since the global financial crisis began, according to the U.N. report. Overall investment into Africa fell for a third straight year in 2011, to $42.7 billion, down from a peak of $57.8 billion in 2008. “The overall fall in FDI to Africa was due principally to a reduction in flows from developed countries, leaving developing countries to increase their share in inward FDI to the continent,” it said.
Many of those developing-world investors, the report showed, hailed from within Africa, a continent of one billion people clamoring toward consumer lifestyles. Already, 355 million Africans spend from $4 to $20 a day, a tier the African Development Bank defines as middle class. Consumer spending in Africa is expected to double from current levels to nearly $1 trillion a year by 2020, according to research firm Euromonitor International.
Africa’s growth is hovering above 5% – with rates approaching 10% in Angola and Ghana – even as the economies of billion-person developing markets in India and China are slowing. India’s economy grew 5.3% in the first quarter, the lowest rate in almost a decade, while China grew 8.1% in the same three months, the slowest since the spring of 2009. Last week, Brazil’s government ordered $4.1 billion in economic stimulus in an attempt to lift growth above a modest 2.5% this year.
“Africa’s domestic market is very big and very poorly served,” says Gachao Kiuna, chief executive of Transcentury Ltd., a Kenyan power equipment and transport company whose revenue has grown to $300 million from $3 million in eight years. “That’s going to be the fundamental driver of continued economic growth – and that is what’s making us more resilient to the global economic shocks.”
Many African countries are accelerating growth from a tiny base. Kenya and Ghana each have economies smaller than Madison, Wis., the Brookings Institution wrote in a recent report.
But collectively, the gross domestic product of Africa’s nations are already roughly the size of Brazil’s. Companies willing to decipher the cultural and regulatory nuances between 54 markets are positioned to tap decades of growth potential, according to Louis Deppe, a director for private-equity firm Actis LLP.
“The demands within African countries are so high and there’s so much room for efficiencies that these markets can be introspective for a long time still,” Mr. Deppe says.
To be sure, global economic malaise hasn’t spared Africa entirely and could yet crimp the continent’s growth. Falling commodity prices are weighing on Africa’s resource exporters. Crude-oil prices fell to an 18-month low in June, hammering big exporters like Nigeria, Angola and Ghana. The European debt crisis has hurt Africa’s more liquid currencies, like Ghana’s cedi and Kenya’s shilling, which depreciated sharply this year as investors fled risky assets. South Africa, the continent’s largest and most open economy, has been the hardest hit – the rand hit a three-year-low against the U.S. dollar last month, but has recovered since.
Some exporters are also struggling to find financing as the European banks that dominate that business have retrenched. “Africa is not divorced from the rest of the world,” says Arnold Ekpe, Togo-based Ecobank’s chief executive.
And a perennial challenge remains: the lack of reliable roads, phone lines and power grids to facilitate trade between countries. Trade between African countries has been stuck at about one-tenth of the continental total over the past decade, according to the International Monetary Fund.
But some improved cross-border connections are making it easier to operate between countries. Stretches of Africa’s potholed roadways are getting face-lifts, often thanks to Chinese and Indian companies that need them to get minerals to ports. Direct flights now link big commercial hubs, whereas flying from Dakar, Senegal, to Lagos, Nigeria, used to involve an eight-hour trek that stopped in three different countries.
Regional trade blocs are also eliminating tariffs between member countries and harmonizing customs and visa policies, reducing dayslong waits for trucks at some borders.
In South Africa, service providers are among those tapping into the continent’s new middle class. Johannesburg-based medication and equipment distributor RTT Group has opened regional hubs in Ghana and Kenya since 2006 and now delivers to 27 African countries.
Iain Barton, RTT’s chief executive, said health-service companies can grow almost exponentially in Africa, where heart disease and diabetes are becoming almost as common as HIV and tuberculosis as Africans consumption habits change. “It wouldn’t be ambitious to aim for less than tripling our business in the next five years,” Dr. Barton said.
Transcentury, Mr. Kiuna’s Kenya-based infrastructure company, made its first foreign investment in 2005 in Tanzania’s seaside capital of Dar es Salaam, acquiring a majority stake in an electric cable factory from France’s Nexans SA.
“They wanted to exit the market because they saw it as small,” Mr. Kiuna said. “I would argue that was a mistake.”
A spokeswoman for Nexans said the factory didn’t fit the company’s Africa strategy at the time.
Less than one-tenth of Tanzania’s roads are paved and it can take a month for imports to clear Dar es Salaam’s port. That can make for unreliable supplies of the copper and aluminum Transcentury needs to forge its cables. But Mr. Kiuna said those tribulations were worth enduring to reach an urbanizing population of 44 million and growth above 6%. Under Transcentury, the factory has doubled its share of Tanzania’s cable market and turned a profit every year except 2010.
Even with Tanzania’s robust growth, companies with strong positions here are looking to expand elsewhere. Since 2009, Bakhresa Group, East Africa’s biggest flour miller and Tanzania’s dominant purveyor of fruit juices and ice creams, has spent $45 million building a grain silo and flour mill in northern Mozambique. The mill will help Bakhresa ramp up sales in Mozambique, where growth averages above 7% a year, and make it easier to transport flour overland to neighboring Malawi. There, Bakhresa has nearly 80% of the market.
“We saw the market potential, and based on that, we expanded,” said Ramesh Kumar, Bakhresa’s vice president for corporate planning. “We’re catering to markets with promise.”
To download the World Investment Report 2012: Towards a New Generation of Investment Policies, please click here.