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Overview of Africa’s Development and Opportunities for Foreign Direct Investment

Mwangi S. Kimenyi

Senior Fellow and Director

Africa Growth Initiative

The Brookings Institution

Washington, D.C.

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Outline

• Introduction: Africa and its People

• Trends—Population, Democratization

• Regional Integration

• Recent Economic Growth Performance

• Business Climate

• Foreign Direct Investment In Africa

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Introduction• Africa is a huge continent.

» Roughly 1 billion people.

» 54 countries recognized by UN.

» 16 landlocked countries.

» Land mass of 30 million (sq. km)

– Brazil 8.4 million (sq. km)

– DRC 2.2 million (sq. km)

– Nigeria .9 million (sq. km)

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Introduction• Thousands of ethnic groups.

• These ethnic groups have more than 10 million people

» Hausa, Yoruba, Oromo, Igbo, Akan, Amhara, Somali, Ijaw, Kongo, Fula, Shona, Zulu

• Many of these ethnic groups have their own language (or dialect of a language) and culture

• There are an estimated 2,000 languages spoken in Africa, in six major linguistic families

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Demographics• Demographic boom.

» Half of the world's future pop. growth will be driven by Africa.

– Not because of higher fertility (which is declining).

– Because of longer life expectancy.

• “Youth Bulge”

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Demographics• Potential positive: “demographic dividend”

» Africa's adult population was 460 million in 2010.

» It is expected to be 800 million by 2030.

» Children and elderly (dependents) will be relatively few.

• Potential negatives:

» Lack of jobs

» Radicalization of youth, political instability

» Crime

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Middle class consumerism• Burgeoning middle class, ready consumers

» Currently, there are 85 million households that make more than $5,000 per year

» By 2020, there will be 128 million households

• Commercial hubs on the rise

» In 2020, the household spending of Alexandria, Cairo, Cape Town, Johannesburg and Lagos will total 25 billion dollars

• Urbanization (associated with economic growth) on the rise

» Today, 40% of Africans live in cities. By 2030, this will increase to more than 50%

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Democratization• Africa has “democratized” to some extent, especially in the 90’s

» In 1989, there 3 democracies; in 2008, there were 23

• “Democracy has become the norm rather than the exception”

• Practice of elections has become entrenched

» In 2013, there are elections to be scheduled in 22 countries

Negatives (long-standing leaders, non-competitive political systems)

» Zimbabwe

» Equatorial Guinea

» Gambia

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Democratization

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Governance

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201044.0

45.0

46.0

47.0

48.0

49.0

50.0

51.0

Governance Score of SSA

Source: Mo Ibrahim Foundation

Factors:

1) Safety/Rule of Law

2) Human Rights

3) Sustainable Economic Opportunity

4) Human Development

On the whole: better governance

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Decline in Violence and Conflict• According to Uppsala Armed Conflict Data Program:

» African civil wars in late 2000s are half as common compared to mid-1990s

» Mass killings are on the decline

» Current wars are more likely to be fought on state periphery

• Problem areas:

Mali, CAR, DRC, Sudan

Terrorist threats of Al Shabaab, Boko Haram

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Imperative of Regional Integration: Big continent but small economies

• Huge land mass, lots of borders Barriers to trade, strengthening of value chains, etc.

» Border delays in trading are up to three times as long in Sub-Saharan Africa.

• Economies of Africa are quite small, comparable to US cities

African Country GDP(Mil) U.S. Metropolitan Area GDP(mil)Sudan 62,046 Boston 313,690Kenya 31,409 Los Angeles 735,743Ghana 31,306 Columbus 93,353Ethiopia 29,717 Ann Arbor 18,566Tanzania 23,057 El Paso 27,025Côte d’Ivoire 22,780 Madison 35,615Cameroon 22,394 Oklahoma City 58,339Uganda 17,011 Kansas City 105,968

Data Source: World Bank data, http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf U.S. Department of Commerce, Bureau of Economic Analysis, http://www.bea.gov/regional/gdpmetro/

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Size of African economies• Sub-Sahara’s 2012 GDP= 1.3 trillion (USD)

» Roughly the same size as Spain’s GDP

» Brazil’s 2012 GDP = 2.3 trillion (USD)

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Regional Integration• Africa has many different regional economic organizations (RECs)

» Community of Sahel-Saharan States (CEN-SAD)

» Common Market for Eastern and Southern Africa (COMESA)

» East African Community (EAC)

» Economic Community of Central African States (ECCAS/CEEAC)

» Economic and Monetary Community of Central Africa (CEMAC)

» Economic Community of West African States (ECOWAS)

» West African Economic and Monetary Union (UEMOA)

» West African Monetary Zone (WAMZ)

» Intergovernmental Authority on Development (IGAD)

» Southern African Development Community (SADC)

» Southern African Customs Union (SACU)

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New Developments in Integration• EAC, COMESA, SADC Tripartite

» Tripartite FTA will span three existing regional economic communities - COMESA, EAC, SADC - 26 countries in total.

» Expected completion: 2014» Tripartite FTA would evolve into…

• Continental Free Trade Area» African Union endorsed a plan to set up a Continental

Free Trade Area (CFTA) by 2017.

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IT revolution• Afro-barometer findings (of 34 countries):

» 72% of respondents own mobile phones.

» Essentially universal access in Senegal (98%) and very high access in South Africa, Ivory Coast, Kenya (93% each)

• Rise of mobile money

» 74% of Kenya pop. uses mobile money

» 31% of Kenyan GDP transacted with mobile money (2013)

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Investment Climate • Significant improvements of the business regulatory environment

» Rwanda as case example

– In 2006, it ranked 58th in the world for ease of starting a business in 2006.

– By 2011, it was ranked 8th.

– Has been named “top reformer” several years.

» Other strong performers include Burkina Faso and Ghana

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Investment Climate • According to the Doing Business 2013

» Of the 50 economies making the most improvement in business regulation for domestic firms since 2005, 17 are in Sub-Saharan Africa

» From June 2011 to June 2012, 28 of 46 governments in Sub-Saharan Africa implemented at least one regulatory reform making it easier to do business – a total of 44

» Burundi, with four reforms, ranks among the 10 economies globally that improved the most in the past year across three or more areas

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Investment Climate • “Distance to frontier” shows how far an economy is from the best

performance achieved by any economy

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Economy• History

» African per capita GDP growth rate was 0.89% per annum between 1950 and 1992

» Most post-independence African governments adopted anti-market policies

» Between 1960 and 2000, there have been about 80 violent changes of governments in the 48 sub-Saharan countries

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Recent Economic Performance• Africa is the world's fastest-growing continent.

• IMF: Over the last five years, Africa grew almost 5% per year

» Advanced countries grew about .5% per year

» Latin America grew about 3.3% per year

• Diverse set of countries have experienced economic growth

» E.g. coastal countries (Senegal, Mozambique) land-locked (Burkina Faso), commodity exporters (Zambia, Nigeria)

• Africa’s GDP is projected to rise 6% each year for the next decade

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Economic GrowthSub-Saharan African

GDP growth (annual %)

Source: World Bank Development Indicators

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

0

200

400

600

800

1000

1200

1400

1600

Sub-Saharan Africa GDP per capita (current US$)

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Growth StoryReal GDP Growth in sub-Saharan Africa

2004 - 2008 2009-2011

Oil Exporters 8.60 6.00

Middle Income 5.00 2.57

Low Income 7.30 5.77

Fragile 2.50 3.20

Total SSA 6.50 4.43

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Growth and Poverty Reduction

• Between 1999-2012, poverty rate fell from 58% to 43%

» ~ 1% point per year

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 20100

10

20

30

40

50

60

70

% of SSA population below $1.25 a day (PPP)

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Growth and Poverty

Source: World Bank Poverty Database

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Drivers of Growth • Improved policy environment—

macro management

• Improved institutions of governance

• Reduced conflict

• Investment Climate

• IT Revolution, Human Capital

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Drivers of Growth• High global commodity prices have

spurred African growth

• Non-resource rich countries have also experienced sustained growth (e.g. Burkina-Faso, Ethiopia, Rwanda, Tanzania)

• New Partners-BRICS

• Regional Integration

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Foreign Direct Investment in Africa: Trends and Opportunities

• FDI Flows to Africa still low from a global perspective

• Significant FDI flows go to the extractive sector

• FDI to Africa increasing, New partners

• Many opportunities unexploited

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FDI inflow (2012)Range Country

Above $3 billion Nigeria, Mozambique, South Africa, DRC, Ghana

$2.0 to $2.9 billion Morocco, Egypt, Congo, Sudan, Equatorial Guinea

$1.0 to $1.9 billion Tunisia, Uganda, Tanzania, Algeria, Liberia, Mauritania, Zambia

$0.5 to $.9 billion Ethiopia, Madagascar, Niger, Guinea, Sierra Leone, Gabon, Cameroon

$0.1 to $0.4 billion Ivory Coast, Zimbabwe, Mauritius, Namibia, Senegal, Chad, Mali, Botswana, Kenya, Lesotho, Togo, Malawi, etc. etc.

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Top 5 Africa recipients of FDI inflows (USD billions)

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FDI flows

• In 2012, global FDI fell by 18%, but FDI flows to African countries increased by 5% (to US$50 billion)

• Investment in extractive industries is the most important driver of FDI to Africa

• Projects in manufacturing and services registered investment increases

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FDI Breakdown

34%

20%13%

11%

23%

FDI inflow to Africa 2012

West

Central

East

South

North

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FDI to Malawi

• Brazil’s sole investor in Malawi (Vale) accounted for 26% of total FDI

Brazil

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Top 20 investors in Africa, 2011(millions of US dollars)

FDI flows

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Top 20 investors in Africa, 2011(millions of US dollars)

FDI stock

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US - Overview• Only 1% of U.S. foreign direct investment goes to Africa

• US FDI in Africa is concentrated in mining and extractives

• 67% of US FDI in Africa in the manufacturing sector goes to South Africa

• U.S. engages in a degree of commercial diplomacy

» Has 11 trade and investment framework agreements with sub-Saharan countries

» Has 6 bilateral investment treaties with sub-Saharan countries

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US - Overview

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US - Overview

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US - Overview

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US - Overview

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US - Overview• Interest in FDI from US private equity firms is on the rise,

although still small

Largest FDI deals by US-based Private Equity Firms in Africa

Year Value ($ million)

Acquiring company

AcquiredCompany

Industry of Acquired Company

2007 3,502 Bain Capital Edgars Consolidated Stores

Retail stores

2009 1,277 Paulson & Co AngloGold Ashanti Ltd

Gold, ore

1997 1,261 Investor Group Telkom South Africa Communication

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Japan - Overview• Japanese FDI in Africa was $460 million in 2011

» In comparison, China’s was $3.17 billion

• Prime Minister Shinzo Abe has aggressively pursued commercial diplomacy with African countries

» Has called for greater roles of public-private partnerships to leverage investment

» Has pledged billions in official development aid so as to pave way for greater investment

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Japan - Overview• Japanese FDI in Africa was $460 million in 2011

» In comparison, China’s was $3.17 billion

• Prime Minister Shinzo Abe has aggressively pursued commercial diplomacy with African countries

» Has called for greater roles of public-private partnerships to leverage investment

» Has pledged billions in official development aid so as to pave way for greater investment

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Brazil - Overview• Brazilian private investment in Africa began in the 1980s

• Although Brazilian FDI to Africa is relatedly limited, it has been on the rise in recent years.

» Concentrated in infrastructure, energy, and mining sectors

» South Africa and Angola are most common destinations

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Brazil - Public institutions• Brazilian Development Bank (BNDES) plays an important role in

the promotion of FDI

» Emphasizes commercial and infrastructure-related investment

» Offers incentives and disbursements to companies in Sub-Saharan Africa

– E.g. Has helped businesses in the African ethanol industry in Angola, Ghana and Mozambique

• Brazilian Caixa Econômica Federal (Caixa) has supported the development of housing projects in Angola and Mozambique

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Brazil - Public institutions• Brazilian Development Bank (BNDES) plays an important role in

the promotion of FDI

» Emphasizes commercial and infrastructure-related investment

» Offers incentives and disbursements to companies in Sub-Saharan Africa

– E.g. Has helped businesses in the African ethanol industry in Angola, Ghana and Mozambique

• Brazilian Caixa Econômica Federal (Caixa) has supported the development of housing projects in Angola and Mozambique

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Brazil - PlayersSome major players:

Odebrecht

Andrade Gutierrez

Camargo Correa

Petrobras

Vale

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Brazil - Odebrecht• Construction company with most number of projects in Africa

(2011 WB Publication)

» Present in South Africa, Angola, Botswana, DRC, Djibouti, Gabon, Liberia, Libya, Mozambique

» Partners with governments, other foreign companies, other Brazilian contractors in Africa

» Engages in projects relating to oil and gas exploration, infrastructure, construction of residential condominiums, urban planning, diamond mines, and food distribution.

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Brazil - Odebrecht• Undertaken numerous business activities in a variety of contexts

» Construction of the Capanda dam in Angola

» Building the Letsibogo dam in Botswana

» Drilling for oil in the DRC

» Providing oil-well services in Gabon

» Constructing container and fuel terminals in Djibouti

» Constructing a coal mine at Moatize, Mozambique (with Vale) and settlements for families displaced by the mine

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Brazil - Camargo Correa • Construction company

» Opened offices in Angola in 2006

» Hired as the contractor for projects including urban planning and building housing, roads, and power lines

» Involved in constructing the Mphanda Nkuwa hydroelectric project on the River Zambezi in Mozambique.

» Part of a consortium which is building a coal mine at Moatize, Mozambique.

» One of the company’s largest projects involved a consortium of foreign and local companies producing cement

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Brazil - Petrobras » Energy sector

– Invested in Angola’s oil and gas sector as of 1979

– Since 2008, has taken a more assertive posture than historically.

– Prospects for and extracts oil, especially in deep waters, with operations in Angola, Libya, Nigeria, and Tanzania.

– Recently acquired a 50 percent stake in a 7,400 square kilometer block off the Benin coast to search for light crude

– Acquired a 50 percent stake in a block for exploration in deep waters in Namibia

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Brazil - Andrade Gutierrez • Construction company

» Has projects in Angola, Algeria, Cameroon, the DRC, Guinea, Equatorial Guinea, Libya, Mali, Mauritania, and Mozambique.

» Done business in Africa since 1984

» Activities include building roads and housing, and urban planning

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China - Overview• Difficult to ascertain Chinese FDI data for certain.

» Reasons include lack of transparency, propaganda

» Represents only FDI that has been officially reported to govt. of China

» FDI that goes through Hong Kong is not reported

» Chinese FDI statistics exclude financial sector investment

– E.g. Purchase of 20% of Standard Bank of South Africa possibly excluded from FDI numbers

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China - Overview• However, by all measures, Chinese investment is big and getting

bigger.

• One measure: Chinese Stock in and Flows to Africa (USD $ bil.)

‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ’12

Flow .39 .52 .16 5.49 1.44 2.11 3.17 2.52

Stock 1.60 2.56 4.46 7.80 9.33 13.04 16.24 21.23

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China - Public Institutions• Chinese government and enterprises are closely connected

• State- and privately-owned enterprises benefit from govt. financing.

» China-Africa Development Fund - equity fund that supports Chinese enterprises investing in Africa

– By the end of 2012, agreed to invest US$2.3 billion in 61 projects in 30 African countries

– Already invested US$1.8 billion for 53 projects.

– E.G. in a joint venture with the Govt. of Ghana and Bosai Minerals Group for creating a proposed alumina refinery

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China - Span of investments• Over 2,000 Chinese enterprises are investing and developing in

more than 50 African countries and regions

» In agriculture, mining and building industry, processing of resource products, industrial manufacturing, finance, commercial logistics and real estate

» South Africa is the leading recipient of Chinese FDI. Followed by Sudan, Nigeria, Zambia, Algeria.

» Between 2009-2012, Chinese enterprises' direct investment volume in Africa's manufacturing sector was US$1.3 billion. By the end of 2012, this figure was US$3.4 billion.

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China - Span of investments• Malawi’s President Joyce Banda went to China in June to sign

two contracts:

» A $600 mil USD contract with China Gezhouba Group Company for a 1,000 mw thermal power plant for southern Malawi

» Contract for the upgrading and construction of new power transmission lines with Tebian Electric Apparatus for central Malawi

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China - Public Institutions• Chinese undertakes heavy-handed form of commercial diplomacy

» By the end of 2012, China had signed bilateral investment treaties (BIT) with 32 African countries, and established joint economic commission mechanisms with 45 African countries.

» Had agreements with at least 10 African countries to help investors avoid the issue of “double taxation”

» In 2012, had an estimated 50 commercial attachés and associated staff in 48 African countries

» Holds discussions, such as Forum on China-Africa Cooperation (FOCAC, with African governments regularly

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India• India’s total FDI stock in Africa was ~US$14 billion in 2012

• India has a diversified portfolio that includes textiles, small- and medium-sized enterprises, social services (health, education) etc.

• Indian FDI in Africa has traditionally been concentrated in Mauritius.

» Why? Mauritius has offshore financial facilities and favorable tax conditions.

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India• Indian FDI in Africa has also invested in Côte d’Ivoire, Senegal,

Sudan, etc.

• In 2010, the Indian company Bharti Airtel purchased the African telephone network Zain for $10 billion (USD)

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Turkey • Many Turkish companies, including small and medium-sized

enterprises (SMEs), are heading to Africa

» Associations like the Turkish Confederation of Businessmen and Industrialists help facilitate such investment

• Small Turkish business are now among the biggest furniture producers in Africa.

» Sanat Mobilya is one the biggest furniture companies in Nigeria and in Malawi.

– It employs 80 people in its factories, mostly Nigerians.

– It teaches furniture-making skills to the local people

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Turkey• Members of the Rwanda Active Businessmen Association

representing the agro-processing, textile, food, steel and furniture industries will visit Istanbul, Turkey in March

» To boost trade and investment between Turkey and Rwanda

» To share and learn from each other’s experiences on how to improve production processes

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South Korea• Korean FDI to Africa was $16.9 USD million in 2001 and 373.6

USD million in 2009.

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South Korea• Korea’s FDI is concentrated

in Madagascar, Nigeria, Libya, South Africa, Mauritius, Egypt, Ghana and Angola.

» These eight countries account for > 95% of Korea’s investments in Africa for 2003-2008.

• Investment flows to natural resources: nickel in Madag., crude oil in Nigeria.

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Iran• Diplomacy

» Iranian Foreign Minister: “The President of the Islamic Republic of Iran attaches great importance to improving all-out relations with Africa”

» Iran Vice President: Iran will build a hospital, a power plant and a major water project in Mombasa, Kenya.

• Iran has diversified areas of international interest, in part because of Western sanctions

» Has agreed to share technology with Nigeria to produce electricity.

» Iranian car manufacturer, Khodro, opened a factory in Senegal

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Emerging Africa: Opportunities for Mutually Beneficial Engagement• There are still many constraints for doing business in Africa

but there has also been major improvements

• Growth prospect for Africa look good and the youthful population presents a great opportunity

• For many countries, governance and improvements in investment climate unlikely to be reversed

• There is a new scramble for Africa particularly by emerging economies

• Brazil has a comparative advantage on account of a smaller cultural divide

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Emerging Africa: Opportunities for Mutually Beneficial Engagement• Africa presents many opportunities for Brazilian investors

specifically in:

- Natural resource sectors—Extraction, value addition, manufactures

- Closing Africa’s infrastructure deficit-construction

- Agricultural transformation

• Exploit the youth bulge/raise productivity

• Partnership with local private sector and even governments

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Strategic positioning

• Brazilian investors should think long term

• Provision of job opportunities is the priority for African (China has a bad record in this area)

• Capacity building is key for durable partnerships

• Focus on the development of communities—health, education-broad corporate social responsibility

• There are challenges but opportunities are greater