Worldwide: Africa’s Promise - Opportunities And Risks In The Extractives Industry

Business perspectives on Africa

For years Africa existed on the margins of the world economy. With markets perceived to be uncompetitive and undiversified, investment tended to be targeted at site-specific projects, for example in the mining or hydrocarbons sectors. Since the 1990s, however, there has been an upsurge of interest in a broader range of industries, sparked by an improvement in both political stability and the overall policy environment, more rapid rates of economic growth, and an increasing awareness that Africa, with a population of an estimated 1bn people, is probably the last largely untapped market left in the world.

Foreign direct investment (FDI) in Africa rose to a record $88bn in 2008, from less than $9.8bn at the beginning of the decade. Provisional data suggest that FDI declined again in 2009, as the global economic and financial crisis increased risk aversion among investors. However, the drop was not as great as in other developing regions, suggesting that the status of Africa as 'semi-detached' from the global economy has on this occasion proved to be advantageous. Indeed, responses to the UN Conference on Trade and Development's World Investment Prospects Survey 2009-2011 suggest that transnational corporations are planning an increase in both the number and value of investments in Africa by 2011.

These new investors will face a series of challenges. Most importantly, Africa is not a single entity – it contains more than 50 states, all with unique opportunities, operating environments and risks. However, some issues are likely to be apparent across a range of markets. In exploring these issues, this report will focus on five markets, from the north, centre and south of the continent: Democratic Republic of Congo (DRC), Gabon, Libya, Nigeria and Zambia. They typify many of the problems of the continent as well the opportunities for investors.

Instability

Instability is one such issue. African political stability has improved greatly in recent years, so that the likelihood of inter-country conflict and (to a lesser extent) coups has decreased substantially. However, this does not mean that the risk of instability has disappeared. African disputes in the 21st century have tended to centre on regional dominance (notably in Sudan's Darfur region, Chad, Côte d'Ivoire, the DRC, Ethiopia and Nigeria), resources (Nigeria, Sierra Leone, Sudan and the DRC) and national power (Burundi, the Central African Republic, Chad, Côte d'Ivoire, the DRC, Guinea, Guinea-Bissau, Kenya, Niger, Rwanda, Sierra Leone, Somalia and Zimbabwe). Future conflicts are likely over water and land. The UN estimates that by 2025, nearly 230m Africans will be facing water scarcity and 460m will live in water-stressed countries. The conflict over land is partly a result of the somewhat arbitrary borders imposed by colonial powers, which may intensify ongoing religious and ethnic tensions too.

In Nigeria, for example, a series of fault lines have the potential to lead to violence. These include the ongoing low-level conflict in the crucial oil-producing Niger Delta; the Muslim-Christian divide, which has been responsible for several serious eruptions of unrest in recent years; a host of local tensions, such as between the Tivs and Jukuns in the Benue state; or a major spate in any of the large ethnically mixed cities, such as Lagos, Kaduna or Kano.

In the DRC, instability will persist in the east of the country, as the government pursues a Rwandan rebel militia. Investors are not normally the direct target of attack in such cases, but incidents can quickly spiral out of control and engulf bystanders, particularly given the poor training (and propensity to overreaction) of some national security forces.

Protectionism

The global economic crisis led to increased calls for the introduction of protectionist measures in many developed and developing countries. Yet Africa has tended to be a victim rather than a proponent of such measures, since only relatively developed or resource-rich African states are in a position to impose meaningful trade-restriction measures. Thus, South Africa has used both border and 'behind border' measures aimed at restricting trade, especially from the developed world – for example, by using procurement provisions in its support package for the local clothing and textile industry.

Where African nations do seek to implement protectionist measures, they tend to be extremely high profile, however, and are often perceived as being specifically 'anti-colonialist'. For example, Zimbabwe introduced a disastrous land-resettlement programme that was nominally designed to address longstanding imbalances in land ownership, but that served to reward government cronies – and all but destroy the country's vital agricultural sector. The government has now promulgated indigenisation legislation under which all firms will be required to divest a 51 per cent stake to indigenous (black) Zimbabweans, with the mines minister stating that the initial focus will be on mines along the mineral-rich Great Dyke region because of their 'skewed' ownership pattern. However, this legislation is opposed by one-half of the country's 'government of national unity', and remains subject to intense political pressures. In late May, for example, the Zimbabwean president stated that mines would not be expropriated, and that the local ownership law would be 'refined' to enable mining companies to expand their operations.

Corruption

Corruption and the selective application of legislation also remain pervasive problems. Although a number of African governments have pledged to tackle graft within the public sector, businessmen can face requests for 'gifts' – often small-scale – on a daily basis. This is in part a reflection of the poor quality of the bureaucracy in many regional states, but is also a function of often opaque operating environments in which cronyism can thrive.

However, corruption is not just a small-scale issue. For example, the former Kenyan president, Daniel arap Moi, was implicated in the Goldenberg scandal, involving extra-legal subsidies of gold exports, as well as accepting a $2m cash bribe relating to the approval of an investment.

In early 2010, the current Kenyan prime minister, Raila Odinga, suspended the ministers of agriculture and education for alleged involvement in the diversion of millions of dollars of public funds from subsidised maize and a donor-backed free primary education scheme.

The corruption issue seems unlikely to be resolved in the short or medium term: although a growing number of African administrations are publicly committed to the eradication of graft, there is a widespread belief among local electorates that high-profile anti-corruption cases are more about attacking political opponents. Nor are there signs of a decrease in bribes paid by international operators. According to Transparency International's 2008 Bribe Payers Index, firms from the so-called BRICs (Brazil, Russia, India and China), whose involvement in Africa is growing, are more likely to offer 'incentives'.

Infrastructure

Other challenges will have to be faced on a day-to-day basis. Chief among these are the difficulties posed by infrastructural constraints. Following years of underinvestment (or, in Gabon's case, poorly targeted investment), African transport infrastructures are notoriously inadequate. Less than 10 per cent of Gabon's 10,500km of roads were paved as of 2000, for example, and although there has been investment since then, maintenance of the road network remains poor, and there is still no direct road linking the capital, Libreville, and the second-largest city, Port-Gentil. In the case of Zambia, transport problems are compounded by the country's landlocked status, and in the DRC by the sheer size of the national territory (which is more than 900,000 square miles or roughly the size of western Europe). However, even where states have access to the sea, port facilities are often inadequate, while safety concerns bedevil air transport.

Human resources

As well as making it difficult for investors to convey products to market, transport constraints can make it difficult for employees to get to work. This is likely to compound already high levels of absenteeism (or simply unpredictable attendance) caused by the AIDS pandemic. African governments have invested substantial sums in AIDS education programmes and the provision of antiretroviral medication, and data from UNAIDS suggest that rates are beginning to stabilise. Nevertheless, some 22.5m Africans are living with HIV, and absenteeism – whether because of personal illness or the need to look after family members – is likely to be a serious issue. It could also be a costly one – in states such as Zambia, where the public health system is poor, many employees rely on company-run insurance schemes for medical care.

This is not the only human resources issue. Despite the fact that, continentwide, rates of unemployment or underemployment remain high, investors are likely to struggle to recruit highly skilled employees. University and technical education systems have traditionally failed to produce large numbers of high-quality local graduates, while those that do exist command a price premium – or move to work outside the region. For example, the Network of African Science Academies estimates that one-third of all African scientists live and work in developed countries, while the continent has lost some 20,000 professionals each year since 1990. Over the past three decades, for example, Kenya is estimated to have lost more than one-third of its skilled professionals. Filling the gap caused by this brain drain continentwide necessitates the employment of up to 150,000 expatriate professionals, at an estimated cost of $4bn a year.

Governments are keen to address this problem (even though, in Libya, it was partly of the state's own making, since the teaching of English was banned in state education), and investors could therefore face difficulties in obtaining work permits for expatriates, or more general pressure to increase the number of local staff in operations. This is likely to require the introduction of company training schemes and, possibly, the use of pre-employment examinations to ensure that the best possible local staff are recruited. Against that, high levels of unemployment mean that union unrest is unlikely to prove a pressing issue in many markets: possible exceptions include Nigeria, where successful strikes against a planned increase in fuel prices have increased union militancy; and Zambia, where privatisation of state assets and attempts to reduce the size of the civil service could increase the risk of labour unrest.

Clearly, therefore, the African operating environment presents a number of challenges to potential investors. The World Bank's latest Doing Business report finds that the regional climate for African entrepreneurs remains extremely challenging, especially among the larger economies (outside South Africa), not least because the high level of bureaucracy and regulation continues to keep most African workers and businesses firmly locked out of the formal economy. Thus it remains much easier to establish operations in many other, non-African emerging markets – and the short-term rewards can be just as high.

Opportunities

However, the continent is also well positioned to take advantage of expected global developments such as the continued economic rise of Asia, increasing competition for agricultural products, and strong demand for industrial and energy commodities. Potential investors are thus banking on the longerterm development of key countries in terms of economic structure, business environment, political maturity and social cohesion, which should help Africa to reach its potential as a supplier and end market. This is feasible: African incomes are gradually rising, and, given large population sizes, states should ultimately translate into significant consumer markets. Entering the market relatively early should allow investors to establish brand loyalty and capture market share – as well as potentially addressing some of the logistical problems likely to face all new entrants. Understandably, therefore, investors increasingly believe that potentially high returns make Africa's risks worth tackling.

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