It’s Africa’s time now
As some rather bullish pundits see it, Africa's time has arrived and the next three decades are going to see massive investment with a subsequent boost to the African middle class, who already numbered 313-million in 2010 according to the African Development Bank.
McKinsey & Company forecast that by 2030 Africa's 18 largest cities will have a spending power of $1.3-trillion. That is a lot of money and a lot of different markets.
Ahmed Heikal is the chairperson of Citadel Capital, Africa's largest private equity firm and a few weeks ago he told CNBC that over the next three decades, Africa will flourish on the back of improved governance and political stability.
"This is a great time to start investing in Africa," he said. "You have the entire continent which is open to you, very little competition, a political environment that is better than it was 20 years ago and it will get better."
Citadel Capital has close to $10-billion under management in Africa.
If the investment that Heikal forecasts materialises, it will be on the back of some already impressive growth in Africa. Turnover of Africa's top 500 companies grew from $393-billion to $690-billion between 2005 and 2010.
The IMF predicts that over the next five years, 10 of the 20 fastest-growing economies will be in Sub-Saharan Africa; another two will be in North Africa. Sub-Saharan Africa had a growth rate of 5.3% in 2012, compared to the global 3.3%. Africa's oil exporting countries averaged 6.7%; South Africa managed 2.6%.
It is clear that there are some exciting and potentially lucrative fiscal adventures to be had in Africa. With European and American investors staring down the double-barreled gun of austerity and economic decline, it's only natural for their eyes to drift south. They also start to wonder why China's investment in Africa has grown from less than $100-million in 2003 to $15-billion in 2012. As the investment market in Africa hots up, the South African giants have their eyes surveying the landscape too.
Improved governance and political stability across the continent havemade Africa more investor friendly, as Heikal noted. According to the World Bank's Doing Business 2013 report, 17 of the 50 top performing countries are in Sub-Saharan Africa, which does not include Egypt and Morocco, which also made the list. Africa's politicians are making the right noises as well.
Speaking at the World Economic Forum in Davos, Switzerland, on a panel titled "De-Risking Africa", South African President Jacob Zuma said: "I've been questioning myself about the topic De-Risking Africa. Is Africa more risky than any other region of the world? Somebody will have to explain to me, because it looks like there's a perception about Africa which needs to be dealt with."
Zuma said that democratic rule was being entrenched on the continent, mass infrastructure rollout was happening and with it increased inter-Africa trade.
Nigerian President Goodluck Jonathan pointed to the African economies with higher growth rates than the global average. "Ethiopia, Ghana, Niger, Liberia, though they are small economies, but in terms of growth it's quite significant. That shows a focus and a promise." The World Bank's chief economist for Africa, Shantayanan Devarajan, said in an interview with the Mail & Guardian he thinks there will be significant investment in Africa, "as more and more countries discover natural resources, macro economic policies continue to improve, and Africa becomes one of the few places with a young population."
"The boom will primarily be resource driven, but with economic growth will come increased demand for consumer goods," said Devarajan "Even the current growth has been fueled partly by domestic demand."
"The usual suspects will likely dominate; South Africa, Nigeria, Kenya, Tanzania, Ghana. Some smaller countries are poised to see a surge in investment; Rwanda, Uganda, Senegal, Cote d'Ivoire. Ethiopia is already seeing higher investment," said Devarajan.
"Infrastructure is a bottleneck, but investment in infrastructure is also rising, with large energy projects such as Lom Pongar in Cameroon and the. Khadadji dam in Niger making a dent in the deficit. I should add that it's not just hard infrastructure, but the soft areas of policies and regulations that are in deficit," he said.
William Blackie, Standard Bank's head of investment banking in South Africa said there has been "significant momentum" towards Africa as an investment destination in the last 18 to 24 months. He singled out the three sectors where most of the growth is taking place as energy, resources and consumer. He said that in the build up to the economic decline of 2008, Africa had not been getting much attention and this persisted until two years ago.
There are a number of key rules for companies expanding into Africa from their South African base.
"You need to scope the market correctly, build local relationships, ensure you enough capital to see the project through, including unexpected contingencies," said Blackie. "You need to learn to do business in each market and not try and operate like you do in your own market."
The Standard Bank Group, Blackie's employers, is no stranger to expansion. [See "Banking on success"] It is also not the only South African group expanding into Africa. Between 1994 and 2004, 22% of foreign direct investment in the Southern African Development Community came from South Africa and in 2011 South African exports to the continent reached $13.2-billion.
In September 2012, Tiger Brands bought a 63.5% stake in Nigeria's Dangote Flour Mills. This follows similar moves in 2011, when it bought biscuit manufacturer Deli Foods Nigeria and a 49% stake in UAC Food (Nigeria PLC).
South Africa's mobile phone companies are also present in Africa; MTN has 126-million subscribers in Africa, 45.6-million just in Nigeria. MTN has partnered with Bill & Melinda Gates Foundation and the Grameen Foundation to fund a mobile money incubator in Uganda and a mobile newspaper in Nigeria. "The telecoms sector has benefited a lot from South Africa, as this sector demands huge investments that can only be met by well-structured companies," said the African Development Bank economist Felisberto Mateus in an interview with the M&G. "The likes of MTN is a real example of a success story in Africa, if you travel to different Southern African countries, you will see the MTN brand and services." Vodacom/Vodafone together have 50-million subscribers in Africa, 20-million of those in South Africa.
Shoprite is present in 15 countries on the continent. South Africa is its overwhelming largest market, followed by Zambia, Namibia, Swaziland and Madagascar. It also operates a chain called Freshmark, a fruit and vegetable business that sources its produce from 354 small-scale farmers, spread out across 11 African countries.
Other consumer retail brands like Joshua Doore, Nando's, Steers, Debonairs Pizza and Spar have all made inroads into the continent. However, not every South African company has made a success of venturing further into the continent.
Mateus said South African companies should have a different approach to those of Western companies. They should hire local work forces and incorporate as much as possible the local values to be seen as local company instead of a foreign company working in a local market.
"South African companies's role on the Africa continent is vital due to their sophistication. African economies will only benefit from South African companies by bringing better services, goods and products," said Mateus. They should also create a more qualified employment by attracting African students who have gone to South Africa to finish their degrees." "A lot of companies rely on South Africa maintenance services for their equipment and part supply, so those companies should move close to their clients."
Banking on success
The Standard Bank Group is no stranger to expansion into Africa. Having ventured into Africa in 1998, with the acquisition of a bank in Swaziland, today the group has operations in 17 African markets outside South Africa. The group currently receives 10% of its revenue and profit from the continent, excluding South Africa.
Standard Bank deputy chief executive Ben Kruger has been reported saying the aim is to grow to 25% in the next five years.
"Africa is at the core of the Standard Bank Group strategy," said Standard Bank Group's deputy chief executive, Peter Wharton-Hood. He said in the markets where Standard has been for a while — Lesotho, Namibia and Swaziland — it has managed to capture large market shares. However, there are newer markets that have big growth potential, such as Nigeria and Kenya, and so it is important for Standard to be investing in these markets.
In 2007, Standard Bank bought IBTC Chartered Bank in Nigeria and rolled out 200 branches in next to no time, signaling that this was a big market for its future.
Standard Bank's largest market is South Africa, followed by Nigeria, Uganda, Namibia, Mozambique and Ghana.
Talking about the ambition for Africa, outside South Africa to contribute to 25% of group revenue, Wharton-Hood said, "it shows our intent". "This current executive team has been in Africa for two decades," said Wharton-Hood. "We had early mover advantage in Zambia, Mozambique, Uganda and Nigeria. It was important to get our footprint right."
Wharton-Hood said the group pursues an organic growth strategy on the continent.
"We are integrating existing businesses into the group, fixing existing businesses and developing new businesses too."
He said that doing all three of these tasks at the same time means simplicity has been "sacrificed", but it allows Standard to move "faster".
The group's South African competitors ABSA, First Rand and Nedbank are also among Africa's largest banks and are moving to catch up to Standard on the continent.
Absa has operations in Mozambique and Tanzania, but is in the process of taking over the African operations of its parent company Barclays Bank, which has a presence in a further eight countries on the continent. First Rand has a small presence in nine countries and Nedbank is present in four countries. In March 2012 Nedbank acquired a 20% stake in Togo's Ecobank, which has a presence in 36 African countries.
"South African companies should carefully study the market they are investing in, because many African markets are not as mature as South Africa's and have different values and business practices," said the African Development Bank economist Felisberto Mateus.
"Absa Bank, for instance, came to Angola and was operating as if [it was] in the South Africa market, instead of understanding that Angola's banking market has its own practices. "They should have incorporated Angolan culture and values in their local business."
"Due to lack of knowledge of the market, Absa left the country after few years of operation," he said. "On the other hand, Standard Bank after a long period of exploring the Angola market has recently dramatically changed their approach by transforming the local business to look like a local bank and has been expanding since then."
Wharton-Hood said that the tech boom with banking in East Africa and success stories like MPesa mean that paper is being taken out the system. This allows for the core banking system to be streamlined and made more efficient.
"We want to respond quickly to customers's needs," said Wharton-Hood. "No two countries in Africa are alike and so it's not always the same customer needs in every country."
Infrastructure behind the boom
With the African continent predicted to boom with investment over the next few decades, the M&G spoke to African Development Bank economist Felisberto Mateus about the future.
There have been a lot of bullish pronouncements on the future of investment in Africa, most arguing that the next decade is going to be a massive boom for investment in Africa. What is your opinion?
According to projection of the economists and the IMF the average growth for Africa in the next three year will be about 5% to 6% while Europe will contract or in the best scenario see modest growth, 0.5% to 1.5%, due to the effects of the finance crisis which have not yet ended. So as other market such as Europe and to a lesser extent Asia and America have reached a maturity stage, Africa still remains an untapped market with huge natural resources and economic potential.
Hence, companies which were reluctant to come to Africa will change their minds. They are doing so already.
It is now more common to see multinational companies in the new Africa emerging markets such as Ghana, Senegal, South Africa, Angola, Ethiopia and most recently Mozambique. Most of the top Fortune 500 companies already operate in Africa.
Do you think this has more to do with the economic downturn in Europe and America, or is it about Africa shedding negative stereotypes that have dogged it in the past?
Both factors are playing a role. On the one hand, African economies are becoming more stable with low inflation rates, robust economic growth, a buildup of international reserves, stable exchange rates and stronger fiscal positions.
On another hand, the economic downturn in Europe and America is forcing companies to look beyond their traditional markets and Africa being so close to Europe due to its culture, history and geographical position is an obvious choice.
Meanwhile, American companies are looking into South America and Africa for the same reason.
Do you think the boom will still be driven by resources or do you think it will be in consumer goods and services, catering to the rising African middle class?
At first, it will obviously be more concentrated on resources but slowly the structure is changing, due to rising African middle income groups, whose spending in the developed world accounts for millions of dollars. Having said that, luxury good companies have started coming to Africa; this is the case in South Africa, Nigeria, Egypt, Angola, Morocco and Senegal, where you can find trademarks such Porsche, Lacoste, BMW and others.
There is going to be a need for massive infrastructure investment on the continent. Do you see this as a bottleneck to investment in Africa?
Yes, Africa needs a massive investment in infrastructure and the African Development Bank is at the forefront in supporting regional integration, private sector development and governance, and this can only be achieved through good infrastructure to facilitate trade and development.
The African Development Bank, by realising that this can constrain investments, is willing to support the continent to rehabilitate its infrastructure.
Furthermore, China has also done a lot on this front by providing much needed resources to African countries to rehabilitate and create new infrastructure without imposing the western conditions for the loans and investments.
Do you expect a massive rise in intra-African trade?
As Africa's economies mature and become more integrated, we should expect a rise of intra-African trade. The African Development Bank has on its long-term strategy the integration of Africa economies by improving the infrastructure in the continent to facilitate trade.
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