Economic growth is on the rise in many African countries and a new partnership between big business and governments is set to improve the investment climate.
According to Tanweer Akram, senior economist at Moody’s economy.com, doing business in Africa presents many challenges, but key among them is governance. “The presence of corruption and inefficient bureaucratic administration are key deterrents to higher investment. As a result of the lack of good governance, the level of skilled workers-the availability of an educated workforce, technicians and managerial talent-is a problem in many countries.”
Another issue is physical infrastructure, particularly for communications and transportation. In many areas infrastructure is highly inadequate, and a great deal of public and private investment is needed to make doing business in Africa more accessible.
“Finally, the regulations concerning business are poor,” says Akram. “For example, when it comes to the amount of time and money that it takes to start a business, it is far more burdensome than, say, in the US or UK,” he says.
Sir Mark Moody-Stuart, chairman of UK-based mining company Anglo American, says that much change is needed to make African countries more amenable to foreign investment. “We know from our own experience and from investing in small businesses in our supply chain how many barriers there are to doing business here, with regulations, customs, general bureaucracy and so on,” he notes. “It is quite clear that only by growing business in general and creating a better investment climate for both large and small companies can we get the growth that is needed in Africa. Aid won’t do it,” he says. “We certainly need government assistance-and improved healthcare and education and so on-but what we really need to do is nurture business.”
Growth in Africa has been accelerating as interest in the region develops. India and China have been big investors in Africa of late-a fact that has some in the international investment community concerned over the implications. But according to Moody-Stuart, the additional forces of investment are welcome. “As to the commercial competition, it has to be good for Africa. Of course there is a need to ensure that any investment-particularly in resources-follows the principles of good business and transparency. But that applies to all companies, whether they are from the UK, America, China or any other country.” He says it is more important to look at the nature and ability of the individual company rather than its country of origin.
African countries overall have a way to go to improve investor-friendliness, says Moody-Stuart. “In terms of growth it is the sub-Saharan Africa region that needs the most improvement. Nigeria, Tanzania, Kenya and Uganda have missed out despite being rich in resources, particularly because they are such large economies,” he says. “In addition, Algeria, Egypt and the Sudan are areas of concern in northern Africa.”
Despite the need for great changes, some of these countries have also seen the greatest improvement in terms of regulatory and economic reforms. Progress has been made in Nigeria, Botswana and Tanzania, and even Rwanda is taking great steps toward enhancing its investment climate. In Nigeria, one big development was the increase in the capital adequacy requirement for banks, which took effect in late 2005. The increase, to 25 billion naira ($195 million) from 2 billion naira, led to a series of recapitalizations and mergers in the banking sector in Nigeria. As a result of banking sector reforms and government stability, the country saw GDP rise by 5.2% in 2005.
Many of these countries also represent the areas of greatest interest for foreign investment. Those resource-rich countries with large economies present great possibilities for international investors, both in terms of greenfield development and investment in existing assets. In the north, countries such as Egypt, Morocco and Algeria are of interest-particularly to European and Middle Eastern companies-because of their large population potential and resources. In the south, Botswana has been very friendly to investors. Also the oil- and natural-resource-rich countries in western Africa and sub-Saharan Africa are of great interest, such as Tanzania, Kenya and Uganda.
The IPO of Kenya Electricity Generating Company (KenGen) in May, for example, saw significant interest from investors in Singapore, Switzerland, the US and the UK. The sale involved 30% of the company and raised 7.85 billion Kenyan shillings ($110 million) at a price of 11.90 Kenyan shillings a share. The deal was more than three times oversubscribed.
An Additional Push
For any serious change to occur, there must be a push not only by governments but also by the private sector. One initiative that promises real reforms in much-needed areas is the Investment Climate Facility for Africa (ICF). The ICF is a recently launched public-private program supported by numerous stakeholders-including various government and regulatory bodies in Africa, international organizations such as the World Bank and, perhaps most importantly, regional and international corporations such as Royal Dutch Shell, Unilever and Anglo American. The facility is a seven-year program aimed at supporting economic and regulatory reform across Africa. The goal is to improve business conditions and the investment climate, with the ultimate aim of significantly increasing economic growth and, through that, improve living conditions across the continent. Initial funding goals are $100 million to $120 million, including a $30 million commitment from the International Finance Corporation of the World Bank and various commitments from business and other entities.
Because the initiative is being led by business, rather than aid organizations, it should have a better chance of assisting governments to implement business climate changes, according to participants-for example, making it easier to start small businesses and simplifying international and regional cross-border trade.
Harish Manwani, head of the Africa & Asia region at Unilever, says that the initiative is unique in its business-like approach. “Unilever has been doing business in Africa for over 100 years. We have large operations across the continent and employ 40,000 people directly. Because we are so closely involved, we have seen the region across many different phases,” he notes. “We felt the ICF was a great opportunity to address problems across Africa. And really for the first time it seems there is a political will to make these changes happen and make this initiative work. The mandate for scope is issues such as property rights and contract enforcement, taxation and customs, business formation and licenses, financial markets competition, corruption and crime,” says Manwani.
Chris West, deputy director of the Shell Foundation, adds that this is not the first time that people have tried to invest to break down barriers, but the difference is that the cast of players involved in this is much closer to the action. “They understand the barriers and how to overcome them in a cost-efficient way,” he says. In addition, there is great commitment from politicians and senior officials, he explains. “By having both of these groups of stakeholders in the governance structure of this, you have them much more involved and closer to the issues. It is not without risks, but the business approach and the partners involved mitigate a lot of that risk.”
Moody-Stuart adds: “Corporations working in Africa or working in any country are dependent on having a thriving economy. Business benefits from having a growing economy.”
With the help of initiatives such as the ICF, executives at multinational corporations such as Shell, Unilever and Anglo American believe that real change and economic growth will occur across Africa over the next few years. As a result, the opportunities for investment look set to become much more attractive in the coming years.