New world fuels African evolution

But trailblazing China is no longer alone in funneling private capital to continent

After the Ninth Africa Development Forum recently concluded in Morocco, a central question emerged: What can Africa do to diversify its sources of investment capital even further away from on-again, off-again international aid?

Increasingly, it is the private sector from the new world that is answering that question.

In the past decade, two notable trends have begun to develop in African development capital - a shift in the mix of external financing away from public sector sources and a geographic shift in the source of that external financing, with less coming from the economically motionless West and more from the economically vibrant East.

This is not to say that the new thing in African finance is all private sector flows from Asia, though this source of capital is indeed accounting for an increasingly large part of the new flows. Chinese official aid in particular - especially that designed to overcome Africa's infrastructure deficit - has had a massive and overwhelmingly positive effect on the continent. The recent reopening of the famed Benguela Railway, rehabilitated with Chinese low-cost finance, will not only help reinvigorate the Angolan economy but the Central African Copper Belt region.

Such projects have literally opened the way for the return of private capital to a part of the world long bypassed by such capital. Interestingly, most of that capital is coming from the new world, not the old. Generally, Western corporate investors still have a blind spot toward Africa's ripening opportunities, their biases hard to overcome after decades of disappointment. The new world has been quicker to seize on the opportunities offered by Africa's vastly improved investment landscape.

China has clearly shown the way with its private sector following the paths paved by its public sector. Few would question the claim that China is still the principal trailblazer. That said, the most interesting development in the last 18 months has been that China's going-out strategy has broadened from developing natural resources and associated infrastructure into manufacturing, notably in Ethiopia and Kenya. Recognizing the competitive threat posed to Chinese companies by lower-cost production facilities in Vietnam, Bangladesh, Sri Lanka and Indonesia, Chinese companies have set up production facilities in African countries with even lower costs, particularly Ethiopia for textiles and footwear (where South Korea and Turkey have also been active) and Kenya for more metal-bashing sectors such as vehicle and truck assembly.

But Chinese investors are no longer alone. Africa's natural resources first drew in Brazil (especially to the fellow Lusophone countries of Angola and Mozambique), India (to Mozambique for coal and Zambia for copper), Thailand and Indonesia (mostly into offshore oil and gas).

But now India - with its existing African diaspora as natural allies - has started moving into manufacturing, too. Tata, TVS, Hero and Bajaj, all of whom are major Indian companies, have set up manufacturing facilities for cars, trucks, motorcycles and scooters in East Africa.

According to some estimates, Africa's biggest new source of corporate capital comes not from China but from within Africa itself - South Africa specifically. The nation's focus has been on providing the African consumer with goods and services such as banking, brewing, bottling, cellphones, retailing, hotels and cement (though Nigeria's Dangote Group is the clear Pan-African leader here). Astute Western investors have even started to re-engage Africa via purchasing South African companies with established Pan-African footprints, such as Walmart buying the Massmart retail network and Marriott buying the Protea hotel chain.

Western private equity is increasingly active on the African continent, though investing more directly while still following the same consumer-centric strategy as South Africa.

A notable newcomer to the African investment scene, or more accurately the return of a millennium-old historic partner, has been capital from the Gulf, both from the public and private sectors. Last month, Qatar National Bank bought more than 20 percent of the most Pan-African of financial institutions, Togo-based Ecobank. Gulf-based investors have shown increasing interest in Africa's transport, logistics, agricultural, telecommunication and hotel sectors.

This rapid acceleration and diversification of Africa's sources of investment capital - and especially the fact that the lion's share of it comes from other emerging markets while a growing percentage of it comes from the private sector - can only bode well for Africa's economic future.

From an African perspective, more acute observers acknowledge that it was China that relit the path for global capital to the African opportunity. Even so, some Chinese investors may now regret that inside a decade they no longer have the African opportunity to themselves.

As the African attendees of the Ninth Africa Development Forum in Marrakech would no doubt attest, there are more than enough opportunities for all of Africa's new wave of foreign investors to pursue.

The author is a strategist at Investec Asset Management.

(China Daily Africa Weekly 10/31/2014 page9)