Africa Investment Notes
INVESTMENT TRENDS | CAPITAL FLOWS | SECTOR INSIGHTS | ENTERPRISE | M&A
A close-up of public finance outlook in Africa
INSIDE THIS ISSUE
Investment trends around Africa Emerging Ideas Policy Matters Capital Investment Appraisal
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Africa Investment Notes: Monthly
June 2016
Africa Investment Notes June 2016
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Investment trends around Africa Making public finance work better for citizens
Reflating most African economies that suffered strong headwinds from low commodity prices once again becomes topical as these economies continue to pursue alternative development agenda. But before such restructuring can be conducted successfully, certain basic elements need be assured. First, the objective of resource-rich governments to raise more revenue from alternative sources like taxes should be made to match citizens interests by causing the least distortions to economic activity as possible. Governments with weak taxation systems, where tax revenue as a ratio of Gross Domestic Product (GDP) remains quite insignificant should consider implementing socially-optimized redesign of the tax systems. Despite the realisation that taxation is by far the most important of all revenues and a central part of modern public finance, there is also the truth that the present day tax burden brings with it a gravity of problems.
Also, considerations to reflate the economy by facilitating huge government spending on infrastructural renewal as is the case in Nigeria should be done within acceptable limits of budget deficits and debt to GDP ratios. This means that for such government investments, the future benefits need outweigh immediate costs. Finally and perhaps most importantly is the amount of openness required of governments throughout the public budgeting process popularly referred to as ‘Open Budget’. Transparency of the process, sufficient public participation and ultimately adequate oversight by the respective institutions charged with those responsibilities are critical elements for the success. Presently, according to the latest release of the Open Budget Index for about 102 countries, almost all resource-endowed economies of Africa are lagging behind on transparency and public participation pillars. The task of making public finance work for citizens need be based on established economic and institutional practices.
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Africa Investment Notes June 2016
Investment trends around Africa New data shows growing angel investor interests in African startups
African startups, particularly those in resource-endowed states, may be witnessing a lull in finance on the backdrop of economic slowdowns in those regions. However, data from newly published 2016 Venture Finance in Africa, conducted by VC4Africa, a leading social network for entrepreneurs and investors in Africa, shows that there is growing international and local angel investor interest in African startups. These interests are also resulting in tangible investments across the continent. The report shows that total investments more than doubled from US$ 27 million in 2015 to about US$ 73 million this year. In the same way, the average amount invested per venture also increased from US$ 200 in 2015 to US$ 326 this year. Covering 462 ventures in 41 African countries and 140 Africa-focused investors from 25 countries across the world, evidence from the data shows that the destinations with the highest number of ventures (more than 50) include Egypt, Nigeria, South Africa and Kenya. In these climes, the sector with the highest number of investor activity is the Technology sector. This is closely followed by Agriculture, Health, Finance and Energy sectors. So far, innovative ventures yield high social and environmental impact and are a key driver for Africa’s development. Likewise, opportunity driven entrepreneurs are generating much of Africa’s employment, income and hope for a better future.
R & D opens up new trending sectors for investment across Africa
Across emerging markets, particularly those on the African continent, a number of sectors are attracting the attention of investors and major brands seeking to have a foothold on this rising frontier for investment strategy. In the new innovation and enterprise hives like in Kenya, Ghana and Nigeria, there’s a renewed appreciation for the role of research and development in supporting economic growth. This approach with obvious promises of opportunities and benefits for the investor has highlighted five key sectors to watch. First is the Financial Technology industry, an industry that has proven pivotal to accelerating commerce across the continent. From farmers using mobile phones to receive instant market pricing updates to mobile applications that have redefined the experiences of hitherto unbanked rural populations, this industry is poised to impact economic development in the years ahead. Next is the Online Retail that has claimed a significant chunk of the wholesale and retail market segments offering juicy deals to online shoppers who barely have the time to visit a physica store. The third sector is the Healthcare industry which has seen mobile solutions address unfavourable medical personnel-to-patient ratios hint at an evolution within the healthcare sector. As many African countries continue to modernize the urban space for efficient mobility of people and goods, the Public Transportation sector with tech-based public transport management solutions will be in heavy demand. Finally and fundamental to all sectors already listed is the Information, Communication and Technology industry, where tech hub organisations are providing the link between enterprise and ICT solutions.
Africa Investment Notes June 2016
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Emerging Ideas Planning Big for African development with ‘regional direct investments’ Across the continent, the case for looking towards local and regional investment is gaining momentum. This is not to opine that there will be more local investors interested in Africa anytime soon. But, the rising demand for intra-African investment and trade is expected to create a virtuous cycle that encourages greater foreign investment. The convergence of local and foreign investment is also supported by strong macroeconomic growth and outlook, improving business environment and focus on infrastructural development. The United Nations Conference on Trade and Development (UNCTAD) data shows that Africa’s foreign direct investment stock has grown six times over from $90 billion in 1995 to $700 billion in 2014. Between 2003 and 2013, intra-African investments also nearly tripled their share, from 8 % to about 22.8%. But public authorities and private stakeholders need to work together to ensure that this base continues to grow. As weaker commodity prices and failure to effectively participate in manufacturing value chains continue to dampen Africa’s outlook for export revenues, it becomes necessary to set sights on a new frontier of hope. A massive push from the African Union at a time of dwindling commodity export revenues, widening budget deficits, rising inflation and insufficient infrastructure finance could open a new vista for the struggling economies of Africa. For instance, the planned Continental Free Trade Agreement (CFTA) has the potential to reinvigorate Africa’s development at this watershed moment. It could prove crucial for the creation of well-paying jobs, especially for Africa’s youth, but political leadership focused on African integration will be decisive. The CFTA could be the game-changer that reverses this state of affairs. Today, cross-border trade deals, such as the “mega-regional” Trans-Pacific Partnership, Trans-Atlantic Trade and Investment Partnership, and the Regional Comprehensive Economic Partnership, focus on regional arrangements as the source for creating new trading, employment and income generating opportunities.
The time is now for Africa to work towards its own mega-regional. Africa’s CFTA has substantial room to increase trade growth dramatically, and to pave the way for the industrialisation and economic transformation necessary for African countries to achieve the ambitious targets of the global Agenda 2030 and Africa’s own Agenda 2063. UNCTAD estimates that implementing the CFTA will roughly double the share of intra-African trade (currently around 13% of African exports) by early next decade. And if past experience is any guide, tariff reductions may even increase trade tax revenue. Manufacturing export sectors will be the biggest beneficiary, in line with current trends that suggest the sector is already doing well in intra-African trade. Agriculture will also get a boost through the creation of a more viable African marketplace for food. Enhanced trade in agricultural products will also increase prospects for agro-processing, creating dynamic linkages with manufacturing. And the impact will be even greater if non-tariff barriers are addressed, if informal trade is integrated into formal trade channels, and if services liberalisation takes place. To maximise the gains, the CFTA should include both a goods agreement and a services agreement. Developing regional markets is important for trade in services and other important new issues, like e-commerce, which are critical to Africa’s future. We need to reach agreement on joint regional harmonisation and regulatory cooperation in these areas of growing importance. Otherwise we lose the opportunity to collectively regulate service provision, provide consumer protection, tax, and earn tax revenue effectively from the multinational players already doing business in this space in Africa. The time is ripe for Africa to be ambitious on the CFTA. But whether or not the CFTA can become Africa’s own “mega-regional” depends on whether it is pitched at the right level of ambition, policies and leadership that can trigger a truly transformational approach to African trade integration.
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Africa Investment Notes June 2016
Policy Matters African farmers need investment – but these 6 factors stand in the way Agriculture has already emerged as one of the major sectors attracting investment across the continent. As governments re-adjust their public finances, agriculture plays a role at the heart of that economic restructuring. Support for investments in agriculture helps reduce drains on foreign exchange from the huge food bill by making African countries at least self-sufficient and at the same time moving closer to achieving food security objectives. According to Kanayo Nwanze, President of the UN’s International Fund for Agricultural Development (IFAD), investments in agriculture can generate great riches for the continent and lift millions out of poverty and hunger. The claims are based on potentially high returns for agriculture in countries that take the sector seriously. Despite many countries in southern and eastern Africa suffering from the worst drought in decades, and with fiscal deficits widening and conflicts increasing on the continent, there are significant potentials for strengthening African economies through the self-sufficiency agenda. Investment in agriculture is also key for economic growth and job creation among Africa’s farmers, but significant constraints remain before they can fulfill that potential. That’s according to Grow Africa’s Enabling Environment survey. The survey gathered responses from 133 companies, domestic and international, in 12 countries, regarding the challenges facing their specific investments. It found that, while private-sector investors in African agriculture report improvements in the “enabling environment” – the overall factors that allow investment into a country – progress is too slow to unlock the sector’s potential to drive economic growth. Based on levels of satisfaction of investors within 14 aspects of the enabling environment, six constraints were identified as standing in the way of progress in the agriculture sector. In the first place, lack of access to affordable finance is consistently cited by private-sector investors within the Grow Africa network as the number one obstacle to implementing projects on the ground. Secondly, the absence of sufficient cross-sector collabo-
rations that help investors overcome challenges within value chains and market systems makes agriculture investment a tough deal. Cross-sector collaboration is increasingly recognized as a key component of successfully being able to execute investment commitments. The third factor is the lack of adequate infrastructure from stable electricity to good public roads that facilitate preservation and timely transportation of farm produce. Investor dissatisfaction with the quality of physical infrastructure is a significant constraint to growing investment in the agriculture sector. Finding skilled labour is another area flagged as being a deterrent to agriculture. Although, progress is being made in this aspect, investors show that smallholders lack the skills to increase quality and quantity of production, and the cost of training is prohibitive for companies. This is compounded by the shortage of commercial managers to oversee operations. With more Africans moving to the urban centres, skill retention in the mostly rural agricultural centres remains a challenge. The fifth factor standing in the way of progress is government policy. There are concerns among investors that their investments are not supported by effective national policies for trade, agriculture and investment. This makes long-term planning a difficult task. Finally, a lack of efficiency on the part of government in terms of its bureaucracy is seen as a constraint to agriculture development. Inefficiencies in administrative and regulatory formalities especially as it concerns land issues and the lack of clarity on land ownership keeps investors second-guessing. Resolving these issues requires a realisation that in many cases, policies are signed off at regional and sometimes national level, but not implemented consistently, or at all, at a local level. Governments paying attention to the need to improve the enabling environment in order to attract private sector investment and development funding will do so with three points in mind. Identify national champions at the presidential level, ensure greater accountability and improve dialogue between ministries and the private sector.
Many times you need that outside insight on investment trends across Africa...
The Africa Investment Notes INVESTMENT TRENDS | CAPITAL FLOWS | SECTOR INSIGHTS | ENTERPRISE | M & A
An Africa-focused enterprise with business-oriented analytical, creative and innovative expertise The Africa Investment Notes is a monthly publication of Pedestal Africa Limited. www.pedestalafrica.com
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Africa Investment Notes June 2016
Capital Investment Appraisal Improving accessibility of infrastructure investment funds for Africa
Good quality public infrastructure is one of the critical requirements for economies that plan to shore up available investment capital to fast-track development. Across Africa, there is a need for big infrastructure funding to close the infrastructure gap in an attempt to catch up with emerging markets elsewhere. However, funding such infrastructure investments is a challenge for governments particularly at a time when the public finance outlook of most of these economies is in poor shape. In such situation, exploring access to infrastructure investment funds, like pension funds, a growing preserve of private sector investors seems a viable alternative. Pension funds have become lucrative despite only recently becoming heavily invested in infrastructure financing as a result of government disengagement from the costly longterm financial commitments required by large infrastructure projects. In this investment class, the progressive realization that infrastructure could be an “ideal asset class” providing tangible advantages such as long duration- facilitating cash flow matching with long-term liabilities, protection against inflation and statistical diversification (having low correlation with ‘traditional’ listed assets such as equity and fixed income) has prompted an increasing number of pension executives to consider investing in infrastructure. Notwithstanding, a number of pension funds and sovereign investors wishing to gain a degree of exposure to infrastructure assets do so indirectly, through investments made in infrastructure funds managed by specialized asset managers. For example, Investec Asset Management recently announced that it has been appointed to manage the approximately US$670 million Emerging Africa Infrastructure Fund (EAIF), a public−private partnership anchored by the governments of the United Kingdom, The Netherlands, Sweden and Switzerland. The EAIF is an initiative of the donor−financed Private Infrastructure Development Group and was developed to mobilise capital into private sector infrastructure projects across sub− Saharan Africa. Established in 2002, the EAIF has invested over US$1.2 billion in 63 projects across
19 countries. In addition to the equity provided by the UK, The Netherlands, Sweden and Switzerland, lenders include a combination of private sector financial and development institutions. Funds like the EAIF maintain laudable objectives such as - to catalyse African infrastructure projects through providing long−term debt and mezzanine financing on commercial terms tailored to local needs; to invest in sustainable businesses with skilled management teams and clear potential to improve economies and help reduce poverty; and to deliver on both investment and specific development goals. Such commitment demands the recognition of governments in infrastructure investment categories in order to maximize benefits and fulfill access requirements. There are also infrastructure funds well-suited to social infrastructure investment including real estate and housing that should be explored for benefits like improving the state of public current accounts. Entities like Growthpoint Properties, the largest SA-based property company are positioned for such investments. Recently, Growthpoint announced that it had received a boost to its Africa expansion plan, with the International Finance Corporation having committed $40m. Last year, Growthpoint entered into a joint venture with Investec Asset Management, to create Growthpoint Investec African Properties Limited, a property investment holding company that would seek out acquisition or development opportunities in Africa. Although African economies are going through short-term challenges at present, the continent is expected to throw-up pretty amazing long-term prospects. As Africa grows it will require improved properties and large-scale developments that can be used by productive businesses and meet increasing consumer demand. To ensure optimal access to infrastructure investment funds, governments will need to keep policies on infrastructure investments in tune with the changing dynamics of these categories of investors.
Endnotes: 1. Cover page infographic created with data from the CIA World Fact book, the Open Budget Index and Pedestal Africa estimates. 2. Page 2 (Trends): a) - AIN Opinion. 3. Page 3 (Trends): a) - Curated from VC4Africa Title: “New data shows growing investor appetite in African early stage startups” by Thomas van Halen (May 18, 2016). b) -Curated from Entrepreneur.com Title: “5 Hot African Industries Investors Should Be Watching” by Konstantin Makarov (May 20, 2016). 4. Page 4 (Emerging ideas): Curated from Eye Witness News Title: World Economic Forum Opinion “An African trade deal to improve lives across the continent” Opinion By Mukhisa Kituyi, Secretary General, United Nations Conference on Trade and Development (UNCTAD) 5. Page 5 (Policy Matters): Curated from World Economic Forum title: “African farmers need investment – but these 6 factors stand in the way” By Alex Gray (May 2, 2016) and additions from The Nerve Africa title: “Investments in agriculture can lift millions out of poverty and hunger in Africa” by Niyi Aderibigbe (May 10, 2016) 6. Page 7 (Capital Investment Appraisal): AIN Opinion with news on Investec Asset Management and Growthpoint from The Namibian and BusinessDay, BD live in South Africa.
Disclaimer: This newsletter is a mix of curated and original information service of Pedestal Africa Ltd. As much as possible we have identified sources of content used in the Endnotes and any omissions, inaccuracies or incompleteness are not deliberate. The research has not been prepared in accordance with the full legal requirements designed to promote independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Pedestal Africa Ltd. may not be held liable for any infringements on intellectual property and copyright laws or for any investment loss arising from the use of this service.
ABOUT AFRICA INVESTMENT NOTES Africa Investment Notes is a monthly investment digest for people, governments and businesses focused on the African continent. Its purpose is to convey strategic investment data, information and insights to both foreign and local investors, entrepreneurs, corporate entities and government actors within the African business space so as to support best practice, capital growth and investment throughout the continent. It is a service of Pedestal Africa Limited.
ABOUT PEDESTAL AFRICA LIMITED Pedestal Africa Limited, an Africa focused enterprise, operates a private equity portfolio, media and IT holdings and an investment advisory service. The advisory service covers country risk, policy insight and multi-sector intelligence to current and potential investors - foreign and domestic, and offers local knowledge of potential business opportunities in Africa. We are focused on generating funding and business knowledge for African businesses both external and within Africa, in order to foster economic growth on the African continent. By curating and publishing market assessment reports and policy papers, and interactive forums, we hope to promote enterprise, innovation and development.
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