AIN May Edition

Africa Investment Notes

INVESTMENT TRENDS | CAPITAL FLOWS | SECTOR INSIGHTS | ENTERPRISE | M&A

CHINA IN AFRICA: to make or to mar diversification?

INSIDE THIS ISSUE

Investment trends around Africa Emerging Ideas Policy Matters Capital Investment Appraisal

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Africa Investment Notes: Monthly

May 2016

Africa Investment Notes May 2016

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Investment trends around Africa $6 bn deal for Nigeria kick-starts the $60bn Sino-Africa pledge

In April, China and Nigeria agreed to a deal worth $6 billion, perhaps as part of the Asian giant’s pledge to commit up to $60 billion in development funding to the African continent over the next three years. Although details of its classification as development aid, credit or counterpart investment funding remain unclear, it is known that the likely projects to access the funds will be in the agricultural, construction, extraction and manufacturing sectors. This is consistent with recent Chinese Outward Direct Investment (ODI) drive that has seen inflows into Africa grow rapidly.

Apart from the recent Nigerian deal, past Chinese investments in Africa includes some large deals which have been highly publicized. For example, in the Democratic Republic of Congo, the Sicomines iron mine involves the Chinese state-owned enterprises China Railway Engineering Corporation and Sinohydro and the private company Zhejiang Huayou Cobalt, in partnership with Congolese state-owned companies. Other high profile deals include CNPC’s gas investment in Mozambique, Chinalco’s mining investment in Guinea, and Sinopec’s oil and gas acquisition in Angola. While many of these deals have been in the traditional extractive sectors, the trend is changing towards more agricultural, infrastructure construction, and industrial manufacturing such as automobiles and home appliances.

Between 2003 and 2014, about 157 Chinese FDI Greenfield projects were operationalized across more than 10 sectors in Africa, bringing in more than $30 billion in investments from several small and medium-scale Chinese firms (see page 7). Another important trend is that the investments are also happening in non-resource sectors. At least 2,500 jobs were created in the five year period in sectors ranging from manufacturing, construction, ICT and several other business services in about 50 African countries.

A deeper historical outlook at Chinese investment trend (see cover page) also shows similar results with more than 2,000 Chinese firms participating in different projects over the period from 1998 to 2012 in as many as 50 African countries. In this case, recorded projects within the top 20 destination countries in Africa alone are more than 3,200. Cross-sectoral analysis shows that a large percentage of the projects target the services, manufacturing and agricultural sectors. At a time when global decline in commodity prices are badly hurting African economies, it appears that direct investments such as those from China will be welcome.

So far, Chinese investments are reinforcing the long-term preferences of majority of African policymakers who are hoping to seize the opportunity of poor revenues and huge current account deficits to achieve much needed diversification objectives. According to the Pew Global Attitudes survey for 2015, African respondents had a significantly more positive view of China (70% with a favourable view) than respondents in other regions such as Europe (41%), Asia (57%), or Latin America (57%).

Across Africa, non-resource sectors, particularly service sectors includ-

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Africa Investment Notes May 2016

Investment trends around Africa Non-resource sector investments continue to grow

ing telecommunications and retail are attracting steady increases in investment contribution to the continent’s economy. Orange, a world’s leading telecommunications operator, has announced a €75 million equity interest investment in Africa Internet Group, the leading Internet platform in Africa and parent company of Jumia, Africa’s leading e-commerce platform. Through this investment, which will be accompanied by a series of strategic partnerships, Orange will help Jumia and other startups under the AIG umbrella to accelerate their growth and seize development opportunities in Africa.

Also, within the property market, Africa’s largest mezzanine fund manager, announced that it has provided $20 million of funding to Landmark Africa, one of Nigeria’s leading property developers. Landmark has developed or managed over 130,000 m 2 of prime real estate across the continent. The real estate company is headquartered in Lagos, with offices in several countries including South Africa and the United Kingdom. Over its nineteen-year history, Landmark has built a high-quality property portfolio, including A-Grade offices for over 100 corporate clients including the Nigerian headquarters for PriceWaterhouseCoopers and Procter & Gamble and provided development management services for one of the largest malls in Nigeria.

Revenues rise as tax systems across Africa evolve

While much still needs to be done to bolster historically informal tax regimes, across much of region, governments are prioritizing and modernizing tax reforms, according to a new research by the OECD and partners.

Between 2000 and 2014, all eight countries covered in the analysis Cameroun, Cote d’Ivoire, Mauritius, Morocco, Rwanda, Senegal, South Africa, and Tunisia - posted increasingly strong tax to GDP ratios. These higher ratios are a strong indication that governments are mobilising a greater share of the nation’s wealth for public spending through taxation.

As a percentage to GDP, all eight reported tax revenues of between 16.1 to 31.3 percent. Corporate income tax revenue to total tax revenue ratio was considerably higher than the OECD average of 8.5 per cent, hovering in the 13 to 18 per cent range.

Since 2000, rising taxes on income and profits have propelled tax revenues in the eight countries higher, with corporate tax making up a big part of it. Value added tax revenues have also gone up.

Mobilising domestic resources rather than relying on external borrowing and aid has many advantages. It can support the prosperity and legitimacy of the state, and enhances accountability. Creating strong, fair revenue collecting agencies is key. African tax systems have a reputation for operating on an informal basis. Symptomatically, not enough is being done to ensure that Africa’s wealthiest are paying their fair share of taxes - an issue that has come to the fore globally with the publication of the Panama Papers leak of offshore legal and banking records.

Africa Investment Notes May 2016

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Emerging Ideas Strategy for business success in Africa: significance of understanding the local context

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frica’s potential as “the next Asia” has been well documented, at least within the last half decade, and multinationals have watched with mounting interest as local economies boomed across the continent. Prior to the commodity price collapse, a good number of Africa’s reformed economies posted impressive growth rates averaging close to 6%, among the highest globally.

Today, projections for GDP growth remain around 3.4% to 4.2%, at least a full percentage point above global growth rate, according to International Monetary Fund (IMF) forecasts.

Africa’s rapidly growing and youthful population together with its expanding middle-class also reinforce the interests of investors to consider the continent’s potential. Africa is home to seven of the world’s megacities and its average of 29 million youth entering the labour force annually is evidence of huge prospects in the construction and manufacturing sectors. The Africa Development Bank estimates that consumer spending will reach US$ 2.2 trillion by 2030 (up more than twofold from $680 billion in 2008).

However, unlike elsewhere, Africa is made up of many diverse economies without a singular or unifying regulatory body for trade or investments.

Thus, differentiating colonial histories, religions, languages, currencies and political systems of the myriad societies is a key element for multinationals and continental businesses that hope to succeed in Africa on the long term. Apart from understanding these distinctions, it is important to be armed with a comprehensive strategy for entry. To know where the firm’s strengths lie and to match these capabilities with the circumstance of each local market, or to know the characteristic success requirements and find competent local partners that can deliver same.

Also, the idea that African economies can be clustered into peers based on economic and institutional development indices is crucial for success.

For example, the expertise that benefits a company’s operations in South Africa would most likely do so in Botswana or Namibia but not in Mali or the Democratic Republic of Congo (DRC). Grouping countries along specific development lines

can help firms make accurate decisions about the extent of absorption of technology tools, availability of a skilled workforce, purchasing power, market size and structure, adoption of innovative or world-class products, and the reliability of supply chains that depend on good quality infrastructure.

In areas where these are poor or lacking, good knowledge of it would enable the company take informed and calculated risks concerning its business success.

Another important point, perhaps the most useful for navigating a local market is the ability for firms to identify a talent pool on the ground that can execute the company’s global strategy at a local level. Although this could start with an embedded core team of home-country experts to oversee the new business, there should be a concious effort to invest heavily in skills transfer. By structuring a progressive scheme for training local employees including bringing them to the home office to understand the firm’s culture and ways of working, businesses can secure a sustainable path to the future of its local operations.

Companies can also source local businesses to partner with, through mergers, joint ventures, or simple supply arrangements. In this situation, the company will need to clearly define what it wants from a potential partner and then evaluate candidates carefully against these requirements.

Finally, it is necessary for companies to ensure that the corporate governance policies and processes are well-suited to the local culture. Local subsidiaries will require some autonomy to develop and execute strategies tailored to their own market. However, such requires careful monitoring since the firm is unexpected to compromise exposures to major economic and ethical violations.

As in less-developed markets, companies will face challenges from local insurrection to overestimates consumer purchasing power as they enter Africa. Yet, incorporating global expertise with economic, institutional, social and infrastructural realities in the local context can guarantee a competitive edge for resilient businesses.

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Africa Investment Notes May 2016

Policy Matters Africa’s failure to industrialize: bad luck or bad policy?

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bout five years ago the African Development Bank, the Brookings Institution and the United Nations University-World Institute for Development Economics Research (UNU-WIDER) came together to try to answer a seemingly simple but puzzling question: Why is there so little industry in Africa? The research conducted in eight sub-Saharan Africa countries - Ethiopia, Ghana, Kenya, Mozambique, Nigeria, Senegal, Tanzania and Uganda provides detail.

By November this year, the United Nations will celebrate the 27th Africa Industrialization Day. Africa’s experience with industrialization over the past quarter century has actually been disappointing. In 2010 sub-Saharan Africa’s average share of manufacturing value added in GDP was 10 percent, unchanged from the 1970s. At the same time, manufacturing output per person was about a third of the average for all developing countries, and manufactured exports per person about 10 percent. Thus, the question: Is Africa’s failure to industrialize in at least 50 years since Independence and more than 25 years since the first African Industrialization Day due to bad policy or bad luck?

Bad Luck Africa’s failure to industrialize is partly due to bad luck. The terms of trade shocks and economic crises of the 1970s and 1980s brought with them a 20-year period of macroeconomic stabilization, trade liberalization and privatization. Import competition forces inefficient firms, both public and private, out of business. Uncertainty with the outcome of the adjustment process and low or negative economic growth meant that there was little private investment overall and practically none in industry. Political instability and conflict also caused investors to hold back. When Africa emerged from its long economic hibernation around the turn of the 21st century, African industry was no longer competing with the highwage industrial “North,” as it had in the 1960s and 1970s. It was competing with Asia. From the point of view of industrial development the timing of the region’s economic recovery was unlucky to say the least.

Bad Policy But the failure to industrialize was also due to bad policy. The eight sub-Saharan countries enacted remarkably similar policies for industrial development: state-led import substitution, Structural Adjustment and investment climate reform. Import substitution sowed the seeds of its own destruction. High protection and heavy import dependency meant that African industry was poorly prepared for international competition. The tendency of many African governments to assign a leading role to the state in creating and operating manufacturing firms simply made the problem worse. Investments were often made with little regard to efficiency, and the managerial capacity of the state was badly overstretched. While the reforms of the Structural Adjustment period paid off in terms of better macroeconomic management and faster overall growth, the rapid liberalization of trade and some ill-advised conditions—such as freeing up the import of second-hand clothing for resale—probably caused a more severe contraction of industry than was desirable. But, hindsight is always 20/20. The key issue looking forward is: Do the policies African governments now have in place prepare Africa to turn the corner in industrial development?

Beginning in 2000, a number of bilateral donors shifted their focus in spurring industrial development to the “investment climate”—the policy, institutional and physical environment within which private firms operate. Although in principle improvements in the investment climate are supposed to cover the whole range of issues from macroeconomic management, to infrastructure and skills, to the policies and institutions that most closely affect private investors, in practice the investment climate agenda has centered too narrowly on regulatory reform.

What is the alternative? Success stories from the “Four Tigers” of East Asia implementing similar industrial development policies have been striking based on the rapid growth of export manufacturing termed “the export push” - a coordinated set of macroeconomic and structural policies designed to boost industrial exports. Perhaps it is time to think again about investment climate reform.

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

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Africa Investment Notes May 2016

Capital Investment Appraisal FDI in manufacturing, catalyst for industrialization and the Chinese leverage

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evelopment economists mostly agree that manufacturing is a panacea for addressing unemployment, which in turn spurs economic growth, enhanced productivity and higher living standards. Indeed, few countries have escaped the poverty cycle without expanding their factories.

ed providing key training to low skilled workers, management experience, technology transfer, integration to global value chains and securing the supply of technical inputs to this intensive sector.

As Chinese FDI in Africa continues to increase, the Asian giant’s investments in manufacturing across the continent has expanded from textiles Manufactured output per person in Sub-Saharan and apparel to industries such as auto, home apAfrica is about 30% lowpliances, heavy coner than in other develstruction, and buildChinese FDI Greenfield Projects, 2003 2014 oping regions although ing materials. At the the region’s average end of 2012, the 11 SECTOR Total Capital Number of Average Jobs manufacturing induslargest cumulative inInvestment Projects Created (US$ million) try has grown year on vestment destinations year for much of past were: South Africa, Ni13,284 77 510 Manufacturing two decades. So, FDI geria, Zambia, Algeria, should be viewed as Angola, Sudan, DRC, 8,726 14 1,064 Extraction capable of playing the Zimbabwe, Mauritius, catalyst role in develEthiopia and Tanza4,650 4 1,415 Construction oping manufacturing nia. These countries and moving towards inaccounted for 75% of ICT & Internet 1,850 4 322 dustrialization.

China’s total direct inInfrastructure vestment stock in Afri1,351 4 66 Ideally, it is the responca. In the same time, Electricity sibility of governments China’s investment to make sure that the Sales Marketing & stock had increased by 149 23 15 Support environment for sucabout 53% of its 2003 Logistics & cessful manufacturing value.

147 3 133 Distribution is in place so as to attract sufficient forTwo quick case examBusiness 84 8 17 services eign direct investment ples further provide (FDI) within the sector. evidence for the imporEducation & 73 8 75 Training However, where the intance of FDI in spurvestment case is overring manufacturing and 32 4 38 Retail whelming, as has been by extension growth in said of Africa, investors Source: World Bank, Investing in Africa Forum industrialization. The may attempt to close first is the case of Ethithe poverty gap by addressing the basics. opia, a country with very modest economic growth prior to 2008 with only a GDP of about $27 billion.

Such has been the experience with Chinese FDI By 2013, Ethiopia received FDI inflows of more to greenfield projects across Africa over the past than 2% of GDP and its economic output reached decade. Although still relatively small compared as much as $132 billion in 2014. In the 2013-2014 to FDI from the West, Chinese investments in Af- period, Ethiopia also recorded the biggest gain in rica is growing and increasingly focusing on the export sales at 143.2% over the previous year. In manufacturing sector and critical infrastructure the case of Rwanda, its FDI increased more than sectors. Between 2003 and 2014, there were 77 threefold from a low base in 2008 to $258 million FDI greenfield projects in manufacturing sector in 2013, totaling $2.5 billion over the five years. at a total cost of over $13bn. Aside the obvious financial prospects, FDI benefits have includ-

Endnotes: 1. Cover page infographic created with data from the Chinese Ministry of Commerce (MOFCOM); W. Chen, D. Dollar and H. Tang (2015): Why is China investing in Africa? Evidence from the firm level.

2. Page 2 (Trends): a) - AIN Opinion, curated from several news sources including Washington Posts’ Title: “China pledged to invest $60 billion in Africa. Here’s what that means.” By W. Robertson and L. Benabdallah (January 7, 2016). Article by W. Chen, D. Dollar and H. Tang (2015): Why is China investing in Africa? Evidence from the firm level.

3. Page 3 (Trends): a) - Curated from TechCabal Title: “Africa Internet Group Gets New 75 Million Euro Cash Injection From Orange” by Bankole Oluwafemi (April 5, 2016) and Nairametrics Title: “Landmark Africa (Owners of Landmark Event Center) Secures $20 million Funding” (April 13, 2016). b) - Excerpts from the This Is Africa Title: “ Revenues Rise As Tax Systems Across Africa Evolve” (April 29, 2016).

4. Page 4 (Emerging ideas): Curated from strategy+business Title: “A New Map for Business in Africa. On the world’s most diverse continent, companies need a deep understanding of local context.” By J. Camarate, P. Hoijtink and M. Puttergill (April 25, 2016). Available at: http://www.strategy-business.com/article/A-New-Map-for-Business-in-Africa?gko=c5a57 5. Page 5 (Policy Matters): Excerpts of Brooking Institution article titled: “Africa’s Failure to Industrialize: Bad Luck or Bad Policy?”

By John Page (November 20, 2014). Available at: http://www.brookings.edu/blogs/africa-in-focus/posts/2014/11/19-africa-failure-industrialize-page 6. Page 7 (Capital Investment Appraisal): AIN Opinion with data from World Bank Investing in Africa Forum. G. Chen, M. Geiger and M. Fu (2015): Manufacturing FDI in sub-Saharan Africa: Trends, Determinants, and Impact. World Bank Group

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.

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