Foreign direct investment (FDI) in Africa has been almost entirely focused on the extraction and sale of natural resources for more than a century. The momentum has changed since the millennium, and the wave has gradually reversed in the last few years. Global investors are increasingly interested in Africa’s citizens rather than its physical assets. Long-term capital inflows have shifted away from petroleum and mining, with more funds focusing on telecommunications, retailing, and utilities. According to a database of new investments maintained by EY professionals, the extractive sectors have only accounted for more than half of FDI once in the last seven years. The pattern is far more pronounced in Sub-Saharan Africa’s 46 jurisdictions. Extractives accounted for more than half of investment in the field in all but one year from 2005 to 2011, but the trend reversed over the next seven years.
The change in governance and prosperity that started in the 1990s with the end of the Cold War is reflected in this investment evolution. The establishment and recognition of democratic institutions have resulted in fewer people living in extreme poverty. These political reforms are still in their infancy, with countries developing at varying rates.
One of the last frontier markets
Even before the coronavirus suffocated the world economy, the near-term economic outlook for Sub-Saharan Africa was bleak. According to the International Monetary Fund, GDP growth in 2020 was expected to be 3.6 percent, a decimal point higher than the global forecast4 — but it was later reduced to a 1.6 percent contraction. Provided that many leading African countries were admitted into global Eurobond markets in the 2010s and approved bilateral loans, mostly at interest rates smaller than commercial financing but higher than those charged by multilateral debt loads are on the increase.
Prior to a big round of debt relief from the Paris Club, a collective of 22 Western sovereign creditors, debt-to-GDP ratios were moving back toward levels seen in the early 2000s. The average national budget deficit in 2020 was 4%, which was higher than the recommended standard of 3%. Debt relief packages were being negotiated at the time of release, but many of Africa’s FDI hotspots could be omitted because they are no longer poor, the World Bank’s classification scheme classifies most of them as middle-income countries.
Cities-out strategy
As money flows into more areas of the African economy, investors are considering the continent’s geography in new ways. Rather than focusing on country-level economics, investment rationales are increasingly centered on metropolitan markets, corridors, and territories. Lagos, Johannesburg, and Nairobi, for example, stand out for their financial-technology hubs, middle-class customers, and connectivity. According to data from Fraym, a US consultant, Africa’s leading cities account for 80% of customers with discretionary income to purchase properties such as vehicles, televisions, and appliances. Luanda, Angola; Khartoum, Sudan; Dar es Salaam, Tanzania; and Addis Ababa, Ethiopia are among the top five cities in Sub-Saharan Africa.
Kinshasa, the Democratic Republic of the Congo’s capital, stands out as a consumer-driven city. It’s on the country’s western outskirts, some 2,000 kilometers from the fighting on the country’s eastern frontier. “Because of the larger mythology, Kinshasa is an under-told story,” says Fraym CEO Ben Leo. “In Kinshasa, there is size and a remarkable amount of purchasing power.”
Cities have the potential to serve as anchors for regional investment strategies in the long run, particularly with the announcement of the African Continental Free Trade Area in 2019. “It will be a long road, but 2019 will go down in history as the year Africa finally ‘got’ trade,” says Eyinla. “This is a historic commitment that will result in the world’s biggest free-trade zone.”
A stronger foundation, with increasing diversification
In 2018, Africa attracted the least amount of FDI capital of any country, and the investment level per project has also decreased. This represents a move away from investments in the extractive industry, which are traditionally the most capital-intensive. The underlying drivers of investment have been more varied in recent years.
One of the most strong of these emerging drivers is cell phones; from 2000 to 2012, the number of mobile phone users in Africa increased by 2,500 percent. 13 Africans use them for both trade and networking, resulting in the development of a modern value chain. It gives the modern technologies and fintech firms to operate on the continent even better. The financial ector is one of the first, that started using this advantage and even created the big market of African Forex brokers that has the influence not only on the african residents but worldwide, due to the flexible environment for them to operate. According to EY calculations, the technology, media, entertainment, and telecommunications (TMT) market accounted for 18% of the 729 new FDI investments in Africa in 2018, the largest share of any single industry.
Prioritizing infrastructure to power growth
FDI techniques differ by industry, but recent success stories highlight similar trends. A country’s capacity to develop infrastructure or form public-private partnerships (PPPs) with international investors strengthens as fiscal governance improves. The continent’s lack of power plants, bridges, railroads, ports, hospitals, and schools is significant; to bridge the gap, an additional US$94 billion in annual funding is expected until at least 2025. African governments expect that initiatives such as public-private partnership rules, government guarantees, long-term contracts and incentives, and specialist task forces to cooperate with investors can come together and serve as a catalyst.
Land acquisition also necessitates local alliances, which can be sensitive in many Sub-Saharan African countries. Land registries are often inadequate or unreliable, and non-governmental players wield authority, such as racial leaders or community leaders.
Instead of seeking to purchase properties, investors have often given a small amount of equity to landowners, who may be private or public bodies. In Nigeria, for example, providing equity to state or regional governments in exchange for land aided Persianas Group in developing malls, raising local support and political will for the projects.
In the two decades after FDI expanded beyond extractives, many major value chains focused on telecommunications, agriculture, and oil have arisen. As Africa’s state-owned legacy telephone companies opened their markets to privatizations and license sales in recent decades, the private sector was able to usher in a mobile telephony age that the governments did not.
The maturation of politics and revenue systems
Ghana has emerged as a key destination for building power plants for DeAngelis and Denham, despite the country’s established utility’s difficulties to deliver the power that is currently created and to get people to pay for what they use. The state claims that its arrangements with private power providers leave it with a surplus that it would pay for even though it isn’t used.
But for most African nations, it’s a good problem to have; most are plagued by supply shortages that result in blackouts, and less than half of the continent’s population has access to electricity. Most African governments welcome private power investment, especially in the development of new generation capacity. However, this requires an upfront investment of hundreds of millions of dollars, as well as confidence in the local utility company’s capacity and willingness to pay for the production. Ghana appeals to investors because of its reputation for good governance and the long-term stability it has enjoyed. Ghana has a free press and a judiciary that is seen as independent of the executive and legislature.
The basic building blocks of governance are in place, according to Solomon Lartey, who recently resigned as CEO of the insurance company Activa Ghana to found the Africa Sureties and Insurance Advisory Group, which aims to solve small business access to finance problems.
With those fundamental building blocks in place in Africa’s leading FDI receivers, governance maturity can extend to other departments and organisations, such as finance ministries, energy providers, and tax authorities. Many of Africa’s most powerful countries established tax authorities in the 2000s, and are now introducing digital structures to improve collections and streamline the process.
The World Bank, the Massachusetts Institute of Technology, the Boston Globa l Forum, and New America have all partnered with EY to form the Prosperity Collaborative, a multi-stakeholder project. Using emerging technology such as blockchain and artificial intelligence, the company is creating new and open-source tax collection solutions.