Among frontier markets globally, the African continent offers one of the most exciting investment opportunities. However, in order to capitalize on the opportunities, investors need to see beyond the obvious and note the large untapped potential in Africa, with its burgeoning youth population and extensive human capital.
In addition, the large pool of diverse natural resources on the continent, places it in an enviable position, as global demand grows for hard and soft commodities. Placed into context, the integrated African market covers 1,2 Billion people, with a combined GDP of over USD$ 3,5 trillion.
As such, we are seeing a large number of multinational companies establishing a presence on the African continent, particularly in countries with improving infrastructure and ease of doing business.
For them, Africa is seen as the New El Dorado.
However, scarcely a day goes by without a media report praising or blaming investment, particularly Foreign Direct Investment (FDI), for an array of issues including but not limited to wage disputes, employment of foreign nationals and lack of corporate social investment.
The influence of both China and the United States in this regard, is particularly apparent. Despite, or perhaps, because of the extensive coverage, no consensus exists on either the causes or impact of this phenomenon. Those in favour of the United States way of doing business, would praise the mechanisms these organisations are using on the continent. Conversely, those in favour of the Chinese way, would praise the extensive investment in infrastructure such as the financing of roads, ports and airports, as part of its extensive Belt and Road Initiative.
Irrespective of whichever model of investment pundits prefer, the reality is that Africa is open to doing business, and companies in both the United States and China need to see beyond the obvious and discern the large untapped potential on the African continent.
Information and Communication Technologies (ICT)
One area of key interest for multinational organisations, which requires further investment on the African continent, is the Information and Communications Technologies (ICT) sector. It has been estimated that developing countries account for approximately two-thirds of the world’s mobile subscriptions. In Sub-Saharan Africa, where there are some of the lowest levels of infrastructure investment in the world, the use of mobile phones is rapidly expanding.
Researchers have noted, that due to the relatively low levels of investment in infrastructure, innovative mobile technology developed as a response. This mobile technology is servicing citizens in ways traditional brick-and-mortar institutions could not. As such, mobile technology has the potential to reshape social and economic relations in local communities, creating novel networks and enabling new modes of information and money transfer.
Agriculture remains a core contributor to the GDP of most countries on the African continent. Investment in the this sector is critical, as there exists a need to develop the entire agriculture value chain, from development and dissemination of plant and animal genetic material, input supply, farm production and post-harvest handling, to post-harvest processing, storage, and exportation.
The World Bank forecasts Africa’s agribusiness to be worth $1 trillion by 2030. It is important to note that 60% of the world’s uncultivated land is in Africa and researchers have predicted that the agro-processing sector is set to overtake mining and minerals in the near future.
In Rwanda, research analysis of the diary value chain identified a critical needs for more local milk cooling points, more collaboration between diary plants and farmers, and greater diversification of the final product.
Another example is sorghum. On the African continent It has multiple end uses, including as porridge, flour and other products for human consumption. However, production of these grains have only increased slightly.
What these examples illustrate is that critical investment is needed to improve the agricultural value chain. Extensive markets exists for the end products, however, without linking small-scale farmers to markets, and substantially developing the value chain, they will continue to produce only for subsistence.
Better value chain, gives better access to markets, which enables greater poverty reduction.
Africa is urbanizing at a rate of 4% per year, according to UN-Habitat. This has lead to a number of challenges such as overcrowding and lack of transportation infrastructure to deal with growing demands. The African Development Bank indicates that from 1950 to today, urban residents have increased from 14% to 40%. This number is set to increase to 50% by mid-2030.
This migration towards urban areas has seen the transportation sector overwhelmed by demands, with growing frustration due to low availability. While companies such as Uber have capitalized on this growing demand, it predominantly services a middle-class market.
Inspired by Uber’s African expansion, a start-up making an Impact in Nairobi is Magic Bus. With a different target market in mind, this innovative sms-based system allows commuters (in Nairobi) to pre-book bus tickets using their mobile phone. With the integration of mobile payments through M-PESA, riders can find out how far a bus is and the exact fare.
What this illustrates, is that there exists a need for innovative transport mechanisms, that both alleviates overcrowding on roads and reduces the heavy demand on the current transportation infrastructure.
SADC stability : Investment opportunity
The relative stability of the SADC region, comparative to other regions on the continent, provides the moored environment Investors are interested in. As such, the Southern African Development Community (SADC) has developed numerous inter-governmental action plans to transform the region into an economic hub.
A key strategic action plan adopted at the SADC Extraordinary Summit in Eswatini (Swaziland) in March 2017, was the Costed Action Plan of the SADC Industrialization Strategy and Road-map. This plan serves as a 48-year blueprint that outlines proposals on transformation of the region from a resource-based economy, to one driven by innovation and industrial activity.
The action plan aims to create an enabling environment for sustaining industrial development as a driver of economic transformation, and establish an enduring alliance for industrialization consisting of the public and private sectors as strategic partners.
Strategic interventions proposed under the action plan include an improved policy environment for industrial development, increased volume and efficiency of public and private sector investments in the SADC economy and the creation of regional value chains.
Africa : The New El Dorado
Africa offers the highest return on Foreign Direct Investment, according to Overseas Private Investment Corporation (OPIC) and UNCTAD. While an array of countries on the continent still face a number of internal challenges, including social and political unrest, the broader political and economic outlook for the continent in stable.
With a plethora of unique markets coming into existence on the African Continent, driven by a burgeoning youth population, a growing middle-class and increased urbanization, an array of investment opportunities exists, from mobile technology, to Industrialization and manufacturing.
Investors who see beyond the obvious deterrents, can truly benefit from the New El Dorado.