Africa Investment Notes INVESTMENT INSIGHTS | CAPITAL FLOWS | SECTOR TRENDS | ENTERPRISE | M&A
EXTERNAL COMMITMENTS & THE LINGERING INVESTMENT GAPS IN AFRICA
INSIDE THIS ISSUE
Investment events around Africa Emerging Ideas Policy Matters Country Focus
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Africa Investment Notes: Monthly
October 2016
Africa Investment Notes October 2016
External commitments and the lingering investment gaps in Africa
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outcome of two recently held investment events in Africa has yielded further commitments to invest in Africa. The AGRF and TICAD-VI both held in Kenya ended with pledges in excess of $90 billion to be invested in Africa. Africa has experienced an increase from $5 billion a year in 2013 to about $30 billion in 2012 in both public and private external commitments. Official Development financing has increased-especially from the World Bank and the African Development Bank. Private participation has surged and now accounts for more than half of external financing. FDI flows to Africa fell to $54 billion in 2015, a decrease of 7 per cent over the previous year. An upturn in investment into North African economies such as Egypt was offset by decreasing flows into Sub-Saharan Africa, especially in natural-resource-based economies in West and Central Africa. Lacklustre economic performance pushed Foreign Direct Investment to a low level in South Africa, traditionally one of the top recipients in the region. Despite the depressed global economic environment, FDI inflows to Africa are expected to rise, due to liberalization measures in the region and some privatization of State-owned enterprises. Are these commitments enough? Do they bridge the investment gaps in Africa? Africa has always been tagged “the next big thing”, “the next investment frontier”, always referred to in the future; but the prevailing poor infrastructure among many others inhibit the enormous growth potential that she has. World Bank in 2009 via a study estimated that SSA needs $93 billion a year on Infrastructure. Recently, IMF estimated that budget spending on infrastructure reached $51.4 billion, leaving a gap of about $41.6 billion. External commitments, both private and public, appear to fill a substantial share of this gap. Official development financing has increased, especially from the World bank and the African Development Bank, but most of these external financing is concentrated in a few large countries and a few sectors. Five countries attracted more than half of the total external commitments to infrastructure development in
2009-2012. Africa’s strength “More efficient use of is enhanced existing by its young and dynamic infrastructure would population of about 1.2 billion reduce the $93 billion people. Howfinancing need by ever, this also poses the big$17 billion. ” gest threat as infrastructural developments do not match this growing population. This presents a huge opportunity for investors. Infrastructure investments is crucial if we are to leverage the opportunity that lies in our Demography. This will contribute in reduction of unemployment rates across the continent. One way to bridge this gap is to raise more domestic finance, and create fiscal space. There is need to increase the participation of domestic institutional investors such as pension funds. Africa pension funds have about $380 billion in assets under management. Evidence suggests that beyond financing barriers to investments, efficiency in fund utilisation is a major challenge. IMF (2015) estimates that 40 percent of the potential value of public investment in low-income countries is lost to inefficiencies in the investment process due to time delays, cost overruns, and inadequate maintenance. These are mostly as a result of undertrained officials; inadequate processes for assessing needs and preparing for and evaluating bids; and corruption. Reducing inefficiencies could substantially increase the economic dividends from public investment.The 2009 World Bank study estimated that if inefficiencies were addressed through such measures as rehabilitating existing infrastructure, targeting subsidies better, and improving budget execution, in other words, more efficient use of existing infrastructure would reduce the $93 billion financing need by $17 billion. The focus of attention on infrastructure should be broadened beyond financing issues to include efforts to improve efficiency.
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Africa Investment Notes October 2016
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Investment events around Africa AfDB to lend Nigeria $4.1bn
The African Development Bank is working on giving Nigeria loan facilities of $4.1bn between now and next year for critical sectors of the economy. The loan includes $1bn at a concessionary interest rate of 1.2 per cent for Nigeria to address the 2016 budget deficit and aid her economic recovery.
Nigeria: BoI, UNDP sign $2 Million Pact on Solar Power
The Bank of Industry, BoI, has signed a $2 million agreement with the United Nations Development Programme, UNDP, to provide solar-powered electricity to no fewer than six communities in six states of the federation.
Marriott Completes Acquisition of Starwood Hotels & Resorts
Marriott International Inc. completed its acquisition of Starwood Hotels & Resorts Worldwide Inc. on Friday, beginning the complex integration process by linking the guest loyalty programs and pledging to keep all 30 brands. The $13 billion merger creates the world’s largest hotel company with more than 1.1 million rooms and about 5,700 hotels in more than 110 countries.
Nigeria: NBS puts investment inflow at $1.04bn
The National Bureau of Statistics on Sunday released a revised version of the capital importation report for the second quarter, with estimated investment inflow of $1.04bn. The investment inflow represents an increase of 46.58 per cent over the amount recorded in the first quarter of this year. This contrasts with the preliminary estimate of $647.1m for the second quarter that was based on the first two months of the quarter, which indicated a quarter-on-quarter decrease of 8.98 per cent. However, a sharp increase in June outweighed the low values recorded in April ($305.82m) and May ($125.58m).
World Bank Disburses $1 Billion to Egypt to Support Inclusive
The World Bank disbursed US$ 1 billion to Egypt for the First Fiscal Consolidation, Sustainable Energy, and Competitiveness Programmatic Development Policy Financing (DPF). This is the first in a programmatic series of three annual development policy finance loans to Egypt in the context of the World Bank Group’s Country Partnership Framework (CPF) for 2015-19. The CPF provides for a total World Bank Group support of about $8 billion during this period supporting vital sectors in the economy in order to reduce poverty and boost shared prosperity.
Africa Investment Notes October 2016
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Investment events around Africa AGRF ends with over $60 Billion pledges to African Farmers Towards Upgrading Agriculture
The 2016 African Green Revolution Forum (AGRF) held in the capital of Kenya, Nairobi, has ended, with Major development partners, firms and African leaders making commitments to provide more than $60 billion in an effort to transform Africa’s agriculture from subsistence farming to agribusiness in the next ten years.
OCP Africa to invest $150 million over the next five years
A fertilizer firm, OCP Africa, committed to investing US $150 million over the next five years to support local fertilizer distribution, storage and blending, while the World Food Programme promised to purchase at least US $120 million each year in agricultural products from smallholder farmers through a partnership called the Patient Procurement Platform.
Ghana issues fifth Eurobond at 9.25 percent
The Ghana has issued a $750 million Eurobond at a more favourable yield of 9.25 percent compared to its last sale, officials have said. The country’s Finance Minister, Seth Terkper told the Reuters news agency that the sale was oversubscribed with orders exceeding $4 billion dollars – a development he said reflected investor confidence in the west African nation’s economy. Ghana also announced a further tender of its 8.5 percent 2017 notes and Tekper said the government was aiming to buy back about $400 million after it bought back around $100 million last month, reports Reuters.
Ghana’s second oil field raises hope of
Ghanaian president John Mahama recently commissioned the country’s second offshore oil field. The Tweneboa, Enyenra and Ntomme (TEN) field estimated reserves are said to be around 240 million barrels of oil and associated gas of 60 million barrels. Production in the $1 billion facility is expected to average at 23,000 barrels per day (bpd) in 2016 and eventually peak to 80,000 bpd
Caterpillar and Dealers Announce $1 Billion Investment in Business, Education and Training across Africa
Caterpillar Inc. (NYSE: CAT) Chairman and CEO Doug Oberhelman, currently taking part in the U.S.-Africa Business Forum (USABF) in New York City, announced that the company, its independent dealers and the Caterpillar Foundation plan to invest more than $1 billion in countries throughout Africa over the next five years. Today’s news reconfirms Caterpillar’s long-term commitment to the continent and is intended to provide a major upgrade in customer service capabilities – including enhanced parts distribution capacity, new state-of-the-art Certified Rebuild Centers, new dealer branch locations, the expansion of Caterpillar’s Technicians for Africa online skills development program and millions of dollars to support programs that lift people
Africa Investment Notes October 2016
Emerging Ideas Efficiency opportunities for emerging economies Emerging markets can tap the potential of digital in the food chain through innovations such as precision agriculture, supply-chain efficiencies, and agriculture-focused payment systems.
Recommendations can be adjusted in real time to reflect changing weather conditions. Soil sensors and aerial images help farmers manage crop growth centrally, with automated detection systems proPrecision agriculture is a tech- viding early warnings of deviations nology-enabled approach to from expected growth rates or quality. farming management that observes, measures, and analyzes the Automated systems showing the status, needs of individual fields and crops. By performance, and potential bottlenecks of allowing farmers to apply tailored care and critical equipment in real time can be manage water more effectively, it boosts used to optimize fleet management, thus production, improves economic ef- increasing delivery reliability and preficiency, and minimizes waste and venting spoilage. Transport times environmental impact. Its develop- can be cut in half by using smart mement is being shaped by two tech- ters to improve routing. Coupling nological trends: big-data and transport-management systems with advanced-analytics capabilities on the agricultural sensors can allow unified one hand, and robotics-aerial imagery, hauling of inbound transportation, genersensors, sophisticated local ating average savings of 10 to 20 percent. weather forecasts on the other. Agriculture-specific payment systems According to 2014 estimates, the and financial services can help farmglobal market for agricultural ro- ers make their economic models more botics is expected to grow from its resilient. Some growers use insurance current $1 billion to $14–18 billion contracts to offset weather risk, for inby 2020. New entrants and large stance. Insurers calculate a premium companies alike are developing products on the basis of the likelihood of a parand services for precision agriculture. The ticular weather event, such as frost, and start-up CropX offers sensors to the impact it would have on a crop at a help farmers adjust irrigation to the specific point in its growth cycle. The needs of their soil, while Blue Riv- premium is paid out when the number of er uses computer vision and ro- occurrences surpassbotics to determine the needs of es a predefined threshold. individual plants. At the opposite end of the scale, IBM This is a Mckinsey Report, 2016. has developed a highly precise weatherforecast technology, Deep Thunder, and an agriculture-specific cloud technology.
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Africa Investment Notes October 2016
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Emerging Ideas
New Ways of Financing Are Crucial for Transforming Africa’s By 2050, Africa will be home to one-fifth of the world’s population. This rapid growth, combined with a strong trend towards urbanization, poses significant challenges for food security, peace and security, and economic opportunity in the region. Agriculture, long seen as an underperforming sector, has over the past 10 years been recognized as the industry most able to provide both sustained economic growth and social inclusion on the continent. Agriculture today accounts for 32% of gross domestic product in Africa. Agriculture and agribusiness together could be a $1 trillion sector in subSaharan Africa by 2030, up from $313 billion in 2010. More important, growth generated by agriculture in sub-Saharan Africa is estimated to be 11 times more effective in reducing poverty than GDP growth in other sectors – a vital multiplier given that 65% of the continent’s labour force is engaged in agriculture. Innovative financing is crucial for agricultural transformation, wealth creation and long-term prosperity in Africa, according to this year’s Africa Agriculture Status Report (AASR), launched on September 6, 2016 in Kenya’s capital, Nairobi. The African Development Bank (AfDB) is one the authors of the report, which focuses on Progress toward Agricultural Transformation in Sub-Saharan Africa. It says despite annual public investments in agriculture having risen across Africa, from US $186.4 million per country between 1995 to 2003 to US $219.6 million between 2008 to 2014, only 13 African countries have honoured
their pledge to invest at least 10 percent of public funds in agriculture as foreseen under the Maputo Declaration of 2003. “If all [countries] that have pledged could make good on their promise, public funding for agriculture across Africa would rise from $12 billion (the amount allocated in 2014) to $40 billion,” notes the publication, unveiled at the ongoing African Green Revolution Forum (AGRF)
supply and downstream trading, processing, and retailing; (iv) more medium to large farms begin to supply the agricultural sector to capture economies of scale in production and marketing, and mean farm size rises with the exit of rural people out of farming and consequent farm consolidation; (v) the technologies of farm production evolve to respond to changes in factor prices (land, labor, and capital) as a country develops (in most cases as non-farm wage rates rise with broader economy-wide development, farms become more capital-intensive as the cost of labor and land rise and the cost of sourcing capital declines); (vi) there is a transition from shifting cultivation to a focus on more intensive, sustainable and management-intensive cultivation of specific fields; and (vii) the agri-food system becomes more integrated into the wider economy. Many of these transformation processes have accelerated since 2005 in countries such as Ghana, Kenya, Zambia, Ethiopia and Rwanda.
Agriculture and agribusiness together could be a $1 trillion sector in SSA by 2030
Inadequate financing for agriculture has been cited as a major impediment to smallholder farmers, their organisations, as well as small and medium agro-enterprises, which lack access to basic financial services. The agricultural transformation process in a country is generally associated with the following seven trends: (i) some farmers move out of farming to take advantage of better economic opportunities, while farmers remaining in production become more commercialized; (ii) farms transition from producing a diversity of goods motivated by self-sufficiency to becoming more specialized to take advantage of regional comparative advantage, and in the process they become more dependent on markets (market performance thus exerts a greater influence over the pace of agricultural transformation); (iii) the ratio of agribusiness value added to farm value added rises over time as more economic activity takes place in upstream input manufacture and
The report calls on African governments to urgently step up partnerships with various actors in order to grow agricultural finance, at the same time creating an enabling environment to foster innovation to the benefit of the smallholder farmer.
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Africa Investment Notes October 2016
Policy Matters Local content legislation: help or hindrance? As the natural wealth of the continent has become more apparent, African governments are increasingly trying to dictate the terms of the extraction of their country’s resources. Local content legislation – designed to ensure domestic economic participation and development – is usually the mechanisms of choice to achieve this. While traditionally associated with the extractive industries, today its scope is far broader. But what is the right approach to drafting this legislation, how should it be implemented and is it needed at all? The term “local content” has been popularised in recent years and yet it remains an ambiguous term; too all-encompassing and vague to some, yet too specific and limiting to others. So a clearly defined starting point matters. For our purposes we worked with the widely accepted definition of local content as: “participation and development of nationals in the workforce and local suppliers, goods and services.” Today, in the African context, the aim of local content is simple: to transfer knowledge, skills and value (including jobs and procurement) to the local economy, companies and people. Why does local content matter? Obviously, businesses must comply with a country’s local content laws to be able to operate, but there are other reasons companies should embrace local content. Investing in skills, sourcing locally and building capacity means businesses can operate more efficiently, more profitably, reduce risk, strengthen their entire brand and so protect their long-term licence to operate. You’d be hard pushed to find a business that does not agree with this sentiment but the tension centres on the legislation itself. From the perspective of governments, local content policies can stimulate broad-based economic growth. Government intervention in the private sector in Africa, especially extractives, is hardly a new phenomenon, but today’s policies no longer just refer to restrictions on imports or imposing tariffs. The legislation is now aimed at creating “backward links” (supplying input, i.e. knowledge, skills and value to the local economy through job creation, the opening of equity to local partners and supply chain investment), as well as “forward links” (increased productivity and infrastructure from businesses operations, i.e. new refineries and plants). Help or hindrance? A number of African markets have proven that striking the right balance between local content requirements and creating a healthy investment environment is difficult. Whilst some argue for no legislation, instead advocating that market dynamics create the level playing field legislation strives for, others worry that no legislation leaves a vacuum for abuse by all sides. However, our debate found consensus across three key areas. Firstly, legislation created in a vacuum (usually for short-term political gain), without consistent dialogue with the private sector, NGOs and local businesses, is destined to fail. What’s more, success is more likely when this consultation is led by an independent third party and includes consideration of the nation’s educational capabilities.
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Africa Investment Notes October 2016
Policy Matters Secondly, time to embed and adapt any legislation is key. Today some point to Nigeria as an example of a comparative success, but it must be remembered that the country has more than 30 years of experience formulating such policies. For markets which are developing or have recently implemented their policy – like Tanzania, Mozambique, Ghana and Kenya – all sides must be realistic in what can be achieved in the short term; especially given that the industries most affected require specialised, high-end technological inputs that are often sourced through globally integrated supply chains.
Where next? The overwhelming consensus from our debate was that local content legislation was needed, even if only because it helps governments articulate their intentions and future direction. This alone is invaluable to investors. For example, Tanzania recently created a new version of its Production Sharing Agreement that asks companies to “maximise their utilisation of goods, services and materials from Tanzania.” This type of wording leaves room for interpretation and allows the industry to demonstrate their commitment to moving in the same direction as the government.
This means countries with younger economies find it difficult to develop and maintain a local supply at the quality, size and pace of these industries. Overtly ambitious local content policies tend to create supply bottlenecks and negatively impact all concerned. Finally, we must be very careful in setting specific targets. Although the Nigerian Oil and Gas Industry Content Development Act 2010 is widely cited as increasing local participation in the oil and gas industry, by prescribing minimum entry requirements to promote transfer of technology and skills to Nigerian staff in the industry, overly optimistic or restrictive targets – like those defining the percentage of local ownership in any joint ventures – create rentseeking behaviour and market abuse that actually denies locals the very opportunities this legislation is seeking to create.
What is critical is that all stakeholders are continuously consulted in the drafting of legislation and continue to be involved during implementation and beyond.
What’s more, rigidly enforced targets don’t adapt to fundamental changes in market conditions, like the recent collapse in the oil price. This means that whilst businesses have drastically rethought their operating models and what’s affordable, they are working with rules that have not, so the legislation starts to (wrongly) be seen as a cost of doing business.
Despite the shortcomings of much of the local content legislation in Africa, a framework to operate within is better than no framework at all. There is no one-sizefits-all solution to this challenge but we believe partnerships and collaboration, across sectors, are the way forwards. After all, as a business you are highly unlikely to be unique in facing local content challenges, so why not learn from others, work together and engage governments as a business community, not just as one company or industry. This sort of cross-sector, united engagement saves everyone time and money and builds the trust and understanding of one another’s needs and expectations that policymakers and businesses must have to create local.
Africa Investment Notes October 2016
Country Focus - Togo Togo has worked hard since set up a commercial court. of the rail, air, port and road 2007 to boost its economy Positioned right on the infrastructure to make Togo and build the foundation for Abidjan to Lagos coastal a hub for West Africa. the solid growth which has road, in the heart of West been among the most signif- Africa, Togo is the hub for Energy; Most of icant seen in the region. This the West African Economic the clean electricity relaunch of the econoproduced in my has helped to repoTogo comes from Why invest in Togo? sition Togo as a dynamthermal technologies, Flourishing growth (of 4% on average over the last ic player in the region but Togo also has two five years) and seen it achieve hydroelectric plants. some significant 66% of the Togolese A young, dynamic and abundant pool of labor initial economic population live in success, thereby rural areas and The country’s geographic location at the heart of the sub-region, making it a natural hub for access to the earning the confidence consume less than West African market of 350 million people (ECOWAS) of international 10% of the country’s A strategic positioning with its deep water port (14 m investors. electricity. deep), the only one in the sub-region
Lomé is home to To encourage a Political stability the headquarters of balanced development regional airline Asky, of the country and West Africa’s leading financial center pan-African bank Ecoto improve the living A new investment code with many advantages for bank, and the Lomé conditions of both investors Autonomous Port, the the urban and rural Continuous improvements being brought to the busionly port on the West populations, the new ness environment (up 15 places in the 2015 Doing coast from which you energy policy guidelines Business rankings) can get to several focus on the developTax and customs benefits on exports for processing capitals in one day. ment of renewable and service companies Using the Port of energy sources (solar, Lomé therefore for the wind, biogas and hydropower systems). carriage of goods means benefiting from very and Monetary Union and the Each of these energy competitive timelines rapidly integrating common sources has greater or lesser energy potential, and costs. With their market. strong pro-business The country offers but as of yet all of them are largely untapped. approach, the Togolese plenty of opportunity for authorities have instituted investments, especially in Agriculture currently reforms, including the the following areas: employs 70% of the working introduction of a new • Infrastructure population and accounts for investment code; they • Energy 38% of GDP. have improved the ease of • Agriculture doing business, joined the • Mining Of the usable agricultural Extractive Industries • Tourism Transparency Initiative and Infrastructure Development land, which is estimated to
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‘the new energy policy guidelines is focused on the development of renewable energy sources ”.
be around 3.4 million hectares, food crops cover approximately 1,387,568 ha (i.e.41 %), while 154,314 ha are used for cash crops (i.e.4.5%).The surface area of arable land that is not used (including the insufficiently developed land covered by forage and pasture) is estimated to be 37%, i.e. about 1.2 million ha. As the backbone of the economy, its growth calls for productivity and added value. Mining currently accounts for 17% of Togo’s exports and 10% of Togolese government revenue. Togo has resources of iron, manganese,chromite, bauxite, nickel, marble, limestone, peat, garnet, phosphates, clay and decorative stones. The country boasts some major tourist attractions with its beaches, nature parks, cultural life and the places of special interest such as the UNESCO World Heritage Site of Koutammakou.
Endnotes: 1. Cover page infographic created with data from World Bank data; Africa Investment Report 2016; African Economic Outlook, 2016 2. Page 3 (Events): AIN selected African investment events curated from several news sources. 3. Page 5 (Emerging ideas): culled from Mckinsey article 4. Page 6 (Emerging ideas): culled from Agricultural Status report by AfDB 5. Page 7 (Policy Matters): culled extracts from African Business Magazine 6. Page 10 (Country Focus): culled extracts from an African Union publication.
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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