Africa > Southern Africa > Six reasons to invest in Africa

Southern Africa: Six reasons to invest in Africa

2016/10/03

The conversation about Africa is shifting from one of “deficits” and “gaps” to one about opportunities, prospects, ventures and creativity. That’s not news to companies that have paid close attention to the continent and invested there. The fast growing youth populations, the urbanization expected to drive over 50% of Africans to cities by 2050, and Africa’s formalising economy are all well known. These trends and other developments have driven a half century or additional of increase in Africa, and will continue to do so.

It’s significant to acknowledge that Africa tests an investor’s patience. Time horizons and return models that fit other markets don’t always work in Africa. Even the majority experienced, sophisticated companies can be forced to recalibrate, as Nestle did last year at the same time as it announced a 15% cut in its workforce across 21 African nations.

Deficits remain. What’s significant is that investors presently realize there is money to be made for those bold enough to help close the gaps. As that takes place, the promise of better prosperity for Africans and African businesses will be realized. Why is it a good time to invest?

Africa needs “connectors”

Missing across much of sub-Saharan Africa are the roads, rails, ports, airports, power grids and IT backbone needed to lift African economies. This lack of infrastructure hinders the increase of imports, exports, and regional business. Companies that can connect Africans and markets can prosper. Sub-Saharan Africa is plagued by power outages – almost 700 hours a year on average -- sapping productivity, adding cost and leaving businesses captive to back-up and alternative power options. Massive investment is leading to major upgrades and expansion at African ports and airports, but much of Africa’s increase potential depends on in-country and intra-African road, rail and air connections. Roads and rail lines are sparse, decrepit and over-burdened. Lack of aviation agreements has limited intra-African air connections. Africa’s lack of efficient storage and distribution infrastructure hinders businesses, entrepreneurs and farmers. Up to 50% of African fruit and vegetables spoil before reaching markets. There’s a soft infrastructure deficit, as well. Outside of South Africa, the data and data critical to decision making by businesses is missing or hard to obtain – credit and risk data, market data, consumption patterns, you name it. Lessons from Dubai and Singapore tell us that once an infrastructure race is on in a rapidly expanding market, being the initial-mover is a significant chance for investors.

2. African trade barriers are falling and Intra-African trade holds enormous potential for the continent.With the 54-country Continental Free Trade Sector(CFTA)

Africa’s own mega-trade transaction – even the smallest African economies could see a lift. If duties are lowered and incentives introduced, manufacturers could see benefit from setting up production and assembly operations in multiple African nations. That could development in electronics, machinery, chemicals, textile production and processed foods. As a initial step, free trade between and within the African economic blocs would make a huge difference. Africa’s share of world trade – a meager 3% -- can only increase if the continent’s commodity and consumption-led economies begin to produce a broad array of goods for home markets and export. And an increase in local beneficiation in the commodities sector could be a driver of increase – processing local commodities (such as minerals, coffee, cotton) in country rather than exporting them in raw form. That said, it will continue to be a challenge for regions with poor power and infrastructure to compete as world manufacturers.

3.Customers are changing

With the increase of Africa’s middle class, we’re seeing development of new expectations. Educated, urban professionals are young, brand-aware and sophisticated in terms of their consumption. Retailers and consumer brands want to expect and drive buying preferences in fashion, home and lifestyle products, but they know they need international standard supply chains if they are to meet request. The major economic forces in Africa are small to medium enterprises, working to meet this new request and competing with world brands.

4.Digital transformation

Africa leads the world in mobile adoption, which continues to offer the biggest cross-sector economic opportunities. Mobile payment networks, pioneered in East Africa, opened the wired, world economy to poor, unbanked city and rural dwellers. Companies such as Novartis are using mobile communications to manage their supply chain; Olam has used mobile to reach out to new African suppliers and farmers. These mobile initiatives have completed huge successes. To illustrate: In 2014, Ethiopia set up a telephone hotline allowing small farmers immediate access advice from agronomists, with over 3 million calls done in the initial six months of the pilot program alone. Mobile is the area where Africa has pushed beyond the boundaries in the developed world, and African tech incubators are pushing to innovate. So what’s next?

5. Africa is diversifying

African economies are finally beginning to diversify beyond commodities, though this is still in the early stages. Africa is seeing a returning diaspora that recognizes the potential and opportunities in their own nations. This people supports local economic increase with their skills and talent, by acting as “initial movers,” investing back in their communities. African nations are beginning to place bets on non-commodity areas where they can be competitive. And they are packaging themselves to appeal to a broader set of investors. Recognising they can no longer count on growing investment from China, each country presently have what are called “Investment Promotion Agencies,” who act as one-stop shops for investors, assisting with registration, taxes, and other steps to establish companies locally.

6. Africa can lead in sustainable development

In energy, technology, supply chain design and other areas, Africa has the ability to look at what works elsewhere again fashion its own answers. They can openly embrace new technology and ideas, with no historical imprint from which to break free. They can develop flexible fuel grids that generate power with a mix of abundant wind, solar, hydro and bio energy, alongside conventional fuels such as oil and gas, which are as well abundant. Nowhere on Earth is there as much unused or poorly used arable land, so look for large agricultural breakthroughs and productivity gains in food production in Africa.

Business people hungry for vibrant new markets and consumers know the reality: globalisation means there are too few remaining frontiers. As the developed world matures, and becomes increasingly difficult to trade in as a result of factors from legislation to terrorism, opportunities for corporate increase are limited. There are too few places where entrepreneurs and businesses with ideas and an appetite for risk can bring price and find long-term increase if they are persistent, creative and determined. But there’s something else they know: Africa is still such a place.

*Tarek Sultan Al Essa is Chief Executive Officer and Vice Chairman of the Board, Agility. He is a co-chair at the World Economic Forum on Africa 2016

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