Increasing investment opportunities across Africa but challenges remain

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LONDON 8 NOVEMBER 2012: Foreign direct investment (FDI) into Africa has increased significantly over the last decade and this trend is set to continue, but the decision on where to invest in this vast and diverse continent can prove challenging, according to Ernst & Young’s Africa by numbers: Assessing market attractiveness in Africa (pdf, 2.4mb)  report out today.

The report sets out the risk profile of 17 of the most popular countries for investment in Africa and balances them against the rewards on offer.

Ajen Sita, Africa Managing Partner at Ernst & Young comments, “The sheer size of the continent can prove daunting for many investors as well as the different sets of rules, regulations, stakeholders and market dynamics that exist across the 54 countries. While there is no template for doing business in and across Africa, we hope that this report provides a useful reference for categorizing and understanding how risk and growth opportunities vary across this diverse continent.”

Risks and opportunities

The risk and opportunity matrix within the report highlights four main groups for key stakeholders to rationally assess the pros and cons of different African markets.

The lower risk, higher reward quadrant is clearly the most attractive, offering a stable business environment and high potential for growth. Despite recent events, South Africa stands out not only for its positive risk rating, but also because of the size of the economy and overall market, as well as ongoing investments being made in fixed capital assets.

Ghana is also prominentin this category, with its high economic growth rates (boosted by recent oil production), political stability and an environment that is generally conducive to doing business.

Despite recent political instability, the North African countries, and particularly Tunisia and Morocco, perform relatively well and continue to attract FDI projects. Zambia is also emerging as an increasingly attractive market in this category, while the entire East African region (including the East African Community countries of Kenya, Uganda and Tanzania, and the bordering countries of Ethiopia and Mozambique) is moving rapidly towards this quadrant.

There are a number of countries that are becoming increasingly attractive, growing at consistently high rates, making steady political and social progress and generally creating environments that are increasingly conducive to doing business. These include Nigeria and several of the East African economies. Others, perhaps most notably Angola and the Democratic Republic of Congo, display strong growth characteristics in terms of resources, however, their business environments remain more challenging.

Further improving the investment environment
Michael Lalor, Lead Partner, Africa Business Center at Ernst & Young comments, “While much more could be done to market the progress and improvements that have been made in many parts of Africa over the course of the past decade effectively, there are concrete issues and challenges that should be addressed, not only to increase the overall investment attractiveness of African economies, but also to ensure that host African countries derive maximum benefit from these investments.”

Regional integration is key to promoting greater levels of regional investment and trade as it will make it much easier and more efficient to conduct cross-border business. It will create markets with greater critical mass, coherence and density of economic activity. However, regional integration and its benefits will only be realized by sufficient investment in infrastructure, both to connect markets and generate enough electricity to support the development of manufacturing and other industrial sectors.

Perceptions of political instability and corruption are dominant themes for many of those considering investing in Africa therefore further measures must be made to improve governance. Closer and more productive collaboration between business and government will also help to further encourage FDI into the continent.

The time to invest is now

Michael continues, “Africa is increasingly being taken more seriously as an investment and business destination, but in many sectors, a window of opportunity does still remain open for establishing an early mover advantage. However, competition is intensifying and that window is closing.

“For companies and investors looking for long-term sustainable growth, we are in no doubt that the time to act on the Africa opportunity is now. Now is the time to invest in understanding markets, identifying partners, developing opportunities, configuring industries, building brands and establishing local credibility.”

What to look for when investing
Africa remains, however, a complex environment in which to do business. This complexity is compounded by the fact that for many companies very few individual markets are likely to provide the kind of scale — in the shorter term at least — that makes them economically viable. Both growth and risk management are therefore framed by the challenge of effectively “connecting the dots” across multiple operations and territories. Besides the issue of scale, underdevelopment also means that solutions for challenges need to be found  that may not even need to be considered in other regions; the infrastructure gap – in logistics, communications, transport and energy – being among the most significant.

Ajen concludes, “For companies beginning or in the early stages of their African growth journey there are critical success factors that should be considered. Perhaps most important is a strong belief in the African growth story — that Africa is good for business and investment, and that business and investment is good for Africa.”

While potential for growth remains positive, relative immaturity and risk — as well as the current lack of scale in many individual markets — is still present. Investors must think about sourcing the best quality human capital as well as creating a business that makes a sustainable contribution to the socio-economic development of the country that they invest in. 

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