The continent of Africa is ripe for trade and investment. Deanna O’Connor looks at the opportunities and obstacles.
Five years on from the launch of the Department of Foreign Affairs and Trade’s Africa Strategy in September 2011, it seems a timely juncture to review how trade, growth and opportunity are evolving on the continent.
While many vulnerable areas still require aid, as Africa progresses economically and socially, new prospects are presenting to industry, business and trade to fulfil the needs and gaps that are emerging, especially from the expanding middle-class consumer base.
A McKinsey consultancy report of 2010 pinpointed consumer-facing industries, agriculture, resources and infrastructure as industries that presented strong prospects for revenue generation, and advised early entry into the market. Speaking at the fifth Africa Ireland Economic Forum in June of this year, Minister Mary Mitchell-O’Connor noted that two-way trade between Africa and Ireland, including in goods and services, increased by about one-third between 2010 and 2014.
Brendan Flood, head of Enterprise Ireland’s international sales and partnering business unit, said at the same event that Enterprise Ireland is currently supporting 460 Irish companies doing business in Africa, and aims to increase this number to 550 firms within two years. “About 80% of exports are currently within the food or agri-tech sector. We are trying to drive that out to other areas,” said Flood.
ISSUES ON THE GROUND
With over 50 countries in the continent there is great diversity, particularly between the countries rich in natural resources and those without. Africa presents different obstacles and opportunities for doing business in the region. Political relationships, development cooperation, trade and investments all play a part in the economic growth of the continent.
Hunger, pandemics, conflicts, corruption, human rights issues and gender inequality still number among the huge issues on the ground. The World Bank highlights displacements due to conflicts, trafficking, piracy and religious extremism as issues that can contribute to uncertainty and raise the costs of doing business in the region.
Cruelly, although Africa is the lowest carbon-emitter, the continent suffers the most from the effects of climate change through drought, coastal erosion and flooding. Mitigating the effects and ensuring food security for the poorest are high priorities for the World Bank, and its Africa Climate Business Plan: A Blueprint for Fast-tracking Climate Resilience sets out concrete plans to promote low-carbon development in sub-Saharan Africa.
While the economic growth figures coming out can be disheartening, there is still huge scope. It’s important to look at the obstacles, but also to look beyond them. Five years ago there was an expectation that the strong pace of growth in Africa would remain at a level of around 6% per year – however, the World Bank now reports a downward trend, coming in at 3% in 2015, a drop from 4.5% in 2014. Greater integration into world markets was a strong hope for African economies, but high borrowing costs have recently shut them out of the international markets.
Over the past year Mozambique’s seemingly rising star and strong growth rate stalled, and they had to turn to the IMF, as did Ghana and Angola. The World Bank granted Nigeria $500m International Development Association credit for a social safety net system to support the poorest households, after a sharp drop in oil revenues hit the state budget.
New prospects are presenting to industry, business and trade
Kenya and Zimbabwe have also been engaging in credit negotiations: for example, the World Bank’s International Development Association guaranteed a commercial financing syndicated loan to refinance Kenya Power and Light Company’s debt. With the millions saved in debt restructuring, KPLC can now focus on providing electricity to millions of previously unserved customers. Solving problems like access to sustainable power paves the way for industry and growth.
A lowering of commodities prices has hit Africa’s fiscal balances hard, as a net exporter of oil, gas, metals and minerals (although apart from Nigeria and Angola, most sub-Saharan countries are net importers of oil and a sustained drop in oil prices would in fact benefit them). A real opportunity to come from this fall in commodities prices is an opening up of the attitudes of African governments to doing business with the private sector, when that commodities crutch has been taken away.
MEGACITIES AND INFRASTRUCTURE
The major economic players on the continent are South Africa, Nigeria, Egypt and Libya, but it is the emerging economies where potentially greater opportunities lie for those with first-mover advantage. With the average age of the African population set to be 25 years old by 2050, versus a global average projected to be 36, the continent will be young and vibrant.
There is an expectation that by 2025 there will be at least 12 megacities (cities with a population of over 10 million) on the continent. Nigeria has a population of 147 million people and there are currently 22 million people residing in the city of Lagos alone; as a city it has the fifth largest GDP in Africa, greater even than Kenya’s.
There is huge scope here, but also a realisation of the importance of ensuring that trade and FDI contribute to creating employment for the growing populations; giant megacities teeming with poor and unemployed youth would be a recipe for civil unrest and volatility.
While lack of infrastructure can be an issue, it can also be an opportunity. Speaking at PwC’s recent Africa Business Forum, Chika Chukwujekwu, Africa Business Group lead, advised businesses going into the African markets to “be a sailboat, not a train!” Her message was that you must be ready to adapt your course to take advantage of local conditions rather than sticking to a rigid track.
An example of this was the use of mobile technology to get around the lack of access to banking; traditional methods have been leapfrogged over and consumers are making payments via mobile phones. People who would previously been excluded from the banking system can even begin to build credit histories.
Africa cannot just remain a story about huge potential that never materialises
According to Patrick Mwehire, managing director of Stanbic Bank Uganda, “its ubiquity and low cost have allowed mobile money to reach 20 million users in five years in Uganda, while the banking sector has barely reached five million accounts in 50 years.” The need for traditional energy infrastructure has been negated by the widespread adoption of low-cost solar power units. Drones are being used to deliver medical and blood supplies to remote areas.
Stories like this show how creative solutions can build even more opportunities in a market. Kealan Delaney, CEO of Delmec, a Carlow-based engineering company working in 10 African countries, praises the entrepreneurial culture he has encountered in Africa: “Nothing is a problem, people have an in-built capacity to try and solve and get around problems.” This attitude comes from getting by and making do under less than ideal conditions, but segues seamlessly into a future marked by technology, disruption and smart cities.
From missionaries to peacekeepers, the Irish have built strong links in African countries over many years. In 1960, then-Taoiseach Seán Lemass, travelled to Nigeria, and Ireland’s first embassy on the continent was established there in 1961. Now Ireland’s network of embassies in Africa numbers ten: Ethiopia, Kenya, Malawi, Mozambique, Nigeria, South Africa, Tanzania, Uganda, Zambia and Sierra Leone.
Investments in Africa by Irish firms include QK Meats building the largest refrigerated plant in South Africa; Zambeef, one of the largest integrated agri-businesses operating in Zambia; and the agri-tech company Devenish in the Ugandan pig sector. Irish businessman John Teeling, of Cooley Distillery fame, has varied interests in Africa: he is currently chairman of Botswana Diamonds (which has recently begun an intensive exploration programme), Petrel Resources and Clontarf Energy in Ghana.
There is stiff competition for the goodwill of African governments in the form of influential superpower investors such as China
Development cooperation policies such as those put in place through Irish Aid, the government’s international aid arm, have focused on building local systems’ capabilities to deliver solutions, particularly in sub-Saharan Africa. The designated programme countries for Irish Aid are Mozambique, Ethiopia, Lesotho, Uganda, Tanzania, Zambia and Malawi.
Private-sector initiatives are supported under the banner of ‘Aid for Trade’, an initiative to help foster economic growth and use trade to help reduce poverty, and move beyond outdated donor/recipient-type relationships. As PwC’s Chukwujekwu underlines, “Western governments need to engage with their embassies, collaborating with them to win business together.”
There is stiff competition for the goodwill of African governments in the form of influential superpower investors such as China, whose private-sector companies work very closely with their government to deliver full packages, making life very easy on the recipient countries’ governments. The running joke is: “China comes with a chequebook, the West comes with a checklist.”
While you may not be entering the market on a superpower scale, there is a lesson there. It’s important to approach local sources in the right way. Even when you are looking for help and advice, make sure that you show what you can do for them – for example, providing employment and training – rather than leading into the conversation with your needs.
When dealing with foreign governments that, for example, may not have previous experience of Public-Private Partnerships (PPP), Chukwujekwu advises: “It’s important to engage with government and engage with your embassies on the ground, because they have the relationship with the government. Show how it will benefit them either financially or electorally – it’s how you present it to them. Show that you are giving back with jobs, training and so on.”
African countries are ripe and ready to welcome foreign investment and business partners. Speaking ahead of the latest Global African Investment Summit, which took place in early September in Kigali, Paul Kagame, president of the Republic of Rwanda said: “Investment and good governance are critically important, and that integration is profoundly in Africa’s interest. We know it, we believe in it. What remains is just to be doing what is necessary to make it reality. Africa cannot just remain a story about huge potential that never materialises.”
While African governments still struggle with their tax collection process, PwC have 10 key tips to help your company thrive in the African landscape.
- Desk research is not enough. Develop a practical understanding of the local tax and regulatory environment while working with advisers.
- Ensure that your company holding structures, as well as your operating and exit strategies, provide sufficient flexibility, substance and tax efficiencies/access to tax treaties.
- Keep a tight control on the cash taxes deducted at source in the form of withholding tax. Where the tax is not legally due, strive to avoid paying it as it is often difficult to get refunds.
- When having discussions or negotiations with the tax and regulatory authorities, engage appropriate senior officers at the authorities and ensure that you are accompanied by knowledgeable and pragmatic advisers who understand the local business culture/environment.
- Do not conclude tax settlements outside set formal procedures. Ensure you receive appropriate supporting documentation for taxes paid and/or agreements reached with regulatory authorities.
- Understand the applicable rules relating to exchange control and immigration regulations in order to avoid having trapped funds.
- When reorganising a group structure that overlaps multiple jurisdictions, seek advice to ensure that any related tax implication triggered in other territories is well understood and managed.
- Get reliable access to changes in the tax and regulatory landscape; manage how these affect your business in the local territory and as a group.
- Transfer pricing is now being practically implemented across Africa – therefore, ensure that profits are allocated to the appropriate entities and all relevant transfer pricing policies are duly supported with appropriate documentation.
- Keep up to date with tax compliance and ensure that you receive proof of the returns filed and all payments made.
CASE STUDY: DELMEC ENGINEERING
CEO Kealan Delaney shares lessons from growing his business across Africa.
USP: Telecom network experts who build, manage and maintain networks. They specialise in upgrading networks as data requirements expand.
Employees: 150 (70 in Ireland, 80 across 11 countries in Africa)
The recession led us to look at where else in the world we could go as the Irish market was drying up. An MBA graduate hired to research came up with Africa in their recommendations.
How did you go about starting out in business there?
The Enterprise Ireland office in South Africa was a big help in terms of market research. I hired a business development manager who went to Africa – Libya, Ghana and South Africa. As it happened, one of our client’s towers collapsed and they needed us. As they expanded, we expanded our operations across Africa with that client.
What issues did you come up against?
Corruption is one that often comes up. Corruption is an issue everywhere in the world – you just have to avoid it, work around it and not get involved. Personal safety was a serious worry initially.
Africa is more sophisticated than people give it credit for, and there are plenty of cities with good hotels and so on. As long as you are sensible travelling, there shouldn’t be issues.
As regards logistics, it’s doable; it just requires a bit of planning. Our main problem was money transfers initially – most of our costs, for equipment etc, were in Ireland but our revenue was in Africa, so we had issues getting money back to pay for costs.
What contributed to your success in Africa?
A little bit of naivety about the market meant we didn’t let the issues put us off and got first-mover advantage on competitors who were put off and are now trying to enter the market.
What advice would you give to anyone entering into African markets?
Employ local management as soon as possible – they understand the market better. Also structure properly from the start – tax, visas, money. Do proper work on it before you enter the market.