News last month that Russian aluminium giant Rusal plans to invest millions of dollars across Africa on building smelters and seeking new places to mine bauxite provided yet more proof that China is not alone in the scramble for African resources.
Whereas once it was 19th-century European developing economies that fought over African resources, today it is the emerging markets of China, India and Russia. Each in its turn is ravenous for resources and has looked to Africa’s vast untapped reserves of mineral wealth and oil for the wherewithal to fuel their phenomenal growth.
Foreign investment leaps
Foreign direct investment in Africa has increased dramatically in the past two decades. The latest statistics from the United Nations Conference on Trade and Development (Unctad) show that more than $35.5bn was invested in the continent by foreign investors in 2006, up by almost 1200% since 1990 when just $2.8bn was invested. Figures for 2007 have yet to be released but it is likely that figure will have risen yet further, boosted by huge investments from overseas in Africa’s natural resources and basic infrastructure. Already this year, China has pledged a staggering $50bn to Nigeria through Sinosure, the Export Credit Guarantee Agency of China, to transform the country’s woeful infrastructure.
It is the same story across the continent. In Madagascar, a consortium of foreign investors is putting $3bn towards building one of the biggest open-cast nickel mines in the world, and late last year the emerging world’s largest bank, the Industrial and Commercial Bank of China, paid a whopping R36.7bn ($5.2bn) for a 20% stake in South Africa’s Standard Bank. It was the largest ever investment by a Chinese company and the biggest single foreign direct investment ever made into Africa.
Such huge inflows of capital to the continent reflect a shifting perception of Africa that flies in the face of traditional views of the region as fraught with political and economic risk. Proof, if it were needed, of this evolving perception of Africa is the huge rise in investment by private equity funds. In 2007, Africa-focused private equity funds raised $2.35bn, more than double what was raised in 2005.
“In the past 10 years, some fundamental changes have taken place across the continent from a political, social and economic perspective,” says John Mawuli Ababio, managing director of the African Venture Capital Association. “Africa is ready for business. With better democratisation and good growth, people are thinking that at least the rule of law prevails and business can be done.”
But is this latest scramble for Africa simply a rerun of the bad old days, when foreign countries took what they needed without necessarily benefiting the average African?
What’s in it for Africa?
Jean-Louis Ekra, president of the African Export Import Bank, is aware of the parallels with the past. In an interview with The Banker, published in this supplement (see Manufacturing is key to prosperity), he calls for a new kind of relationship with foreign investors. “It is not the first time that Africa has seen interest in its commodities,” he says. “What we need to look at this time is how to approach it from the point of view of Africa, not just the point of view of the investor.”
This will involve a transformation of economies across Africa. To harness the billions of dollars being invested, local economies need to add value to their commodities. Nigeria is a case in point. It is Africa’s largest exporter of oil, among the top 10 exporters in the world, and yet it imports its fuel. It is the same with most African exporters of raw materials: few have a genuine manufacturing base.
Mr Ekra says that Africa is a continent that produces what it does not consume and consumes what it does not produce. “If more and more African countries produce finished goods then we can trade among ourselves and you would open new markets,” he says.
Chinese lessons
Africans are increasingly aware that they need to get more out of their relationships with the likes of China, India and Russia than merely healthy stocks of foreign currency reserves. For some, the development of a true consumer society in Africa must start with the banks.
Dr Celia Ibru, chief executive of Oceanic Bank in Lagos, believes that African countries can learn a lot from their investment partners. Fresh back from a trip to China’s capital, Beijing, she tells The Banker how impressed she is by the Asian giant’s infrastructure. “It was an eye opener and it just shows what you can do if you set your mind to it. What they have done – we too can do it,” she says. “Where we are now was where China was 15 to 20 years ago. The challenge is how to put the new passion into action.”
A challenge indeed. Most banks in Africa will admit that the concept of a true African middle class is still a long way off. In a continent where the vast majority of people live in rural areas and have little or no access to banking facilities, it will be a huge task to create a formal economy. Although many banks, in particular in Nigeria, have increased lending to small and medium-sized enterprises (SMEs), such lending still amounts to a fraction of their total loan books. Most reserve the vast majority of their lending for large corporates or individuals on steady salaries.
It is hardly surprising that banks will not lend to individuals or small businesses. There are few credit bureaux in Africa and the challenge of unique identification – knowing exactly who the borrower is – presents an almost insurmountable problem. Add to that the woeful infrastructure in most rural areas in Africa and it seems hard to imagine how this section of society will ever be brought into the formal economy.
Thinking small
One answer to the question of how to create a thriving internal economy on the continent could be microfinance. Although not a new concept to Africa, microfinance is taking on a bigger significance thanks to not-for-profit organisations, such as Opportunity International. Founded in 1971, Opportunity International’s stated aim is to help the world’s poor out of poverty through microfinance. It has operations across the African continent and since 2003 it has established banks in Malawi, Mozambique, Ghana, Rwanda, Uganda, Kenya, South Africa and Tanzania.
“Microfinance banks are the best and most sustainable tools for breaking the vicious circle of poverty in Africa,” says Francis Pelekamoyo, chairman of Opportunity International. “Microfinance loans are transforming the economic and social life of African people through harnessing entrepreneurial ability. Through the loans, we are letting them take care of their own future.”
Opportunity International, through its subsidiaries across Africa, organises rural communities into what are called ‘trust banks’, which consist of between 10 and 15 individuals. In this way it can get round the problem of identification and credit history because each member of the group guarantees each other’s loans.
Opportunity International’s approach to microfinance differs from other similar organisations in that it places a high regard on educating its borrowers. Before it lends, the group puts each member of the trust bank through an eight-lesson course on the basics of finance and their obligations towards the lender. “They are taught to understand that the money they are borrowing is the savings of another poor person,” Mr Pelekamoyo says.
Loans start as low as $50 to each person in the group. At the end of the repayment cycle, the next loan amount is doubled but only if the entire previous loan has been paid back. “By going through the phases, you can transform someone who started with nothing into a potential SME borrower,” says Mr Pelekamoyo.
Despite good intentions, however, microfinance faces enormous obstacles in its quest to transform the internal economy of Africa. Raising sufficient capital to meet central bank requirements in each country in which it invests is one such obstacle. Another is the enormous scale of the problem. “I look forward to a day when we have reached every single poor person, but that aspect is an enormous task,” Mr Pelekamoyo says. In his home state of Malawi alone, 70% to 80% of people are classed as rural poor and no infrastructure yet exists that will enable microfinance institutions to bring them into the formal economy.
Food shortages
A far greater obstacle than poor infrastructure to the creation of a genuine internal African economy is inflation, which is arguably the biggest threat to future prosperity on the continent.
The prices of staple goods, such as wheat and rice, have soared in the past two years. When this supplement went to press, producer prices of staples such as millet, maize and sorghum had increased by almost 200% during the previous year. The director-general of the UN’s Food and Agriculture Organisation, Jacques Diouf, warned last month that surging prices for basic food imports such as wheat, corn and milk could potentially create social tension, leading to social reactions and eventually even political problems in developing countries.
His concerns are justified. The price rises have led to food riots across the developing world and Africa is no exception. Côte d’Ivoire president Laurent Gbagbo was forced to cancel custom duties last month after two days of violent protests against rising food costs in the country’s largest city, Abidjan. There have also been riots in Cameroon, Burkina Faso and Senegal. In Nigeria, the government of president Umaru YarAdua has said it plans to import 4.5 million tonnes of cereal, mostly wheat and rice, in 2008 to bridge the shortfall in staple goods.
Electricity access
Aside from inflation, other barriers stand in the way of creating a stable investment environment across the continent. Recent power cuts in Africa’s most advanced nation, South Africa, brought into sharp focus the desperately poor state of electricity supplies. The vast majority of Africans have little or no access to electricity and most businesses are forced to generate their own power through costly diesel generators. This fact alone makes starting a small business expensive without even taking into account the other infrastructure problems faced.
There is, however, hope for the future. The much-vaunted Grand Inga Dam project in the Democratic Republic of Congo (DRC) was moved tentatively towards reality in May when seven African nations met in London with some of the world’s biggest banks and construction companies to discuss the $80bn project.
If completed, the Grand Inga Dam, which will take advantage of the colossal power potential of the world’s biggest waterfall on the Congo river, could provide electricity to countries throughout Africa, and even Europe. It could potentially produce up to 40,000 megawatts of power from 50 turbines and will harness 26,000 cubic metres of water a second.
As with many projects in Africa, however, progress is threatened by political instability. The Congo region is highly volatile and recent civil wars in the DRC have delayed the project. Grand Inga has been on the drawing board since the early 1980s and has yet to come to fruition.
However, the secretary general of the World Energy Council, Gerald Doucet, is confident that this time the project has a good chance of getting off the ground. “It’s much more feasible now than ever. There is a peace settlement in Congo, and economic and technical studies have all shown it is possible,” he said in April.
Despite the obstacles, the overwhelming view on Africa is positive. With soaring levels of foreign direct investment, the challenge now is for African governments to harness that money to benefit African people and develop a truly effective internal economy.
