Stay Smart About Africa

New Pro-business U.S.-Africa Policy Approach Opens Opportunities for American Firms Patient Capital

Historically, the majority of American firms have remained hesitant to commit capital to Africa. The continent has been viewed by many investors as too risky,

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By Sola David-Borha

Historically, the majority of American firms have remained hesitant to commit capital to Africa. The continent has been viewed by many investors as too risky, especially given the myriad of post-2008 regulatory and governance requirements they must adhere to.

But now, the continent has become too politically and economically important to ignore.

As a new era in U.S.-Africa relations is ushered in by the Trump administration, fresh opportunities are opening up for American companies in what many international investors now view as the world’s largest emerging market. Firms on the lookout for new investment destinations for their capital, now have the administration’s support at the highest levels.

In recognition of Africa’s increasing importance on the global political and economic stage, last year the U.S. announced a number of important changes to its policy on Africa. This marked a shift from focus on providing development assistance to driving a business-first agenda.

This is positive both for U.S. firms and for Africa. By strengthening economic ties, the administration has demonstrated its support for the development of the continent through enterprise rather than aid.

In October 2018, U.S. President Donald Trump’s signed into law the Better Utilization of Investments Leading to Development (BUILD) Act which creates a new development finance institution, the US International Development Finance Corporation (IDFC), comprising $60 billion to support US companies in Africa and elsewhere. This not only replaces the Overseas Private Investment Corporation (OPIC), the former development agency which encouraged investment by US companies in Africa, but also doubles the budget.

This milestone was followed by Ambassador John Bolton’s announcement of a new Africa policy in December, underpinned by a set of business-driven initiatives called “Prosper Africa”.

Both these developments should be viewed as positive and supportive of American companies pursuing investment opportunities in Africa. According to the United Nations’ World Investment Report, foreign investment in sub-Saharan Africa rose 13% to $32 billion during 2018.

American companies will therefore have to play catch-up with competitor firms, especially those from other parts of the world, notably China, Great Britain and France. Already the value of foreign direct investment (FDI) to sub-Saharan Africa surpassed bilateral development assistance in 2011 as international investors, particularly China, established a foothold on the continent.

According to the consulting firm McKinsey, more than 10,000 Chinese companies now do business on the continent, earning approximately $180 billion each year. In 2009, China overtook the United States to become Africa’s biggest trading partner.

The mistake many foreign investors make when it comes to Africa is dismissing potential opportunities by looking at each of the 54 countries individually. However, when viewed as a whole, Africa’s young and growing population of 1,2 billion people as a potential market rivals China’s in terms of investment opportunity.

It is also a highly dynamic market. The population of Africa is projected to reach 2.5 billion by 2050, at which point it will comprise 26 per cent of what is projected to be the world’s working age population. The continent’s economy as whole is estimated to grow twice as rapidly as that of the developed world, according to the UN Economic Commission for Africa (ECA).

The creation, in less than two years, of the largest single market in the world through The African Continental Free Trade Agreement (AfCFTA) demonstrates the seriousness of Africa’s ambitions. Signed by 44 African countries in Kigali, Rwanda, in March 2018, the agreement will create a tariff-free continent, improving legal and policy harmonisation across borders to boost intra-African trade and attract investors to drive industrialisation.

If all 54 African countries join a free trade area, it will be the world’s largest by number of countries, with a combined GDP of $2.5 trillion, says the ECA. It also signifies Africa’s move towards a regional approach to trade negotiations and the U.S. would do well to take note of this shift in direction.

While Africa’s infrastructure backlog remains an untapped opportunity for foreign investors, American firms’ competitive advantage lies in the sectors of energy, agriculture, telecommunications and information technology (IT), especially business IT. It is in these sectors that many American firms are seen as global leaders, and therefore can leverage this expertise via the Prosper Africa initiative to the benefit of Africans.

In East Africa, countries such as Kenya, Uganda and Ethiopia provide a plethora of opportunities for U.S. firms in telecommunications and IT. Amazon Web Services and Microsoft are already building and expanding digital infrastructure on the continent, helping not only to drive financial inclusion and e-commerce, but underpinning sustainable economic development and growth across Africa.

Countries such as Mozambique and Angola, which have made a concerted effort to create more business-friendly operating environments to attract FDI in the oil, gas and energy sectors, have also seen American firms leveraging their capabilities to expand production capacity.

A consortium led by U.S.-based Anadarko Petroleum has invested in a large new liquefied gas export plant in Mozambique, while other companies, including Eni of Italy and ExxonMobil are also planning to invest heavily in the country’s gas sector.

Foreign investors should take a long-term and patient view to accommodate Africa’s new strategic importance in the global world order. Of course, what will ultimately set American companies apart from competing interests in Africa is not their commercial or even diplomatic approach to investment on the continent.

Their success will be determined on whether they are willing to adopt a patient capital mindset to investing. If American firms have the appetite to take a stake in Africa’s development, they can indeed prosper under the Trump administration’s new Africa policy. Africa, too, will be the better for it.

Sola David-Borha, is the chief executive of Africa Regions at the Standard Bank Group. She recently participated in the Corporate Council for Africa (CCA) US-Africa Summit held in Maputo, Mozambique.

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