Where to invest in Africa A guide to corporate investment 2013/2014 edition RMB Global Markets Research
Authors
Contributing author
Celeste Fauconnier Nema Ramkhelawan-Bhana
John Cairns
Data analyst Claudell van Aswegen
Contents Chapter 1: Overview and rankings
2
Chapter 2: Regional integration
16
Chapter 3: Market size
26
Chapter 4: Market growth
32
Chapter 5: Operating environment
40
Chapter 6: Finance
50
Chapter 7: Infrastructure
58
Chapter 8: Manufacturing
66
Chapter 9: Resources
74
Chapter 10: Retail
84
Chapter 11: Country snapshots
90
Chapter 12: Appendices
118
t
Data tables (A1 to A24)
120
t
Sources and further information
174
Chapter 13: Contact details and disclaimers
182
Design concept Kente cloth has its origin with the Ashanti Kingdom in Ghana and was adopted by the people in Côte d’Ivoire and many other West African countries. It is an Akan sacred cloth worn only in times of extreme importance and was the cloth of kings. Over time, the use of kente has become more widespread. However, its importance has remained and it is held in high esteem. Legend has it that kente was first made by two Akan friends who went hunting in an Asanteman forest and found a spider making its web. The friends stood and watched the spider for two days then returned home and implemented what they had seen. Where to Invest in Africa 2013/14's design concept showcases some of the many unique and vibrant textiles found on our continent from the rich natural textures of the material to the sunny disposition of the colours.
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O V E R V I E W
A N D
R A N K I N G S
Chapter 1 Overview and rankings Africa’s appeal as an investment destination continues to improve. RMB’s Where to Invest in Africa report highlights the attractiveness of each market for corporate investment.
Shweshwe cloth, South Africa
2
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Overview and rankings
South Africa remains Africa’s best investment destination but its attractiveness continues to decline, which implies it’s losing ground on a relative basis as other countries improve.
RMB is proud to present our third annual Where to Invest in Africa: A guide to corporate investment. This publication highlights the attractiveness of each market for corporate investment. However, it does not constitute an assessment of creditworthiness in the respective African countries, nor does it represent RMB’s willingness to extend credit for investment into these economies. In this year’s edition, we have updated our investment attractiveness scores and looked more in-depth at issues of regional integration, retail, manufacturing, resources, and infrastructure (logistics and construction). We have excluded the section on “Why Africa?” that was contained in the first two editions — the case no longer needs to be made!
Highlights of this year’s report t "GSJDBDPOUJOVFTUPTIPXBOJNQSPWFNFOUJOJUTJOWFTUNFOU attractiveness, mainly due to robust economic growth, expanding market size as well as underlying structural reforms. t 5IFUPQNPTUBUUSBDUJWFEFTUJOBUJPOTSFNBJOUIFTBNF as last year: South Africa, Nigeria, Egypt, Ghana, Morocco, Tunisia, Libya, Ethiopia, Tanzania and Kenya. t 8FBSFNJOEGVMUIBUDZDMJDBMFWFOUT TVDIBTUIFCBDLMBTI from the Arab Spring, are likely to influence companies’ choices of where to invest and do cloud the outlook. As such, we have kept Egypt and Libya in our rankings but greyed their names in tables and graphs throughout the document to highlight the increased uncertainty surounding the current state of affairs. t 4PVUI"GSJDBJTTUJMMUIFNPTUBUUSBDUJWFDPVOUSZJO Africa, but it continues to lose ground to Nigeria, which has leapfrogged into second place. t 4PVUI"GSJDBJTOPXSBOLFESEJOUIFXPSMESBOLJOHT (according to our methodology), its worst position over the peroid for which we can construct rankings. Nigeria is ranked 38th, an improvement of 35 places in the past decade. t 0GUIF"GSJDBODPVOUSJFTSBOLFE1, 42 showed an improvement in their investment attractiveness this year.
Sharp improvements were seen in some of the most troubled countries on the continent, notably São Tomé and Príncipe, Gabon, Cameroon, Sierra Leone, the Congo, Mauritania and Liberia. Those slipping backwards include Algeria, Angola and Equatorial Guinea. t "GSJDBJTBUBDSJUJDBMNPNFOUJOUJNFXIFOJUOFFETUP boost industrial development and curb its infrastructure deficit if it is to transform its growth spurt into a sustainable trend. We have therefore included a chapter on manufacturing, and a subset on logistics and construction to the section on infrastructure.
Investment attractiveness rankings We have constructed investment attractiveness scores for each country. These scores are determined by a multiplicative combination of market size (GDP), economic growth (GDP growth forecasts over the next five years) and an operating environment index — the three most important factors for most business investment decisions. Each of these factors as well as the advantages and disadvantages of our methodology are addressed in detail in later chapters. The investment attractiveness scores for all African countries are shown in Table 1. Figure 1 illustrates how the countries perform based on each of our three pillars, with the top 10 countries shaded in orange.
Note: 1. Somalia and South Sudan have insufficient data to be rated, thus our rankings only comprise 52 of 54 African countries.
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Overview and rankings continued Table 1: RMB’s 2013/14 rankings of the most attractive African countries for investment (the higher the score, the better) 2013 rank
Country
Score
2012 rank
RMB's world rank
1
South Africa
5.79
1
33
2
Nigeria
5.63
3
38
3
Egypt1
5.57
2
44
4
Ghana
5.46
4
47
5
Morocco
5.41
6
51
6
Tunisia
5.37
5
53
7
Libya1
5.20
7
61
8
Ethiopia
5.09
8
67
Tanzania
5.08
10
68
Kenya
5.00
9
72
9 10 11
Botswana
4.97
12
76
12
Algeria
4.91
11
80
13
Zambia
4.90
13
82
14
Rwanda
4.90
14
83
15
Uganda
4.90
16
84
16
Mauritius
4.90
15
85
17
Côte d'Ivoire
4.61
19
102
18
Mozambique
4.60
18
103
19
Cameroon
4.55
22
105
20
Angola
4.54
17
107
21
Burkina Faso
4.53
21
108
22
Gabon
4.41
29
113
23
Namibia
4.39
20
114
24
Senegal
4.25
23
124 129
25
Madagascar
4.17
24
26
Mali
4.16
25
131
27
Malawi
4.15
28
132
28
Sierra Leone
4.10
32
134
29
Guinea
4.08
26
135
30
Congo
3.99
34
138
31
Benin
3.95
30
140
32
Mauritania
3.91
36
142
33
Chad
3.91
35
143
34
Niger
3.89
27
144
35
DRC
3.89
31
145
36
Sudan
3.73
37
148
37
Togo
3.46
38
152
38
São Tomé and Príncipe
3.43
49
154
39
Gambia
3.39
40
155
40
Zimbabwe
3.32
41
156
41
Burundi
3.27
39
157
42
Lesotho
3.19
42
159
43
Liberia
3.10
46
162
44
Swaziland
3.10
45
163
45
Cape Verde
3.09
43
164
46
Seychelles
3.07
44
165
47
CAR
2.96
47
171
48
Djibouti
2.80
48
176
49
Guinea-Bissau
2.66
51
178
50
Comoros
2.63
52
180
51
Eritrea
2.58
50
181
52
Equatorial Guinea
2.50
33
182
53/54
Somalia2
-
-
-
53/54
South Sudan2
-
-
-
Note: 1. We have kept Egypt and Libya in our rankings but greyed their names in tables and graphs throughout the document to highlight the current state of affairs. 2. Somalia and South Sudan have insufficient data to be rated. Source: RMB Global Markets Data as at September 2013 4
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Figure 1: Most attractive countries in Africa based on market size, market growth, and doing business Operating index 8 Mauritius 7
South Africa
Botswana
Rwanda
Tunisia
6
Ghana Morocco
Namibia
Egypt
5 Swaziland
Zambia Uganda Tanzania
Kenya Algeria
Senegal
Ethiopia
Cameroon
4
Nigeria Mozambique
Libya Sierra Leone
Côte d'Ivoire Equatorial Guinea
3
Congo
Angola
Guinea
DRC
Sudan 2 0%
2%
6%
4%
8%
10%
GDP growth Note: 1. Forecast GDP growth is based on IMF figures for 2013 to 2018. The operating environment score is explained in Chapter 5. A higher number represents a better business environment. Circle sizes represent the size of the economies in 2013 on a purchasing power parity basis. Source: RMB Global Markets Data as at September 2013
Figure 2: Africa’s top 10 most attractive investment destinations
6. Tunisia
5. Morocco
7. Libya 3. Egypt
4. Ghana
8. Ethiopia
2. Nigeria
10. Kenya 9. Tanzania
1. South Africa Source: RMB Global Markets Data as at September 2013
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Overview and rankings continued
Nigeria has overtaken Egypt to second position in our rankings (Figure 3). This strong showing comes from expectations of continued rapid economic growth. Based on the pace of improvement in the attractiveness score, it is possible that Nigeria will overtake South Africa within the next two to four years. This could happen sooner if the revisions to GDP, that are currently underway, result in an upward adjustment in the size of the Nigerian economy. Of the top 10 in Africa, Nigeria has the largest improvement in its attractiveness score.
economic size of the three continental giants.
Although Egypt is ranked third, continued political discord has detracted from its favourable characteristics such as its sizeable market, large population and decent operating environment (excluding political risk), which should support investment once tensions subside. The 2013/14 rankings were formalised before the recent flare-up of tensions in Egypt and Libya and are therefore not taken into account in the latest attractiveness scorings. We are mindful that cyclical events, such as the backlash from the Arab Spring, are likely to influence companies’ choices of where to invest. However, the outcomes of our research methodology are meant to inform long-term investment decisions. As such, we have kept Egypt and Libya in our rankings but greyed their results in tables and graphs throughout the document to highlight the increased uncertainty surrounding the current state of affairs. We elaborate on the unrest in Egypt and Libya at the end of Chapter 1.
Countries that continue to surprise
North and East African economies are jostling for positions in the bottom half of the top 10, with Morocco surpassing Tunisia for the first time and Tanzania moving ahead of Kenya. In terms of changes in the attractiveness scores, Tanzania registered a large improvement while Libya declined substantially on account of greater political risk.
There are four rankings that continue to surprise. For a small country, Ghana is performing exceptionally well, fourth in the African ranking, placing it 47th in the world. This ranking is just shy of the much larger and well known emerging markets of Vietnam and the Philippines and is three places higher than Italy. Ethiopia is again placed eighth in Africa, a position that many view as odd given the stereotypical image of the country. Ethiopia, however, offers a relatively large economy, a result of a massive population, and is experiencing exceptional rates of economic growth. Rwanda remains an outstanding African economy — consider its positioning in Figure 1. Continued reforms have created a very favourable operating environment and spurred economic growth. Rwanda is placed 14th on our list of most attractive destinations, its position is only held back by its small market size.
Ghana continues to see a steady improvement in its investment attractiveness. After being placed 10th in 2007, it has now ranked fourth in Africa for the last three years and is slowly catching up to the top three. This is a remarkable performance for a country that has only a fifth of the
Angola, despite its size and rapid growth, is 20th in our rankings. This is down from the third position it held in 2006
Figure 3: Investment attractiveness scores (the higher the score, the better) South Africa
7
Egypt
6 5 4 3 2 1 1995
Source: RMB Global Markets Data as at September 2013
6
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2000
2005
2010
Nigeria
and 2007 if we apply our methodology over a longer period. The decline is mainly from the slowdown in growth: back in 2006/07 GDP was growing and was expected to keep growing at 15% p.a.; growth expectations are now 6% — still very attractive but far from what they were. There has also been a deterioration in the operating environment, with its score dropping from 3.5 to 3.2.
Figure 4: Country rankings of investment attractiveness in Africa (the lower the rank, the better) Rwanda
50
Angola
40
30
20
10
0 1997
2002
2007
2012
Source: RMB Global Markets Data as at September 2013
Continued improvement in Africa Africa’s attractiveness as an investment destination continues to improve. As a whole, its investment attractiveness score has leapt from 5.3 in 1995 to 6.1 (out of 10) this year, although this year’s score is still slightly below the level prior to the financial crisis (Figure 5).
Figure 5: Africa's investment attractiveness (the higher the score, the better) 7 6 5 4 3 2 1 1995
2000
2005
2010
Source: RMB Global Markets Data as at September 2013
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Overview and rankings continued
Forty-two African countries showed an improvement in their investment attractiveness scores in the past year, while 10 showed a deterioration. The biggest improvers this year were São Tomé and Príncipe and Gabon (Figure 6), while Cameroon, Sierra Leone, the Congo, Mauritania and Liberia are also worth mentioning. It’s encouraging that these improvements are in some of the most troubled countries on the continent. The deteriorations came from Algeria, Angola and Equatorial Guinea, with the latter dropping 19 places in our rankings to be placed last at 52 because of the sharp decline in growth prospects.
Figure 6: Notable improvers in the investment attractiveness scores (the higher the score, the better) Gabon
5
São Tomé and Príncipe
4
3
2
1 1995
2000
2005
2010
Source: RMB Global Markets Data as at September 2013
Africa’s improvement is even starker when viewed over a longer time frame. When looking at the change in the global investment attractiveness scores over the past decade, we find that African economies appear in the top five best improvers. A further 39 countries have also improved, while only Swaziland, Zimbabwe and Equatorial Guinea have worsened (Figure 7).
Figure 7: Change in investment attractiveness scores over the past decade 3
Africa
2 1 0 -1 -2 -3
Source: RMB Global Markets Data as at September 2013
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Other
Figure 8: Sub-components of Africa’s investment attractiveness score 10
Market size (total)
Growth
Market size (weighted)
Operating environment
9 8 7 6 5 4 3 2 1 1990
1995
2000
2005
2010
Source: RMB Global Markets Data as at September 2013
While Africa’s operating environment remains stagnant in aggregate, there have been certain countries that are performing very well. Rwanda has led the way and substantial progress has also been made in the Seychelles, São Tomé and Príncipe, Gabon, Guinea, and Sierra Leone. Over the past decade, 26 countries have improved while another 20 have deteriorated.
World rankings We’ve used our methodology to calculate investment attractiveness scores on a worldwide scale, which allows us to compare Africa’s relative performance. Table 1 lists the scores for the African countries as well as their ranks in Africa and the world. Figure 9 illustrates these world rankings graphically. Africa offers none of the top 10 destinations (South Africa is ranked 33rd). Even with the development in the investment climate in recent years, Africa still dominates the bottom of the list, although the worst of all the countries listed this year goes to Syria, which has fallen 155 places since 2011. At the time of publication, Syria faced a potential strike by Western forces after their condemnation of the use of chemical weapons to quell civilian uprisings.
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Overview and rankings continued
Table 2: RMB’s 2013/14 rankings of the top 40 most attractive countries for investment in the world (the higher the score, the better) 2013 rank
Country
Score
2012 world rank
1
China
7.22
1
2
US
7.17
2
3
Australia
6.49
3
4
South Korea
6.48
4
5
Taiwan
6.47
5
6
Hong Kong
6.43
10 11
7
Singapore
6.39
8
India
6.38
7
9
Canada
6.38
9
10
UK
6.38
6
11
Japan
6.36
8
12
Malaysia
6.34
15
13
Germany
6.29
13
14
Saudi Arabia
6.28
12
15
Qatar
6.22
16
16
Chile
6.20
17
17
Thailand
6.17
14
18
Peru
6.08
22
19
Turkey
6.08
24
20
Mexico
6.06
21
21
France
6.05
18
22
Indonesia
6.02
20
23
Sweden
5.97
19
24
United Arab Emirates
5.92
31
25
Colombia
5.92
25
26
Netherlands
5.90
26
27
Brazil
5.88
29
28
Switzerland
5.88
27
29
Poland
5.88
23
30
Norway
5.85
30
31
Kazakhstan
5.82
32 33
32
Israel
5.80
33
South Africa
5.79
28
34
Russia
5.72
39
35
New Zealand
5.71
34
36
Spain
5.70
37
37
Ireland
5.64
41
38
Nigeria
5.63
45
39
Denmark
5.63
40
40
Finland
5.62
38
Source: RMB Global Markets Data as at September 2013
10
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Figure 9: Global investment attractiveness scores (1 = poor; 10 = good) Africa
10
Other
9 8 7 6 5 4 3 2 1 0
Source: RMB Global Markets Data as at September 2013
Table 2 lists the top 40 investment destinations in the world. China and the US top the list, well ahead of the rest of the pack. China overtook the US as the world’s most attractive investment destination in the aftermath of the Great Financial Crisis, but with the US economic recovery, the gap is starting to close again (Figure 10). The remainder of the top 10 is
dominated by advanced economies and Asian emerging markets. However, not all advanced economies are highly ranked e.g. Italy, the 11th largest economy in the world, is ranked 50th. The BRICS also put in a mixed performance, with China ranked 1st, India 8th, Brazil 27th, South Africa 33rd, and Russia 34th (Figure 11).
Figure 10: Investment attractiveness scores of China and the US (the higher the score, the better)
China
US
8 7 6 5 4 3 2 1 1995
2000
2005
2010
Source: RMB Global Markets Data as at September 2013
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Overview and rankings continued
Figure 11: Investment attractiveness scores of the BRICS (the higher the score, the better) Brazil
8
Russia
India
China
South Africa
7 6 5 4 3 2 1 1995
2000
2005
2010
Source: RMB Global Markets Data as at September 2013
Methodology Consistent with what theory suggests should be the case, and which surveys prove is actually the case, we believe that the decision to invest is typically based on three key issues: market size, market growth and the business environment. Our methodology is built on these three pillars and does not constitute a sovereign credit rating. As is explained in subsequent chapters, we use logged GDP (to reduce wide-ranging sizes to smaller scopes) at purchasing power parity (PPP) to represent the market size; forecast economic growth rates for market growth; and a composite operating environment index for the business environment. These three pillars are adjusted to provide a score between 1 and 10 for each country. The composite investment attractiveness score is then a geometrically combined total of the three pillars. This type of averaging implies that a country must do well in all three areas to perform well overall. The operating environment index is arguably the most subjective element. Our estimate uses four sources consistent with our rankings in 2011 and 2012: the World Bank’s Doing Business Report, the Heritage Foundation’s Index of Economic Freedom, the World Economic Forum's (WEF) Global Competitiveness Report and Transparency International’s Corruption Perceptions Index, which are surveyed at different times of the year (refer to page 41). We have used these four sources as they are highly regarded, have long histories, and contain a mix of hard and subjective data. There are many other potential indices that could be used. It could also be argued that some indices overlap or that certain indices should be given higher weights. However, we have found that most assessments of business operating conditions tend to be highly correlated: countries where corruption is high will also have prohibitive bureaucracy, less economic freedom and be perceived as being less competitive. Quite simply, it probably 12
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would not make much difference which indices are included or with which weights. Individual indices will have their own idiosyncrasies, but taking an equally weighted average of four indices helps smooth individual anomalies. The value in our methodology can be seen when we compare actual FDI against the investment attractiveness score (Figures 12 and 13). The close link between the two series suggests that we are not only capturing what theory suggests but also what the reality is on the ground. While we believe our methodology is strong, it only provides a general overview of the attractiveness of each country rather than a specific rating that will be relevant to each company or each sector. We still highly recommend that individual companies look at the factors that are relevant to their particular businesses. Miners, for instance, will not be particularly interested in market size, but would rather pay attention to issues of infrastructure and corruption. If anything, our methodology is biased towards companies looking to sell into Africa but, even then, high-end and lowend retailers would face different market sizes, neither of which would perhaps be adequately captured by GDP only. One result of our methodology is that small countries will always struggle to compete with large ones. This isn’t totally restrictive: the city states of Hong Kong and Singapore are still ranked sixth and seventh in the world while Ghana is ranked fourth in Africa despite its small economy. We used logged GDP in our scoring, which limits the divergence between large and small countries. An economy may be small but, if it provides access to a larger market, then it might be a relevant place to set up a business. In this year’s edition, we have looked at the issue of regionalisation and introduced supplementary scores that account for broader market access (refer to Chapter 2).
Figure 12: Actual global FDI and the RMB investment attractiveness index (2005 – 2011) Investment score 8 7 6 5 4 3 2 1 1
10
100
1,000
10,000
100,000
1,000,000
FDI (US$m) Source: RMB Global Markets Data as at September 2013
Figure 13: Actual FDI in Africa and the RMB investment attractiveness index (2005 – 2011) Investment score 7 6
South Africa Egypt Nigeria
Tunisia Ghana
5 4
Congo
Burundi
3 2 1 1
10
100
1,000
10,000
100,000
1,000,000
FDI (US$m) Source: RMB Global Markets Data as at September 2013
Where are South African companies heading? In last year’s edition, we graphically illustrated where FirstRand's2 clients (around 800 surveyed) are heading into Africa (Figure 14) and how their footprint has grown. It is incredible to see the extent and pace of expansion into the continent. We have drawn a few conclusions: s 4HEFOOTPRINTNOWSPREADSACROSS!FRICACOMPAREDTOAND s 3OUTHERN!FRICAREMAINSANATTRACTIVEDESTINATIONFOR3OUTH!FRICANCOMPANIES MAINLYDUETOPROXIMITYANDASTABLEOPERATING environment. s %XPANSIONINTO%ASTAND7EST!FRICAHASIMPROVEDDUETOANINCREASEINKNOWLEDGEOFTHESEMARKETSANDTHEDEMOGRAPHIC potential these regions offer.
Note: 2. FirstRand has a broad presence in Africa. Well-established First National Bank retail and treasury operations are present in Botswana, Mozambique, Namibia, Swaziland, Lesotho, Tanzania and Zambia. RMB operates a fully fledged investment bank in Nigeria and representative offices in Angola and Kenya.
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Overview and rankings continued
Figure 14: South Africa Inc’s footprint in Africa over the years 1 - 10 SA companies
2006
11 - 39 SA companies
40+ SA companies
2009
2012
Source: RMB Coverage Data as at September 2013
We extended the analysis further and found it interesting that half of FirstRand's clients in our subsidiary countries are retailers or automotive and logistics companies. Local logistics companies deliver consumer goods, and transport minerals and soft commodities either for processing or export.
This is mainly due to improving infrastructure and supply chains borne of rising consumer demand. Financial and business services are increasingly being demanded, while the service companies are expected to follow suit.
’ footprint in Africa (sector perspective) Figure 15: South Africa Inc’s Retail
Manufacturing
Auto and logistics Mining
Financial
Services
% of client base by sector Botswana 25.6
19.2 28.0
16.8
3.8
Namibia 23.1 6.7 4.5 Source: RMB Global Markets Data as at September 2013
14
RMB Global Markets
19.2
18.7
13.5
26.9 23.1
Nigeria
20.1 26.9
Kenya
Lesotho
15.9
13.5
5.6 4.8
Ghana
172 6.3 9.4
23.4
14.1
29.7
18.3 16.7
26.1 5.8 13.0
23.2 15.9
Swaziland 21.9
21.9
11.7
32.9
23.6
13.9 41.7
Tanzania 15.6 17.2 14.1
6.8 4.1 12.3
6.7 5.0
Mozambique 25.0 5.6
23.4
10.9 18.8
26.4
5.6
Zambia 17.5
25.0
7.5 7.5 20.0
22.5
Addressing the elephant in the room Egypt: Political backdrop cause for concern According to our overall ranking, Egypt is the third most attractive investment destination in Africa. However, its current political backdrop warrants concern. At the time of writing, Egypt’s interim government had announced a temporary constitution, laid out plans to amend the state’s fundamental principles and broached a timetable for elections, estimated for the end of 2013. Though unnerved, Western donors neither welcomed the removal of President Morsi nor denounced the action as a coup, which under US law would require a cessation of aid. Egypt’s Gulf allies welcomed the political transition, offering US$8bn in relief to alleviate the country’s economic woes. Impact on our overall ranking Egypt’s political storm will undoubtedly be negative for economic growth as it will act as a vice on investment and exacerbate the socioeconomic despair, notably unemployment and food costs. An assessment of countries which have undergone similar political crises over the last 10 years suggests a 0.5% to 1.5% loss of forecasted output (i.e. lower GDP growth over the next five years). At the extreme, we assume an average growth rate of 3.5% compared to the IMF’s current estimate of 5.1%. Political risk is part of the operating score — it is a primary consideration in two of the four surveys used to measure the ease of doing business across Africa. Due to the nature of the political discord, Egypt’s situation can be likened more to the uprisings in Thailand during the 2000s than to the current situation in Syria, which implies a relatively mild drop in its operating environment. Although Thailand was marred by political upheaval between 2006 and 2010, perceptions of its business environment stayed the same. This is reflected in an unchanged score of 6.7 (out of 10) over five years.
By adjusting our forecast growth and operating scores by -1.5% and -0.5% respectively, we find that Egypt would slip three places to number 6 in our investment rankings. Though stark, the decline does not detract from Egypt’s allure as a potential long-term investment destination in times of stability. Despite the possibility of sub-trend growth, Egypt’s current market size will still be formidable, comprising almost 17% of Africa’s purchasing power. Notwithstanding concerns over its political stability, Egypt’s operating environment should remain competitive as the factors underlying its ease of doing business, such as technological readiness, is unlikely to deteriorate markedly. We remain confident in our scoring but are mindful that sporadic shocks could lead to changes. Over the long run, the decision to invest should be premised on our core methodology. Libya: Investment fears are valid In a very similar position to Egypt, Libya is ranked in our top 10 most favourable investment destinations, but is struggling to make a success of the recent transitions in its political environment. In 2011, Colonel Muammar alGaddafi’s autocratic government was brought to an end by a six-month uprising and civil war. In November 2012, the official transfer of power to an elected government was completed. Although a positive move, the transition did not necessarily mean a peaceful and smooth one. The government is still faced with severe institutional capacity constraints, especially with a fragmented political landscape and tribal power struggles. Furthermore, despite demands that the government-sanctioned militias be disbanded, they remain powerful, causing additional political instability, as seen in violent confrontations between militias and local protesters in Benghazi in 2013. The judicial system remains weak, and threats and physical attacks continue, while rising militant activity by radical Islamists are taking advantage of the government’s weaknesses. All these issues are a concern for local businesses and international investors alike and will play a large role in deciding whether or not to invest in Libya.
Barring Syria, the operating score of a sample of countries that underwent a similar decline indicates an average decline of 0.5.
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R E G I O N A L
I N T E G R A T I O N
Chapter 2 Regional integration Regional integration is characteristic of the post-independence era in Africa. The Abuja Treaty, signed in 1991, is the cornerstone of African integration efforts.
Kente cloth, Ghana
16
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Regional integration
Despite the dawn of several integration schemes, there have been varying levels of success due to ambitious targets set within unrealistic time frames.
Africa: The sum of its parts Regional integration is characteristic of the post-independence era in Africa. Governments, particularly those of smaller economies, sought to unify policies with neighbouring states to enhance economic growth and development. The Abuja Treaty, signed in 1991, is the cornerstone of African integration efforts. The accord is premised on the creation of an African Economic Community (AEC) by way of a five-stage process culminating in a political union3.
Regional Economic Communities (RECs) (Table 3) serve as building blocks for the AEC. There are 14 in existence, though the AEC recognises eight, of which COMESA and CEN-SAD boast the largest affiliations with 27 and 21 participants respectively. But RECs are not mutually exclusive — overlapping memberships are common among African countries (Figure 16).
Figure 16: Regional Economic Communities identified by the AEC COMESA
SADC
AMU
ECOWAS
CEN-SAD
ECCAS
IGAD
EAC
Source: AEC Data as at September 2013
Table 3: Regional Economic Communities Regional Economic Communities
Date of establishment
Number of affiliates
Union du Maghreb Arabe
UMA
1989
4
Intergovernmental Authority for Development
IGAD
1996
6
Economic Community of Central African States
ECCAS
1983
13
Southern African Development Community
SADC
1980
14
Economic Community of West African States
ECOWAS
1975
15
Common Market for Eastern and Southern Africa
COMESA
1994
21
Community of Sahel-Saharan States
CEN-SAD
1998
27
Source: AEC, World Trade Organisation Data as at September 2013 Note: 3. Many regional integration agreements prescribe deeper co-operation which assumes a linear pattern starting with a free trade area, followed by a customs union, a common market, economic union and ultimately a political union. RMB Global Markets
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Regional integration continued
Table 3: Regional Economic Communities continued Regional Economic Communities
Date of establishment
Number of affiliates
West African Economic and Monetary Union
WAEMU
1994
Mano River Union
MRU
1973
14 3
Central African Monetary Community
CEMAC
1994
6
Economic Community of the Great Lake Countries
CEPGL
1976
3
East African Community
EAC
1999
5
Indian Ocean Commission
IOC
1982
5
Southern African Customs Union
SACU
1889
5
Source: AEC, World Trade Organisation Data as at September 2013
Levels of integration
trade in goods, services, capital, and labour are removed. Additionally, non-tariff barriers are reduced and eliminated. For a common market to be successful, there must be a significant level of harmonisation of microeconomic policies and common rules regarding monopoly power and other anti-competitive practices.
Regional integration occurs in phases. International trade theory identifies five potential levels, although seven can be isolated based on the degree of unification of economic policies. In theory, each level of integration incorporates the properties of those preceding it.
s A monetary union is the first major step towards macroeconomic integration and enables economies to converge more closely. The adoption of a shared currency implies a common monetary policy, including interest rates and the regulation of the quantity of money, and a single central bank.
s Free Trade Areas (FTAs) are created when two or more countries agree to reduce or eliminate barriers to trade on all goods sourced from their respective countries. s A customs union involves the removal of tariff barriers between members, together with the acceptance of a common (unified) external tariff against non-members. This means that members may negotiate as a single block with third parties.
s Economic integration involves the complete harmonisation of all policies, rates, and economic trade rules.
s A common market is the first significant step towards full economic integration and occurs when member countries trade freely in all economic resources — barriers to
Progress across the eight RECs acknowledged by the AEC is outlined in Figure 17.
Figure 17: Extent of regional integration Established
Envisaged
Not envisaged
IGAD CEN-SAD AMU ECCAS COMESA ECOWAS EAC SADC
0 Free trade area Source: AfDB Data as at September 2013
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1
Customs union
2 Common market
3 Monetary union
4
Political union
5
increased investment spending, higher production efficiency, better quality goods and lower prices.
The Tripartite Free Trade Agreement (T-FTA) In an attempt to merge the RECs, 27 heads of state (effectively members of SADC, the EAC and COMESA) agreed to the formation of a free trade area in 2008 to expand intraAfrican trade, support collaboration between the regions and enable joint resource mobilisation and project implementation. If successful, the T-FTA will enjoy a combined purchasing power of US$1.4 trillion by 2018. However, as with most African integration strategies, the objectives of the grouping are perceived as being impractical. A main point of contention is the timing and a supposed lack of political will, technical expertise and private sector involvement.
Welfare effects: Trade creation versus trade diversion Regional integration has the potential to: t Boost competitiveness through increased productivity, greater economies of scale and reduced unit costs; t Improve well-being by allowing individuals to purchase goods and services from the cheapest source, resulting in the reallocation of resources based on a comparative advantage; t Assist smaller economies in achieving economies of scale by pooling resources or combining markets; and t Encourage greater competition among firms by removing distortions created by monopolies resulting in
The increase in the level of trade between nations as a result of regional economic integration is called trade creation, which can bolster consumption via lower prices or stimulate production through specialisation. Internationally, trade creation is more apparent in customs unions where the member states are affluent, produce similar industrial goods and record sizeable volumes of trade prior to integration. Trade diversion is at the other end of the spectrum and occurs when production is concentrated in countries with higher opportunity costs and lower comparative advantage, resulting in increased trade with a less efficient producer within the trading block. The IMF quantifies trade expansion and creation for seven RECs in Africa using a gravity model that states that economic interactions between two countries are proportional to their sizes and inversely related to the distance between them. By controlling for issues like common borders, colonial links, common languages, overlapping memberships and currency unions across several arrangements across the world, the IMF finds that SADC, COMESA, the EAC, ECOWAS, WAEMU and SACU have observed an expansion in trade since 1990. Intra-SACU trade is 57.2 times higher than the expected level (refer to page 20). Trade creation has been evident in six of the seven areas identified in Figure 18. The EAC and CEMAC have shown lower levels of creation due to distance, which has been a considerable barrier to multilateral trade.
Figure 18: Trad Trade effects of regional trade agreements in Africa expressed as a value relative to expected level Trade expansion Trade expansion >than 50 55.4 57.2 10
Trade creation
8
6
4
2
0 SACU
SADC
COMESA
ECOWAS
EAC
CEMAC
WAEMU
Source: IMF Data as at September 2013
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SACU: The oldest customs union in the world
later (T+2). This led to severe fiscal distress in Swaziland and Lesotho following the Great Financial Crisis.
The Southern African Customs Union (SACU), comprising South Africa, Botswana, Lesotho, Swaziland and Namibia, is credited with bettering the living standards of its member countries by facilitating trade within and outside the area.
Two common proposals to help reduce the impact of the T+2 adjustment include:
Heads of the respective SACU states have expressed a desire for the union to be transformed into an economic community, which would entail the establishment of a common market through the elimination of fiscal frontiers, the liberalisation of the movement of goods, services and factors of production, and the harmonisation of macroeconomic and fiscal policies. IMF studies have found that the SACU has outperformed other African agreements in enabling trade among its member states. Based on bilateral export data, intra-SACU trade is 57 times higher than projected compared to a global benchmark and 145 times higher on an African basis. A large proportion of the gains are mainly derived from South Africa’s trade with Botswana, Lesotho, Namibia and Swaziland (BLNS), with about 70% of the grouping’s imports originating from South Africa. With the exception of Swaziland, 60% to 90% of primary commodities produced in BLNS are destined for markets outside of the SACU. South Africa is the main recipient of Swaziland’s processed and semi-processed exports, accounting for 50% of the country’s exports between 2005 and 2010. The union has often been criticised for being a device for South Africa’s enrichment. Botswana, Namibia, Lesotho and Swaziland’s production structures are thought to have been negatively impacted by the size of South Africa’s industries, which could deter intra-SACU trade. The vehicle industry is often cited as an example of this negative polarisation effect. Vehicles are subject to hefty import tariffs in the SACU yet the industry is almost entirely based in South Africa. It could be argued that the other members should be compensated for extra-normal profits earned by South African vehicle manufacturers on account of the external tariff to ensure equitable distribution of wealth within the trade area. Another area of contention is the volatility associated with SACU receipts owing to variations in customs duties and the adjustment to transfers based on the revenue sharing formula. Annual allocations from the common revenue pool are based on a forecast of profits made the previous year. If the transfer to a SACU member differs from the size that it is entitled to receive, then the difference will be reversed two years
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1. Closer economic integration, which implies a collective approach to fiscal policy, the strengthening of regional institutions and the establishment of a stabilisation fund. 2. The distribution of revenues to the country of final use. However, this system could undermine intra-regional trade and destabilise the public finances of BLNS.
The Common Monetary Area Further to regional integration, Namibia, Swaziland, Lesotho and South Africa enjoy the benefits of financial assimilation by way of the Common Monetary Area (CMA), whereby Namibia, Swaziland and Lesotho’s currencies are pegged at par to the South African rand. The CMA generates welfare gains particularly for the smaller participants because it shields their monetary policies from fiscal pressures. The IMF asserts that the expansion of the CMA, in which the South African Reserve Bank would set the monetary policy for the region, depends on if it makes sense to both the existing members and potential newcomers. It finds that the addition of a single country (from the SADC region) hinges on a country’s current and expected financing needs. t "OHPMB .BVSJUJVTBOE5BO[BOJBBSFVOMJLFMZUPQSPGJU from the arrangement as their trade dynamics are negatively correlated with South Africa's. The ability of the affiliate to contend with exogenous shocks would be limited if they were to adopt South Africa’s monetary policy. t 0OUIFPUIFSIBOE #PUTXBOBBOE;BNCJBTQPTJUJWFUFSNT of-trade associations with South Africa would help them stabilise output in the event of a global event. t "MPXFSJOGMBUJPOSBUFXPVMEIFMQBMMFWJBUFUIFGJTDBM pressure on selected countries' monetary policies e.g. Botswana, Zambia and Zimbabwe. Figure 19 shows the IMF’s calculated welfare gains or losses from adding a single SADC country to the CMA (as a percentage of GDP).
Figure 19: Deriving benefit or losing value from being assimilated into the CMA % of GDP 4.50
3.00
1.50
0.00
-1.50
Zimbabwe
Zambia
Tanzania
Mozambique
Mauritius
Malawi
DRC
Botswana
Angola
-3.00
Source: IMF Data as at September 2013
Why have RECs been unsuccessful in Africa? Despite the dawn of several integration schemes, there have been varying levels of success due to ambitious targets set within unrealistic time frames. African trade only accounts for 10% to 12% of total intra-regional trade and is mainly driven by one or a few major players. According to the IMF’s Direction of Trade Statistics, South Africa accounts for the largest proportion of SADC’s exports while the majority of goods in COMESA originate from Kenya, Egypt, Uganda and Zambia. Unsurprisingly, Kenya dominates the EAC while Nigeria and Côte d'Ivoire tower above their West African peers in ECOWAS. Cameroon stands out in ECCAS as it provides the largest percentage of exports to the region. The OECD identifies six constraints to regional integration: t Multiple objectives: Members remain at different stages of development with regard to each of the aims of the REC and attach varying degrees of importance to each ideal. t Overlapping memberships: Members of several formal arrangements do not have the necessary resources to meet the requirements of their respective associations,
resulting in the exhaustion of finances and technical expertise. Tanzania’s decision to withdraw from COMESA in 2000 was partly due to its inability to abide by the initiative’s ambitious timetables and goals such as the implementation of its preferential tariff schedule. t Absence of strong supra-national institutions: This is particularly evident in West Africa. The ECOWAS Secretariat has little authority to force governments to implement trade liberalisation and other integration measures. t Non-implementation of harmonisation provisions: Many countries are unwilling to pursue regional objectives when they are at odds with national trade policies. t Lack of political commitment: Countries have vastly different political ideologies and external alliances making it difficult to align objectives with RECs. t Inadequate compensation mechanisms: Rigid distribution formulas could deter countries from implementing integration measures. This could partly explain the slow reduction in tariff barriers across ECOWAS, where compensation mechanisms are viewed as rigid.
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Regional integration continued
Key components of regional success Competitiveness plays an integral role in the success of regional communities. Fifty percent of SADC’s participants are among the 20 most attractive investment destinations in Africa (Table 1). These countries have relatively sound institutions, efficient goods and labour markets and well developed financial markets. Despite having the largest number of member states, only 30% of CEN-SAD’s affiliates are ranked within the top 20 mainly due to the weakness in many of their operating environments. Access to finance, corruption, tax rates and inadequate supply of infrastructure are among the most problematic factors for doing business in this region. The magnitude of trade within an REC is dependent on the ease of enforcing contracts, which is a function of each economy’s judicial system. An aggregation of the WEF’s scoring on the strength of the legal and administrative landscape shows that SADC is perceived to have the best environment, although the difference in overall regional scores are slight. The EAC stands out as being the easiest region to enforce contracts, while the ECCAS is much more challenging. The cost of doing so, however, is generally high throughout Africa. To ease the burden of transaction costs, many countries have implemented trade reforms to reduce import tariffs to encourage duty-free merchandise trade among member states. Though crucial, it is only one mechanism of enabling greater trade. Overcoming non-tariff barriers, such as arduous administrative processes and weak infrastructure, would readily improve transaction costs. According to the Trade Law Centre of Southern Africa, East and Southern African regions comprising COMESA, the EAC and SADC, struggle with
customs procedures, clerical requirements, strict standards and inefficient road and rail networks which increase the cost of intra-regional trade. This topic is discussed in Chapter 7.
The extent to which regional affiliations affect investment attractiveness Our core methodology does not explicitly account for the potential benefits of economic integration. To determine whether regional affiliation improves an economy’s investment attractiveness, we calculated a geometrically weighted score using the inputs from our principal methodology discussed in Chapter 1. The market size and market growth rates of each economy are adjusted by values reflecting the relative success of the respective RECs. To avoid duplication, we excluded the market size and growth rate of each country from its REC. A composite score is then derived by combining the macroeconomic pillars with the outcomes of the operating environment index laid out in Chapter 5. The results are meant to supplement our findings of our Where to Invest in Africa publication. The rate assigned to each REC is arguably the most subjective element of the methodology as it is premised on our assessment of the effectiveness of each zone. However, we find that most literature is congruent with our thinking and identifies the SACU, AMU and the EAC as well-functioning arrangements. Sixty-seven percent of respondents to EY's 2012 Africa attractiveness survey noted that they are already present in the SADC region, while 47% were active in the EAC (Figure 20). ECCAS is not favoured as an investment destination mainly due to fragmentation within the region.
Figure 20: Trade zones offering the most potential for doing business in Africa We already have prescence there We are not interested
We are actively considering investment We are unaware of this market
We are interested in investing Can't say
SADC AMU EAC ECOWAS ECCAS 0%
10%
Source: EY Data as at September 2013
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20%
30%
40%
50%
60%
70%
80%
90%
100%
Regional titbits: Defining a top 10 Despite its geographical distance, Mauritius emerges as the primary investment destination in Africa based on its access to broader markets within SADC and COMESA (Figure 21). Firms operating on the island can participate in the expeditious growth rates of countries like Tanzania and Mozambique through SADC’s various protocols and the ease of doing business locally, which will enable greater cross-border trade. Interestingly, Mauritius is ranked 16th in our principal methodology. Rwanda’s favourable macroeconomic scores embellish its exceptional operating environment, propelling it to the number 2 spot. As a member of COMESA, CEMAC, EAC and CEPGL, Rwanda could serve as a focal point for different industries to expand into the north and east of Africa. Despite a worsening in its growth outlook, South Africa is ranked third per our regional methodology, underscoring its importance as a gateway into Africa. Its scoring remains relatively the same on both measures of attractiveness, reflecting its trade and administrative dominance within SADC and the SACU. Of the 52 African economies surveyed, the Seychelles exhibits the largest gains in its score from regional integration, rising from 3.1 on an unadjusted basis to 5.9 (out of 10). At number 4 in the ranking, the island economy boasts a relatively good operating environment and is comparable to Mauritius in terms of its economic reach — linked to both SADC and COMESA.
improvement in the main attractiveness scoring since 2007. Despite being 5.5 times smaller than Nigeria, Ghana offers countless opportunities to tap into ECOWAS on account of its stellar business environment (ranked sixth in Africa). Botswana, Tunisia, Zambia and Nigeria are ranked in the latter half of the regional top 10. Nigeria towers above its West African counterparts in terms of economic size and is forecast to grow at a pace of 7% over the medium term. Yet, trade creation within ECOWAS and WAEMU remains limited due to a lack of political will, which is likely to restrict upward movement in the regional rankings. Namibia’s standing at number 15 (per the regional scoring) is testimony to the benefits of an effective, well managed trade arrangement. Its participation in the SACU and access to larger Southern African nations heightens its allure as an investment destination, propelling it eight positions higher than in the main rankings. On average, investment scores increased by one notch. The Seychelles, Cape Verde, Swaziland, Comoros, Djibouti, Liberia and Guinea-Bissau exhibit the largest improvements, increasing by more than two scores. Liberia’s association with WAEMU, ECOWAS, CEN-SAD and the MRU means that it has broader access to more expansive markets. Twenty-seven countries receive marginal benefits from their respective memberships, implying limited welfare gains. This is evident in the cases of Cameroon and Côte d'Ivoire, which show minimal increases of 0.2 and 0.4 to their overall scores despite their participation in two or more regional communities.
It is unsurprising that Ghana is among the five most desirable investment destinations regionally, considering its sturdy
Figure 21: RMB Top 10 investment destinations: regional vs. unadjusted (1 = poor, 10 = highly sought after) Regional
10
Unadjusted
8
6
4
2
Nigeria*
Zambia
Tunisia*
Botswana
Ghana*
Seychelles
South Africa*
Rwanda
Mauritius
0
Note: 1. Countries marked with a star appear within the top 10 rankings of both measures of attractiveness. Source: IMF, World Bank, WEF, Transparency International, Heritage Foundation, RMB Global Markets Data as at September 2013
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Regional integration continued
Table 4: Participation in RECs UMA Algeria
IGAD
ECCAS
SADC
s
s
ECOWAS
Angola Benin
CEN-SAD
WAEMU
s
s
s
s
s
s
MRU CEMAC CEPGL
EAC
IOC
s
Botswana Burkina Faso
SACU
s
s s
Burundi Cameroon
s
s
s
s s
Cape Verde
s s
CAR Chad
s
Comoros
s s s
s s s
s
Congo
s s
Côte d'Ivoire
s
Djibouti
s
DRC
s s s
s
Egypt
s s
s s
s
s
Equatorial Guinea
s
s s
Eritrea Ethiopia
s s
s
s
Gabon
s s s s s
Gambia Ghana Guinea Guinea-Bissau
s
Kenya
s s s s s
s s s s
s s
s
s s
s
Lesotho
s s
Liberia Libya
COMESA
s
s
s s s
s s
Madagascar Malawi
s
Mali
s s
s
s
Mauritania
s
Mauritius Morocco
s
s
s s
s s
Mozambique Namibia
s s s
Niger Nigeria
s s
s s
s
Rwanda
s
São Tomé and Príncipe
s
Senegal
s
Seychelles
s s
s s
s
Somalia
s
s s
Sierra Leone
s s s
s
s
s
South Africa
s
South Sudan
s
Sudan Tanzania Tunisia Uganda Zambia Zimbabwe
s s
Note: 1. Please refer to page 17 for a detailed explanation of RECs. Source: AEC, World Trade Organisation Data as at September 2013
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s s s
s s
s s
s
Togo
24
s s
s s
Swaziland
s s s
s s
M
A
R
K
E
T
S
I
Z
E
Chapter 3 Market size Together, South Africa, Egypt and Nigeria account for almost 50% of Africa's US$3.5 trillion economy.
African Guinea Brocade cloth, Nigeria
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Market size
Though South Africa remains the dominant force on the continent, five of the 10 largest economies in Africa hail from the north.
Market size Africa spans over 30 million km2. Though smaller than Asia, the region dwarfs its other continental peers. Home to over one billion inhabitants, the continent is as diverse as its people. This is evident in the economic size of each of its 54 countries, ranging from tiny islets like the Comoros and São Tomé and Príncipe to continental giants like Nigeria, Egypt and South Africa.
Who is dunking the biggest portion of Africa’s doughnut? Five of the 10 largest economies in Africa hail from the north of the continent. Together, Egypt, Algeria, Morocco, Tunisia and Libya make up a tad over one-third of Africa’s total market size of US$3.5 trillion at the end of 2012. South Africa, Nigeria and Angola tower above their SSA counterparts, contributing a further US$1.2 trillion of purchasing power collectively. East Africa’s contribution to Africa’s total GDP is negligible compared to the Southern and Western groupings. Yet, its growth potential outweighs most of its regional foils, with the exception of West Africa, which is awash with hydrocarbon wealth.
Africa’s biggest and brightest South Africa remains the dominant force on the continent. At US$608bn, it is 8% larger than Egypt, its closest rival in PPP terms4, and comprises 17% of Africa’s total purchasing power. However, the Southern African Goliath is plagued by high levels of unemployment and an unequal distribution of income, with the wealthiest 10% of the population earning 58% of the nation’s income.
Despite its formidable market size, South Africa’s growth prospects (discussed in Chapter 4) are uninspiring, implying a slower rate of expansion over the next few years. While the tertiary sector is the clear outperformer, it is heavily reliant on an increasingly pressured South African consumer. Moreover, structural constraints within the primary and secondary sectors continue to hamper growth. Like South Africa, Egypt is enriched by a sizeable economy, trailing South Africa by a mere US$48bn. With an estimated 82.5m people, it is the third most populous country in Africa. However, it is plagued by twin deficits: rising inflation and structural institutional challenges, which are likely to stall its rate of growth. The current political instability also undermines tourism and investment flows. Activity is expected to increase as political tensions subside. Despite being Africa’s most populous nation, with 164m people, Nigeria’s market size (US$488bn) is currently 75% of South Africa’s GDP. However, Nigeria could displace South Africa as the largest economy on the continent by 2014, if the rebasing of its GDP leads to an estimated 60% expansion of its economic size (similar to Ghana), thereby enhancing its attractiveness as an investment destination. One of the implications of the rebasing exercise is an improvement in Nigeria’s income classification (i.e. GNI/capita). Yet the statistical adjustment will do little to reduce income disparity. According to international standards, amendments to the System of National Accounts should be carried out every five years to incorporate variations in domestic output and production. However, revisions to Nigeria’s GDP measurement are almost 17 years overdue (refer to page 28). Together, South Africa, Egypt and Nigeria account for almost 50% of Africa’s GDP. Their supremacy is evident in Figure 22, making them difficult to ignore as part of an expansion strategy.
Note: 4. GDP can be converted into US dollar terms using either market exchange rates or purchasing power parity levels (PPP). In this document, we primarily use the latter as it avoids the volatility created by fluctuating exchange rates. Compared to using market exchange rates, the PPP method increases the reported size of all economies, especially for poorer countries. PPP GDP effectively measures the volume of goods and services that can be bought in an economy based on local rather than international prices. The Appendices and country snapshots provide GDP based on both PPP and market exchange rates but, unless otherwise stated, GDP refers to 2012 PPP GDP as calculated by the IMF.
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Market size continued
Rebasing: Baking a bigger pie GDP growth is ordinarily presented at constant prices. Over time, the base year and structure of the economy are used to calculate the change in real economic activity which can become less aligned to changes in a country’s price structure, leading to exaggerations in the rate of growth. To avoid discrepancies, countries periodically rebase their GDP. The reclassification generally takes place every five years in line with the International System of National Accounts to ensure that aggregates of GDP reflect the evolution of prices in an economy. This has been largely overlooked in Africa, with 19 of 35 countries surveyed by the African Journal of Statistics reporting that their base year is more than 10 years old.
in per capita income, elevating Ghana to lower-middle income status. Prior to the revision, the GSA found evidence that suggests growth had been severely underestimated. This was apparent in Ghana’s fiscal indicators, such as tax/GDP and expenditure/ GDP, which were far higher than most of its SSA peers. Taking into account surveys detailing various economic activities conducted in and around the reference year, the GSA was able to improve its coverage of the national accounts. Aside from an overall expansion in all sectors of the economy, Ghana underwent a shift in the relative importance of its industries, with services turning out to be the primary contributor to GDP growth. In truth, the value added by the sector’s sub-components increased five-fold from 2006.
While upward revisions to GDP arising from changes to base years are common in developed countries, they have drawn widespread attention in SSA. Ghana is the most notable example, attracting comments from scholars and the international community alike after its statistical agency (the GSA) announced in November 2010 that its annual estimate of GDP had virtually doubled. This implied an increase of 60%
Ghana’s rebasing exercise is quite unique in that it was well documented and widely publicised. A similar revision is underway in Nigeria but requires approval by the World Bank. Liberia and Burundi were unsuccessful in their attempts, failing to secure endorsements from the World Bank or IMF.
Moving on up
citizen participation, strengthening government accountability and increasing non-hydrocarbon growth.
Algeria, Morocco, Angola, Ethiopia and Tunisia, while not as expansive as South Africa, each have purchasing power greater than US$100bn. Algeria accounts for 8% of Africa’s GDP. It has grown consistently over the last decade owing to judicious macroeconomic policies. Economic wealth is mainly derived from hydrocarbon earnings, which have contributed to its strong fiscal position. However, economic activity is fairly undiversified, with 98% of exports and more than 66% of budgetary revenues still derived from the hydrocarbon sector. Like many of its North African counterparts, Algeria is vulnerable to social unrest as a large percentage of its youth are unemployed. The government has introduced several political and economic initiatives to improve Algeria’s business climate. These measures are aimed specifically at bolstering
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Morocco, Africa’s fifth biggest economy, has recorded favourable growth performances over the last 10 years. The IMF attributes Morocco’s success to sound macroeconomic and political reforms, which have helped the government contend with the slowdown in Europe (its main trading partner) and persistent social demands that emerged during the Arab Spring. Nevertheless, long-term economic growth is contingent on the implementation of extensive structural and fiscal reforms, aimed at improving productivity and the overall business environment. Angola’s success is well known — a decade of rapid oilinspired growth has seen its economic size grow from slightly over US$32bn in 2000 to US$128bn in 2012 at current international dollar rates.
With an expected purchasing power of US$138bn at the end of 2013, it is now the third largest economy in SSA and the sixth in Africa. Yet it remains in the shadows of its oilexporting rivals adding a meagre 3.1% to Africa’s total market size. Despite being Africa’s second largest producer of crude oil with an estimated 12bn barrels of reserves, the country’s economic structure is undiversified. Oil still accounts for nearly 80% of government revenue, 90% of exports and 47% of GDP, exposing the economy to oil price shocks that could eat away at its market size. Coming in at number seven is Ethiopia, which has nudged ahead of Tunisia owing to strong export growth and investments in public enterprises. This comes as a surprise to many whose image of the country was framed by the droughts and food aid of the 1980s and early 1990s. Ethiopia’s economy has seen a stellar performance over the past decade, growing at 8.4% per annum, second only to Angola and Sierra Leone. Until recently the economy was largely closed to foreign investors but the government has rapidly been opening it up. Investment opportunities have been bolstered by regulatory and administrative reforms such
South Africa
Egypt
Nigeria
Angola
Other
Algeria
17%
36%
16%
4%
Prior to the political and social upheaval of 2011, Tunisia’s market size expanded from US$50bn to US$100bn in a matter of 10 years. Despite slipping below Ethiopia in terms of market size, Tunisia remains resilient. A stabilisation in its social climate has enabled a moderate recovery in production growth. Yet activity continues to underperform as a dubious political landscape slows the pace of economic reform weakening recovery efforts. Its prospects have been dampened by Europe’s stagnation, which has tainted external demand. Restoring confidence is crucial if Tunisia is to increase its market size by 40% by 2018 per the IMF's expectation. After a severe contraction in 2011, which more than halved the size of its GDP, Libya is set to crack the elusive US$100bn mark by 2014. The IMF anticipates double-digit growth over the next three years, though its forecast is highly correlated to hydrocarbon demand, which is set to slow by 2018. This could taper Libya’s market size as non-hydrocarbon activity comprises only 22% of GDP.
Figure 22: Who’s dunking the biggest portion of Africa’s doughnut?
Morocco
as reducing internal inefficiencies to facilitate cross-border trade.
Stacking the remaining building blocks There are eight other economies in Africa worth noting — three in West Africa: Ghana, Cameroon and Côte d'Ivoire; four in East Africa: Kenya, Tanzania, Uganda and Sudan; and one in Southern Africa: Botswana. Individually, these economies pale in comparison to South Africa but, combined, their total market size of US$524bn is slightly smaller than Egypt’s. Of the remaining countries, 10 are larger than US$20bn, eight between US$10bn and US$20bn, and 17 account for only 2% of Africa’s total market size.
14% 5%
8%
Source: IMF, RMB Global Markets Data as at September 2013
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Market size continued
Figure 24: Economic versus geographic size
Figure 23: Largest economies in Africa South Africa
Egypt
Nigeria
Morocco
Angola Noteworthy
Ethiopia Other
Libya
Algeria Tunisia
US$ trillion 3.6
8 5
4
2
9
11 10
3
14
7
15 12 13
3.0
6
2.4 1.8 1.2
1
0.6 0.0 2012
2013
“Economic” size does matter Geographical size does not necessarily correspond with economic size. One can easily forget that Uganda, which is surrounded by some of the biggest countries on the continent (Figure 24), has the ninth largest population and the fifteenth largest economy in Africa. Population densities remain high further down the rift valleys, with Rwanda and Burundi also having economies well out of proportion to their geographical size. In West Africa, by contrast, a combination of low-income levels and low population densities mean that many countries, while geographically large, are small in economic size. Rwanda actually has a bigger economy than Niger.
PPP (people and their purchasing power) In addition to PPP, the size, growth and mobility of a population are important considerations for a business looking to establish in Africa. Various studies have shown that
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Note: 1. Size of the bubble represents the size of the economy. Source: IMF, RMB Global Markets Data as at September 2013
economic size is a key determinant of horizontal FDI, which is the replication of home-based activities by multinational firms in a host country. Sizeable markets with favourable growth prospects are perceived as more profitable as they can support the efficient utilisation of resources and economies of scale. The potential to attract FDI is also bolstered by higher levels of GDP/capita, which bodes well for countries offering both size and affluence. This is characteristic of South Africa, Algeria, Angola and Tunisia. It is remarkable to note that four of the biggest economies in Africa (Nigeria, Egypt, South Africa and Algeria) are among the 10 most densely populated countries in the region. If we add a wealth component (i.e. GDP/capita) to population and economic size, we find that the same countries are ranked within the top 20 wealthiest nations (Figure 25).
Figure 25: Comparing size, population and absolute income 200 Nigeria
Population (m)
160 120 Egypt 80 Sudan
40
South Africa
Algeria
Ghana Morocco
Angola
0 1,0 00
0
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
GDP/ capita (US$bn) Note:1. Size of the bubble represents the size of the economy. 2. Graph excludes countries with populations less than 20m and a GDP/capita lower than US$2,900. Source: IMF, RMB Global Markets Data as at September 2013
Regionally, Southern African residents are among the wealthiest in Africa — Botswana, Mauritius, South Africa and Namibia are ranked in the top seven. Smaller oil-producing countries like Equatorial Guinea and Gabon have an average GDP/capita of US$17,531. Bringing up the rear is Malawi, which has overtaken the DRC as the poorest country in the world, with a GDP/capita of US$237. Malawi, the DRC, Burundi, Niger, Madagascar, CAR, Liberia, Ethiopia, the Gambia and Guinea are the 10 poorest countries in the world with an average GDP/capita of US$402 as at the end of 2013. Income per capita does not capture the true state of human welfare across Africa, which relates to the manner in which a country’s wealth is spent. The multi-faceted nature of human welfare makes it difficult to assess using one gauge.
The Human Development Index (HDI), which weighs life expectancy, educational achievement and income, is considered by many commentators to be a preferred measure of wellbeing. Using these statistics as a barometer, we find that even though the Seychelles and Gabon have similar levels of GDP/capita, the island economy boasts a much greater level of human development than its West African counterpart (0.8 versus 0.6). The same holds true for Algeria and Namibia (Figure 26). To account for inequalities in the Index, the UN publishes a series, the Inequality-Adjusted HDI (IHDI), adjusting for variations in the distribution of successes in each of the three components. The IHDI will be equal to the HDI value when there is no inequality, but falls below the HDI value as inequality rises. This is evident in wealthier economies like Mauritius, Gabon, Egypt, Namibia and Morocco.
Figure 26: Contrasting HDI scores with GDP/capita of Africa’s 20 wealthiest economies 25,000 Equatorial Guinea GDP/ capita (US$bn)
20,000
15,000
Libya Gabon
10,000
Botswana Angola
5,000
Namibia
Seychelles
Mauritius South Africa Tunisia Algeria Egypt
0 0.0
0.2
0.4
0.6
0.8
1.0
Human Development Index (score 0 - 1) - where 1 is best Source: UN, RMB Global Markets Data as at September 2013
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Chapter 4 Market growth Seven of the world’s top 10 fastest growing economies over the next six years will emerge from Africa.
Kanga cloth, Zanzibar
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T
H
Market growth
The continent is still looked upon with scepticism due to its reliance on resources, yet its emerging middle class continues to bolster consumption and private investment supporting robust levels of domestic demand.
Once touted as the hopeless continent, Africa has grown in economic size and stature since 2002, trebling in size. Africa’s rapid expansion over the last decade is a sound justification for investment, especially when nominal growth rates are taken as a measure of commercial return. Seven of the world’s top 10 fastest growing economies over the next six years will emerge from Africa (Figure 27). The region is forecast to grow by 5.8% in 2013. The continent’s emerging middle
class continues to bolster consumption and private investment especially in the service sector, supporting robust levels of domestic demand. Strong levels of growth are also evident on the supply-side. While oil and mining activities continue to enhance the growth prospects of countries which are richly endowed with mineral resources, non-resource sectors are also expanding, although from a low base.
Figure 27: Top 10 fastest growing countries (2013 – 2018) % 10.0
Average growth between 2000 and 2012
Average growth between 2013 and 2018
8.0
6.0
4.0
2.0
Tanzania
Nigeria
Rwanda
Cambodia
Côte d'Ivoire
Zambia
Mozambique
China
Iraq
Guinea
0.0
Note: 1. Excludes countries emerging from post-war conflict or political crisis and economies with populations of less than 10m. Source: IMF, RMB Global Markets Data as at September 2013
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Market growth continued
To agree, or not to agree that is the question: Consensus views There is widespread consensus that certain economies will grow at pace. This is borne out by the data in Table A5 (Appendices), which is a comparison of average economic growth forecasts over the next six years also illustrated in Figure 28. A standard deviation of less than one implies a slight difference in estimates provided by the IMF, Business Monitor International (BMI) and IHS Global Insight. According
to the three agencies, economic output in Uganda, Zambia, Rwanda, Kenya, the DRC, Tanzania, CAR and Liberia should equal or surpass 6% over the next six years. Interestingly, mineral exploration and/or production are underway in each of these economies, underpinning investment and growth. Countries of sizeable magnitude, which are subject to a sharp contrast in views (i.e. a standard deviation greater than 2) are Ethiopia and São Tomé and Príncipe. This is mainly due to divergent outlooks on oil production and external debt position expectations.
Figure 28: Long-term GDP forecasts (average from IMF, BMI and IHS Global Insight) %
Average
Standard deviation
15 12 9 6
0
Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde CAR Chad Comoros Congo Côte d'Ivoire Djibouti DRC Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea-Bissau Kenya Lesotho Liberia Libya Madagascar Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda São Tomé and Príncipe Senegal Seychelles Sierra Leone Somalia South Africa South Sudan Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe
3
Note: 1. Bars in green indicate divergent views, the higher the standard deviation, the less aligned the forecasts. Source: IMF, IHS Global Insight, RMB Global Markets Data as at September 2013
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Africa in a global context Global output should increase by 4.1% over the next five years. While Emerging Asia remains the primary engine of growth, exceeding 7%, its prospects have weakened slightly. The sovereign debt crisis has had far-reaching macroeconomic consequences for the Eurozone, which is forecast to grow by a mere 1%, crippled by weak economic confidence and meagre domestic demand. Africa will develop at a much faster rate than advanced economies over the next five years. Aside from Southern Africa, which is anticipated to perform less strongly due to its greater exposure to global events, growth across the other regions will outpace Latin America’s expansion. This is impressive given the differences in market size. Figure 29 illustrates the IMF’s growth forecasts for Africa between 2013 and 2018.
t 5IFNPTUQPQVMPVTDPVOUSZJO"GSJDB /JHFSJB TIPVME experience rapid growth of 7.0%. Other economies that are expected to grow at pace include South Sudan (21.2%), São Tomé and Príncipe (12.5%), Guinea (9.7%), Sierra Leone (9.4%), Mauritania (8.7%), the Congo (8.2%), Mozambique (8.0%), Zambia (7.8%), Côte d’Ivoire (7.7%) and Rwanda (7.0%). This is mostly a reflection of their high commodity endowments. t 1PTUDSJTJTFDPOPNJFTTVDIBT-JCFSJB BOE-JCZB (9.6%) are expected to perform extraordinarily well. This is in line with historical evidence that shows that countries which have suffered a crisis can bounce back rapidly. Liberia, however, is rather small in terms of market size to be an obvious investment destination.
Africa, a stage where regions must play a part Highlights t 5XFMWF"GSJDBODPVOUSJFTBSFFYQFDUFEUPHSPXBUBSBUFPG 7% or higher between 2013 and 2018, suggesting a doubling of their economy's size within 10 years. This is two more than estimated in last year’s publication. t (SPXUIJTFYQFDUFEUPCFXJEFTQSFBE XJUIPG countries (two-thirds of the continent) set to grow more than 5.0%. t 0GUIFGJWFNPTUBUUSBDUJWFJOWFTUNFOUEFTUJOBUJPOTJO Africa, only Ghana and Nigeria are forecast to grow by more than 6.0%. t 4PVUI"GSJDB BHJBOUJOUFSNTPGFDPOPNJDTJ[F JTMJLFMZ to register sluggish growth (3.2% according to the IMF’s estimates) in comparison to Nigeria and Egypt, offering substantial market size but not exceptionally quick market growth.
Even though Africa is forecast to perform very well, growth prospects differ across the continent. This is apparent when comparing regional growth rates for the next five years. Barring Central Africa, Southern Africa is clearly the laggard, growing at 1.9% slower than West Africa. The difference could be attributed to the number of countries within each region, eight in Southern Africa versus 21 in the west of the continent. Yet, Southern Africa is home to Africa’s largest economy (South Africa), which is almost 98% of West Africa’s total market size. North Africa and East Africa are likely to register growth rates in excess of 6% between 2013 and 2018, while Central Africa should slow to 3.2% from 3.9% registered over the last 12 years (Figure 30). We identify the economies expected to perform well or vastly underperform in each region.
Figure 29: Economic growth (2013 – 2018)
< 0% - 4% growth
4% - 7% growth
7% - 10% growth
> 10% growth
Source: IMF, RMB Global Markets Data as at September 2013 RMB Global Markets
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Market growth continued
Figure 30: Average regional growth levels
2000 - 2012
% 7.5
2013 - 2018
6.0
4.5
3.0
1.5
0.0 North Africa
East Africa
Central Africa
West Africa
Southern Africa
Source: IMF, RMB Global Markets Data as at September 2013
West Africa Of the 21 countries in West Africa, São Tomé and Príncipe, Guinea, Sierra Leone, Mauritania, Côte d'Ivoire and Nigeria are expected to grow at or greater than 7% over the forecast period. São Tomé and Príncipe could prove to be a stalwart in West Africa if it is successful in harnessing oil deposits in its Exclusive Economic Zone and the Joint Development Zone shared with Nigeria. There is a considerable debate among economic agencies regarding São Tomé and Príncipe's medium-term growth outlook based on its ability to galvanise the commercial viability of its offshore oil reserves. Encouragingly, Total has laid out plans to invest US$200m in the drilling of a test well from its existing oil rig in Nigerian waters. Moreover, recent hydrocarbon discoveries in surrounding waters offer favourable investment opportunities, though larger oil consortiums have shied away due to political uncertainty. Guinea, Côte d'Ivoire and Nigeria are estimated to be among the top 10 fastest growing economies in the world. Despite their expeditious growth rates, Mauritania and Sierra Leone fall short due to their negligible population size that is less than 10m each. The implementation of key reforms by the Guinean government aimed at improving its business climate, rehabilitating the energy sector and refining governance of the mining sector facilitated the completion of the Highly Note: 5. According the WEF.
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Indebted Poor Countries initiative administered by the IMF. Although viewed as uncompetitive5, Guinea holds significant mining potential, which, if unearthed, could foster greater economic diversification and more sustainable levels of economic growth. However, the IMF’s forecast growth rates for Guinea are exposed to several downside risks, notably renewed political instability and a weak external environment, which could weigh on demand for bauxite and alumina. Production growth is centred on fresh mining exploration and a strong recovery in alumina output to offset a potential moderation in commodity prices. On the demand-side, growth will be largely supported by government consumption, which should remain robust as the administration strives to improve living standards despite fiscal consolidation. Sierra Leone and Mauritania’s appeal is deep-rooted in their respective mining sectors. The primary impetus for economic expansion in Sierra Leone is iron ore production. Sustained investment by UK-based firms is expected to fortify growth in the industry and support robust growth in the services sector. Development of non-iron ore activities will be primarily driven by the government through investment in basic infrastructure, healthcare and education. Perhaps, the gravest challenges to strong economic growth are chronic electricity shortages, infrastructure constraints and variable weather conditions which impair agricultural production.
Mauritania is more exposed to a downturn in international commodities prices given its dependence on non-ferrous metals and oil. Notwithstanding a slump in commodities prices, Mauritania should maintain a robust level of economic growth supported by sustained offshore investment in mining and oil exploration. Growing confidence in Mauritania’s regulatory environment should encourage the service operators to expand their activities, underscoring production growth. A surge in oil revenues in Equatorial Guinea coupled with renewed activity in public investment was behind a recovery in economic growth in 2011. Growth is expected to wane in 2013, owing to volatility in the international oil price. The country is tremendously reliant on energy and has made little inroads into diversification of its economic activities. East Africa East Africa is bursting with growth-laden economies. Each of the members of the EAC — Kenya, Tanzania, Uganda, Burundi and Rwanda — are expected to experience rapid growth. Tanzania, Uganda and Kenya’s prospects have been bolstered by the discovery of oil and gas. Growth could exceed current expectations should production come online in the next five years. Despite planned fiscal consolidation, Rwanda’s outlook remains strong due to a projected recovery in the services sector, bigger investments in agricultural infrastructure and a greater allocation of capital to the government’s strategic investment programmes. Eight of the 17 countries in the region (Mozambique, Sudan, Rwanda, Tanzania, Uganda, Ethiopia, Malawi and Kenya) are forecast to grow at an average rate 6.8% between 2013 and 2018. Each member of the EAC should reach between 5.2% and 7.0% growth over the forecast period. At first glance, South Sudan appears to be the region’s star performer, growing at pace over the next six years. Oil is the lifeblood of the economy, implying sizeable variations in GDP. This was evident in 2012 when real output contracted by 53% after production ceased in the first half of the year. The economy is expected to make a sterling recovery in 2013 and 2014, averaging real GDP rates of 40%, provided that there are no further protracted shutdowns of oil exports. However, the impetus is likely to fade by 2015 as oil production begins to normalise. Balance of payments funding will be largely derived from grants and FDI, though donors’ ongoing concerns about corruption could prove challenging. Moreover, renewed ethnic conflicts would certainly deter investment flows. Rwanda is championing the East African cause through prudent macroeconomic reforms. Its main objective, outlined in its Vision 2020 programme, is attaining middle-income status and reducing its poverty rate to below 30% of the population by 2017/18. This is a tall order, requiring annual average growth of 11.5%. The IMF puts forward a more
palatable level of 7%, which is congruent with Rwanda’s prevailing domestic and external environment characterised by a gradual decline in the public investment-to-GDP ratio due to an anticipated decline in aid and a measured increase in domestic resource mobilisation. The more affluent island economies of Mauritius and the Seychelles — where Mauritius also offers one of the best operating environments in Africa — should maintain steady growth rates of 5%. However, a tightening of consumers’ belts in developed economies could lessen the tourism sector’s contribution to growth in each economy. Eritrea brings up the rear, averaging a mere 1.0% over the last 12 years. Its economic performance is likely to remain lacklustre over the forecast period. The diversion of resources to the military, negligible foreign investment (beyond the mining sector) and the government’s economic mismanagement will continue to undermine Eritrea’s economic performance. North Africa The average growth rate for North Africa reflects signs of recovery, particularly in Libya, which has been plagued by social uprisings and political discontent since 2011, resulting in massive economic disruptions. The anticipated rebound in growth is premised on the continued expansion of the hydrocarbon sector and a revival in FDI. Though recuperating, oil production is likely to remain volatile due to labour and operational constraints. Sudan is at the other end of North Africa’s growth spectrum as it contends with the loss of oil and population following South Sudan’s secession in 2012. Though modest in terms of its contribution to GDP, the oil sector provides a vast majority of Sudan’s foreign exchange receipts and budget revenues. The tenuous political situation continues to inhibit the implementation of an oil sharing agreement that is contingent on issues such as security. Non-oil GDP is unlikely to compensate for lower oil production due to a reduction in domestic absorption. Southern Africa Despite being at the forefront of our investment rankings, South Africa trails its larger African peers, recording an uninspiring average growth rate of 1.9% over the last four years (2009 – 2012). Confidence remains depressed, evident in a decline in business confidence and a moderation in private sector fixed investment growth in 2Q13. Concerns about labour market developments and political uncertainty continue to weigh on the private sector’s willingness to invest. This unease will also translate into a moderation in employment growth at a time when households are already showing strain, as seen in slowing retail sales growth and rising bad debts.
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Market growth continued
All that glitters is not gold Despite seven of the world’s 10 fastest growing economies emanating from Africa, the continent is still looked upon with reluctance due to its reliance on resources. Volatility in both the volume and prices of commodities has brewed uncertainty over whether Africa’s recent growth spurt is sustainable. Fluctuations in GDP growth are generally precipitated by dependence on natural resources, a highly concentrated export basket focused on primary commodities, and poorly developed financial systems. These aspects are more apparent in smaller landlocked economies. A downturn in the commodities spectrum presents a primary economic risk. This is exacerbated by fears of a slowdown in the Chinese economy, reflected by an easing in growth in gross fixed investment as a contribution to its GDP over the last few years.
we find that oil rich economies are most susceptible to commodity price volatility. t 0GBMMUIFPJMFYQPSUJOHOBUJPOT "OHPMBIBTUIFIJHIFTU export concentration ratio followed by Algeria, Chad, Equatorial Guinea, Libya and Nigeria. t &ODPVSBHJOHMZ $IJOFTFEFNBOEGPSPJMJTMPXDPNQBSFEUP its base and precious metal requirements. t ;BNCJBIBTBIJHIFYQPSUDPODFOUSBUJPOSBUJPGPSDPQQFSPG 0.73 and is therefore more susceptible to a severe economic downturn in China. t "DPVOUSZMJLF,FOZB XIPTFCJHHFTUFYQPSUJTBHSJDVMUVSBM goods such as tea and coffee, has a low dependence on base metals and energy exports, which bodes well for its medium-term growth outlook. t .PSPDDP .BEBHBTDBSBOE4FOFHBMIBWFUIFMPXFTU export concentrations in Africa due to either a welldiversified economy or having an almost non-existent export base. The low ratios make them less vulnerable to a downturn in global commodity prices.
When comparing export concentration ratios6 across Africa (where 1 is a highly concentrated export portfolio in which one or two commodities account for the bulk of the export mix and 0 reflects the least concentrated export portfolio),
Figure 31: China's share of global commodity demand % 60
Consumption share of global production
Import share of global trade
48 36 24 12
Corn
Natural gas
Meat
Seafood
Wheat
Crude oil
Coal
Rice
Aluminium
Copper
Cotton
Soybeans
0
Source: IMF Data as at September 2013
Where x is the value of total exports of product i, X is the value of all exported products and n is the number of products. ECR values range from 0 to 1.
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1–
( Xx
i
2
(
Note: 6. The ratio as defined by the UNCTAD is a measure of the degree of market concentration. It is calculated as: Eni = 1
–
1/n
1/n
on foreign aid. Ninty percent of employment in Africa is generated by the private sector, but it is largely informal due to bureaucracy, inadequate access to financing, weak infrastructure and education systems that are unable to cater to the needs of the labour market. The introduction of structural changes and regulatory reform in certain economies has fostered business-friendly environments, resulting in enhanced competition, trade and investment over the last decade. A lessening in income disparity across certain regions is testament to improved physical capital and education, which are important determinants of GDP/capita. Government expenditure is more pronounced in oil-exporting countries, overshadowing the role of the private sector.
How sustainable is Africa's growth? Africa’s trend growth of 3.4% between 2000 and 2012 is likely to be surpassed over the next six years should total factor productivity continue to improve. This is premised on a stable increase in labour, capital and technology. However, differences in the rate of technological advancement between countries will result in variations in growth rates. The diversification of economic activities, particularly into technologically progressive industries such as electronics, will enhance productivity in certain economies, supporting stronger levels of growth. Africa’s recent growth success is also attributed to the level of institutional quality that relates to the rule of law — that is the extent to which there is confidence in and adherence to the rules of society. In a paper on the sustainability of Africa’s recent growth, the authors7 contend that countries which grew at pace8 between 1996 and 2007 were characterised by solid institutions which grew in stature throughout the sample period and helped economies weather the effects of the 2008 financial crisis.
Despite a slew of measures to enact macroeconomic stability, some African economies are still plagued by inadequate investment and sluggish policy reforms resulting in output volatility, which is negative for consumption and per capita growth. The figures in Table A6 (Appendices) and illustrated in Figure 32 show that 14 economies have investment-toGDP ratios above 30%, the range in which most rapidly growing economies fall. Eighteen economies, including three of the largest in Africa (Angola, Egypt and South Africa), are below 20%, revealing a lack of investment in new production capacity and the necessary infrastructure to derive future growth.
While household consumption dominates aggregate demand growth in Africa, ranging from 98% of GDP in Swaziland to 12.2% in the Congo, the private sector is increasingly considered to be the primary engine of growth as it enables domestic revenues to increase and reduces dependence
Figure 32: Strong growth but investment-to-GDP lagging 24.0
Sierra Leone
GDP growth (%)
18.0
Côte d’lvoire
12.0
Nigeria
Niger Gambia
Angola
Mozambique
6.0 Chad
Equatorial Guinea
Morocco Algeria
Egypt 0.0 Benin Sudan -6.0 0
10
20
30
40
50
60
Investment-to-GDP ratio (%) Note: 1. Circle sizes are representative of the size of the economy in US$bn. Source: IMF Data as at September 2013 Note: 7. Is Africa's recent growth sustainable?, Thomas Barnebeck Andersen and Peter Sandholt Jensen, University of Southern Denmark, April 2013. 8. Above a median of 2.6% over the period 1996 to 2007.
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O P E R AT I N G
E N V I R O N M E N T
Chapter 5 Operating environment Potential investors need to be cognisant of the various risks ks (including political, regulatory and operational) involved in doing business in Africa and benchmark these appropriately against the attractive GDP growth profiles. ofiles.
Egyptian cotton, Egypt
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Operating environment
We have constructed a composite operating environment index by combining four main independent global assessments on operational issues.
Potential investors need to be cognisant of the various risks involved in doing business in Africa (including political, regulatory and operational) and benchmark these appropriately against the attractive GDP growth profiles to formulate a more balanced assessment of potential investment opportunities in Africa.
Our operating environment methodology To assess the operating environment, we constructed a composite operating environment index by combining the four main independent global assessments on operational issues: The World Bank’s Doing Business Report 2013, Transparency International’s Corruption Perceptions Index 2012, the Heritage Foundation’s Index of Economic Freedom 2013 and the WEF’s Global Competitiveness Report 2012/13. The Corruption Perceptions Index and The Global Competitiveness Report are released late in the calendar year, hence we have used the score from the previous year’s report.
These four reports combine both objective and subjective assessments of the operating environment across a wide variety of areas. There are other reports that could have been included, but we have chosen these given their prominence, wide coverage and lengthy time series. To combine the indices, we adjusted each of their scales so that the best possible score is 10 and the worst possible score is 1. Table A3 (Appendices) provides the full listing of the composite index scores and the four components. The data is summarised in Figure 33 where the countries are coloured according to groupings of how good their operating environments are.
Figure 33: RMB’s composite index of Africa’s operating environment Good
Moderately good
Average
Poor
Very poor
Sources: World Bank, WEF, Heritage Foundation, Transparency International, RMB Global Markets Data as at September 2013
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Operating environment continued
t 'SPNBDPVOUSZTQFDJGJDQFSTQFDUJWF 4VEBOTQFSGPSNBODF deteriorated the most over the past year mainly due to the political uncertainties related to the formation of South Sudan.
Highlights of our latest scorings t 5IFPQFSBUJOHFOWJSPONFOUSFNBJOTDIBMMFOHJOHBDSPTT most of the continent. Only seven African countries are rated better than average; none are rated very good; and 12 are rated as very poor. t 5IFCFTUPQFSBUJOHFOWJSPONFOUTBSF.BVSJUJVT Botswana, and Rwanda, while South Africa, Tunisia, Ghana and Namibia are seen as moderately good.
t 8IJMFUIF4FZDIFMMFTIBTJNQSPWFEUIFNPTUTJODFPVS previous publication, Rwanda remains the best performing economy of the past decade. According to the 2012/13 Global Competitiveness Report, Rwanda benefits from strong and relatively well-functioning institutions, with very low levels of corruption due to the government’s no-tolerance policy and a good security environment. Its labour market is efficient, its financial markets are relatively well developed, and it is characterised by a capacity for innovation that is quite good for a country at its stage of development.
t 8IFODPNQBSFEUPUIF#3*$4DPVOUSJFT UIFUPQ performing African countries are rated higher than China and much better than Brazil, Russia and India. No African country, however, is close to the scores of the world’s leading industrial nations. t 5IFGJWFXPSTUQFSGPSNJOHDPVOUSJFTBSF4PNBMJB Sudan, the DRC, Eritrea, and the Congo.
Most problematic factors for doing business in Africa
We assessed the performance of each country over the past year and the past decade to see which were the best and worst performers over that period.
The overall make-up of Africa’s most problematic factors remain very similar to last year's. Access to financing, corruption and inadequate infrastructure are still the top three barriers in SSA, according to the WEF (Figure 34).
t *OTVNNBSZ DPVOUSJFTPQFSBUJOHFOWJSPONFOUT improved over the past year, while 26 improved over the past decade. Sixteen countries worsened from last year’s ranking, while 21 deteriorated over the past 10 years.
Figure 34: Most problematic factors for doing business in SSA 20
% of respondents
16 12 8 4
Most Source: WEF Data as at September 2013
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RMB Global Markets
Poor public health
Government instability
FX regulations
Crime and theft
Restrictive labour regulations
Tax regulation
Policy instability
Poor work ethic
Inflation
Uneducated workforce
Inefficient govt bureaucracy
Tax rates
Inadequate infrastructure
Corruption
Access to financing
0
Least
We do not ignore that the situation risks causing persistent civil disorder and could deter tourists and foreign business from entering the country. And it will most certainly discourage funding opportunities for businesses wanting to enter. We have therefore illustrated a country’s attractiveness according to our RMB composite index and compared it to a country’s sovereign risk rating (Figure 35). Countries in the upper right-hand quadrant have attractive investment scores, like Egypt, but have below investment grade sovereign ratings, which could translate into difficulty when attempting to access financing.
Access to financing and exchange rate issues Access to financing is the most problematic factor in most African countries. Further details on the different means of accessing funds in local African markets, as well as the complexities of transacting in a foreign currency, are discussed in Chapter 6. Emphasis is placed on currency risk: aside from volatility, which is distinctive of units such as the South African rand, African currencies are characterised by other risks which may stem from frequent changes in domestic liquidity conditions, inflation differentials with primary trading partners, or perhaps foreign exchange controls. Though varied, these risks are largely determined by the prevailing exchange rate regime.
Mitigating some of Africa’s operating environment risks: Mergers and acquisitions
Other key factors playing a part in the difficulty of accessing finance are the credit and political risk factors associated with each country. Although our rankings point to attractive investment environments filled with opportunity, we highlight that gaining funding to invest in certain countries might prove problematic. Two good examples here are Egypt and Libya: although they are well ranked when we apply our research methodology, these countries are currently facing political upheaval. In Egypt, for example, the sovereign rating has been downgraded significantly over the past two years due to the uncertainties surrounding the political environment.
We often advise our clients to get good local partners in Africa, especially as most African countries have difficult business environments — mergers and acquisitions (M&A) are a prime example. According to Thomson Reuters, the value of M&A transactions involving SSA targets reached US$25bn in 2012, an 18% rise from 2011 (Figure 36). It is not only Africa’s strong growth performance driving the increasing M&A activity in Africa, but also the privatisation programmes by some governments.
Investment score (1 = poor, 10 = good)
Figure 35: Deterioration in Egypt’s sovereign credit ratings between March and September 2013
10.0 7.5
US UK
China
Brazil Russia SA
5.0
Egypt 1Q13
India Nigeria
Botswana
Ghana
Angola
2.5
Egypt (current)
Benin
Cape Verde
0 AA+
AA-
A
BBB+
BBB-
BB
B+
B-
CCC
CC
Sovereign credit rating Source: Standard & Poor’s, RMB Global Markets Data as at September 2013
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Operating environment continued
Figure 36: SSA targeted M&A US$bn 50 40 30 20 10 0 2000
2002
2004
2006
2008
2010
2012
Source: Thomson Reuters Data as at September 2013
Almost half of the activity involved a South African target, while 27.6% occurred in Nigeria and 7.2% in the DRC (Figure 37). South Africa and the UK were the most acquisitive nations during 2012, accounting for 38.7% and 21.8% of SSA M&A targets (Figure 38).
Figure 37: Top five most targeted SSA nations South Africa (47.8%)
Nigeria (27.6%)
Zimbabwe (3.6%)
Mozambique (2.7%)
Figure 38: Top five most acquisitive nations of SSA targets DRC (7.2%)
South Africa (38.7%)
UK (21.8%)
Nigeria (8.1%)
Canada (8.1%)
China (10.8%)
Canada
Mozambique
South Africa
Zimbabwe Nigeria DRC
South Africa
China
Nigeria UK Source: Thomson Reuters Data as at September 2013
Source: Thomson Reuters Data as at September 2013
The materials and energy and power sectors were the most active, together accounting for 63% of activity in 2012 (Figure 39). Given the expected continued demand for primary resources from China and India, these sectors are anticipated to continue to drive M&A activity in Africa. The financial services sector has also received a large amount of attention, but this has mainly been driven by regulatory
changes, specifically in the Nigerian market after the banking sector consolidation. The telecoms sector has demonstrated meaningful levels of activity in the past five years, while the consumer staples sector’s contribution has been improving due to investors’ growing interest in the consumer story of SSA specifically.
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Figure 39: Top SSA target industry breakdown 2011
US$bn
8
2012
9.7
10 7.6
6.1 6 4.5 3.7
4
3.4
2 0.8
1.3
1.3
1.2
0 Materials
Energy and power
Real estate
Financials
Telecommunications
Source: Thomson Reuters Data as at September 2013
A pragmatic approach to M&A
Local ownership requirements
Understanding the various challenges of doing business in SSA, together with correctly assessing investment opportunities from the outset, can greatly enhance the likelihood of success and enable investors to better manage their processes so as to capitalise on the wealth of opportunities offered by the continent. Some of RMB’s key considerations for investing in SSA and potential mechanisms to manage these challenges are discussed in greater detail below.
Many African countries have adopted or are in the process of adopting citizen empowerment laws, which typically require inter alia a minimum percentage of local shareholder ownership. As discussed above, a strong and appropriatelyaligned partnership can help to facilitate business setup, an understanding of local markets and the introduction of strategic relationships, which may prove to be crucial to business success and, at the same time, satisfy all or part of the local ownership requirements. Local shareholders are often unable to fund the initial acquisition consideration or ongoing capital expenditure requirements. Consequently, the transaction is likely to need to be structured to ensure equitable economics and the meaningful participation of local partners over time, with structured funding solutions that ensure that economic returns are based on funding contribution and not solely on shareholding.
Achieving control Many businesses are family-owned or controlled and it can be difficult for a foreign shareholder to acquire outright control. Consequently, transactions often need to be structured on a phased-in basis that will enable increasing exposure to the underlying business over time, as the relationship develops. An upfront agreement on a clear path to control for the incoming shareholder, indicating timelines and appropriate mechanisms to deal with issues such as pricing, can help to ensure that the ultimate objectives of both parties are achieved. Choosing the right local partners This is important in most transactions but is especially critical when the partner is relied on to drive local relationships and is likely to have a longer-term involvement in the business. The right partner can help a new entrant in the market to understand local culture, the business environment and facilitate necessary introductions.
Local listing requirements In an effort to develop in-country stock exchanges, many regulators are putting pressure on large international companies to list on local exchanges, with Nigeria being the latest to consider compulsory listing for some of the companies operating in its market. The historic lack of liquidity in many of these markets can make the commercial advantages of such a listing unclear. However, some of the larger exchanges (including Kenya and Nigeria's) are making significant investments in improving their trading platforms and compliance requirements. Companies should therefore
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Operating environment continued
be proactive about managing their contact with regulators to ensure that they comply with regulatory changes in a manner that best suits their corporate structure and requirements, while still satisfying the local regulator. Valuation considerations There is often a disconnect between local and international investors’ perceptions of country risk and growth opportunities, resulting in significant valuation expectation gaps that need to be managed. To address this challenge, enough time should be invested in discussing growth expectations and understanding realistic, achievable outcomes. The valuation debate is further complicated by a lack of listed comparable companies across many SSA jurisdictions, while the companies that are listed are typically illiquid and their trading prices are often not an accurate reflection of fair market value. Ultimately, valuations should be referenced to other emerging market benchmarks rather than developed market counterparts and there needs to be a solid understanding of the impact of the local market environment on in-country discount rates. Financial disclosure and due diligence While many of the larger countries in SSA are migrating to International Financial Reporting Standards (IFRS), this process has often not been fully implemented, resulting in a ”modified” approach to IFRS being applied. In addition, there is often limited financial disclosure, both for listed and unlisted companies, which means that access to valid, accurate, complete and reliable financial information can fall short of investor expectations. The lack of information means that it is difficult to ensure that the requisite information is available and presented in a format that is typically acceptable in a due diligence process. It is also important to have a detailed understanding of the strength of the legal system and enforceability of contracts in the relevant jurisdiction and be comfortable with the ultimate jurisdiction of contract.
Understanding the political environment While Africa’s political and macroeconomic climate has improved in recent years, it is still important to maintain awareness of important events, such as elections, and understand their potential impact on the transaction timetable. Key to this is having a solid understanding of the political association of the major stakeholders involved in the transaction (both business partners and regulators that may need to approve the transaction), which should be clarified in the early stages of due diligence. Staff considerations Staff rationalisation is often politically sensitive. Almost all recent inward M&A transactions in South Africa have had restrictions on staff rationalisation and a similar trend is developing in many other SSA countries. It is therefore important to understand these requirements upfront and price for them accordingly. Timing Deal execution has potentially long lead times. Consequently increased pricing and execution risk needs to be considered. Ideally, transactions should be designed with maximum pricing and structuring flexibility to minimise the impact of changes in market conditions. Choose the right advisors Advice is an intangible product and firms typically prefer to work with advisors they know and trust. However, local knowledge and an on-the-ground presence are vital for navigating local nuances. A combination of trusted and resident advisors has worked well for companies implementing transactions in SSA in the past and it is important to establish who the pre-eminent advisors are that can unlock a transaction in the relevant markets.
Table 5: Top 10 SSA M&A deals 2012 (any involvement) Value (US$m) Rank dates
Target name
Target nation
Sector
Acquirer or name
Acquiror nation
2,500.0
2012/11/19
OML 138 Block
Nigeria
Energy & power
Tiptop Energy Ltd
China
1,910.0
2012/09/07
Richards Bay Minerals
South Africa
Materials
Rio Tinto PLC
UK
1,790.0
2012/12/20
ConocoPhillips-Nigerian Assets
Nigeria
Energy & power
Oando Energy Resources Inc
Canada
1,451.2
2012/10/23
Fountainhead Property Trust
South Africa
Real estate
Growthpoint Properties Ltd
South Africa
1,250.0
2012/01/05
First Quantum-Residual Assets
DRC
Materials
Eurasia Natural Resources
UK
985.1
2012/06/05
SA Corporate Real Estate Fund
South Africa
Real estate
Capital Property Fund
South Africa
850.0
2012/06/29
Oil Mining Lease (OML)30
Nigeria
Energy & power
Shoreline Natural Resources
Nigeria
804.2
2012/07/11
Nordenia International AG
Germany
Materials
Mondi Ltd
South Africa
555.0
2012/07/24
Minas de Revuboe Ltd
Mozambique
Materials
Anglo American PLC
UK
555.0
2012/12/07
Camrose Resources Ltd
DRC
Materials
ENRC Congo BV
DRC
Source: Thomson Reuters Data as at September 2013
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Governments are trying to broaden their tax revenues. While it is difficult to do so on an individual basis due to political backlash, it is often passed on to corporates to gain more revenue. In the next section, we look at the total tax rate for each African country, together with the time it takes to comply with the taxes and the number of payments that need to be made. In the Appendices, we provide each country’s company tax rates and withholding taxes for residents and non-residents as laid out by the PwC. Total tax rate in Africa In PwC’s latest report, Paying Taxes 2013: A global picture, Africa’s total tax rate averages 57.4%, which is well above the world average. It also shows, however, that the cascading sales taxes, which are still present in three economies (Comoros, Gambia and the DRC), contribute heavily to this high rate. More countries have adopted a VAT system, which has had a major impact, bringing the average down and helping to improve the ease of paying taxes in these economies. If the three economies with cascading sales taxes were excluded from the average, it would fall to 43.4%, which is still above the global average. Looking across the
Time to comply The average time to comply (the indicator measuring the time taken by companies to prepare, file and pay the major types of taxes and contributions) in Africa is 313 hours, which again is well above the world average. The various levels of government that companies are required to engage with can also contribute to a high compliance burden. Sixty percent of African economies have more than one level of government levying taxes. Number of payments Africa’s number of payments are well above the world norm, coming in at an average of 37. The majority of the payments relate to labour taxes and social contributions, and ”other” taxes. Only three economies (Mauritius, Tunisia and South Africa) have electronic filing and payment commonly used for their major taxes. A lack of electronic filing for labour taxes and VAT largely accounts for 41 of the economies in the region having a number of payments that exceed the world average of 27.2.
Profit taxes
Labour taxes
Other taxes
Gabon Burkina Faso Niger Kenya Tanzania Guinea-Bissau Equatorial Guinea Senegal Cameroon Togo Morocco Mali Burundi Angola Congo Tunisia CAR Chad Benin Mauritania Algeria Guinea Eritrea Comoros Gambia DRC
Zambia Lesotho Namibia Botswana Seychelles Liberia Mauritius Rwanda Sierra Leone São Tomé and Príncipe Ethiopia South Africa Ghana Nigeria Mozambique Malawi Zimbabwe Madagascar Sudan Swaziland Uganda Cape Verde Djibouti Côte d'Ivoire
15.2 16.0 22.7 25.3 25.7 27.4 28.5 31.3 32.1 32.5 33.3 33.3 33.5 33.8 34.3 34.7 35.8 36.0 36.1 36.8 37.1 37.2 38.7 39.5 42.6 43.5 43.6 43.8 44.4 45.3 45.9 46.0 46.0 49.1 49.5 49.6 51.7 53.0 53.2 62.9 62.9 65.2 65.4 65.9 68.2 72.0 73.2 84.5
217.9 283.5
Figure 40: Total tax rate
other economies in the region, corporate income tax is prominent in the majority of economies, while labour taxes and social contributions are relatively low.
339.7
Total tax rate for each African country
Note: 1: The taxes included can be divided into five categories: profit or corporate income tax, social contributions and labour taxes paid by the employer (in respect of which all mandatory contributions are included, even if paid to a private entity such as a requited pension fund), property taxes, turnover taxes and other taxes (such as municipal fees and vehicle and fuel taxes). Source: PwC Data as at September 2013
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Are there improvements in Africa’s tax environment? Indeed, over the eight years of PwC’s study, there has been improvement across all three paying taxes indicators. The total tax rate has seen a significant reduction, largely as a result of several economies replacing their cascading sales taxes with VAT systems. Overall, the average remains at a high level.
Figure 41: The indicator trends for Africa Total tax rate
Time
Payments
Percentage payments
Times (hours)
80
400
60
300
40
200
20
100
0
0 2004
2005
2006
2007
2008
2009
2010
2011
Source: PwC Data as at September 2013
Planning for success So, while operating in Africa is not without risk, the right approach and planning for a transaction can significantly improve the likelihood of investors achieving a successful outcome and enable them to realise the significant growth opportunities that SSA is anticipated to deliver.
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F
I
N
A
N
C
E
Chapter 6 Finance Regulatory reforms, the emergence of an elite urban middle class and technological advancements are allowing financial institutions to access previously unbanked parts of the population.
Kanga cloth, Tanzania
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Finance
Certain economies are developing their local capital markets to improve the flexibility and effectiveness with which financing is raised, but the pace of financial deepening needs to increase across the region to facilitate rapid economic growth.
Africa’s financial roots are visibly deepening across the continent as a broader spectrum of services are being offered to enterprises and households alike. Rapid credit growth, particularly in SSA (Figure 42), is testament to the expansion of Africa’s financial sector, albeit off a low base. Regulatory reforms, the emergence of an elite urban middle class and technological advancements are allowing financial institutions to access previously unbanked parts of the population. Despite these developments, access to financing remains a key constraint for resident and non-resident firms.
Figure 42: Domestic credit to the private sector (% of GDP) 2002
% 150
2011
Average (2011)
120 90 60 30
Togo Senegal Swaziland Mauritania Seychelles Benin Botswana Mozambique Angola Nigeria Burundi Mali Malawi Burkina Faso Côte d'Ivoire Uganda Tanzania Comoros Liberia Gambia Lesotho Ghana Cameroon Niger Eritrea Zambia Guinea-Bissau Sudan Madagascar CAR Gabon Guinea Congo Sierra Leone Equatorial Guinea DRC Chad
South Africa Mauritius Tunisia Morocco Cape Verde Namibia São Tomé and Príncipe Kenya
0
Source: World Bank Data as at September 2013
Access to financing: The thorn in most firms’ sides According to the WEF, access to financing is the most problematic factor in 23 of the 34 African countries surveyed. While certain economies are developing their local capital markets to improve the flexibility and effectiveness with which financing is raised, the pace of financial deepening needs to increase across the region to facilitate rapid economic growth. In this chapter, we highlight the different means of accessing
funds in local African markets, as well as the complexities of transacting in foreign currencies.
Domestic financial market development: Assessing Africa’s financial forestry Southern Africa’s financial markets are generally well developed, with five countries (South Africa, Namibia, Mauritius, Botswana and Zambia) ranked in the top 50th
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Finance continued
percentile of the WEF’s 2012/13 financial development index (comprising 144 countries). South Africa, characterised by easy access to capital, sound banks and a well-regulated securities market, is still ranked first in Africa and has improved six places in the world standings (third in 2012, compared to ninth in 2011), trailing Singapore and Hong Kong. Acquiring financing in Burundi, Mauritania, Algeria, Angola, Chad, Madagascar, Mali and Burkina Faso is more problematic as financial services are costly and/or scarce. Tables A14 and A15 (Appendices) outline the extent of financial market development in Africa.
Banking sector credit: The big baobab Like the baobab, commercial credit provides support to a large spectrum of businesses across Africa. Obtaining credit, however, is usually cumbersome for both local and international companies as the size of bank credit tends to be limited. While the total assets of Africa’s 200 largest banks amounted to almost US$1 trillion in 2010, most banks remain largely under-capitalised, restricting lending activity. When measuring financial intermediation by looking at the domestic credit extended by the banking sector as a percentage of GDP, most African nations are still fall far behind South Africa (Figure 43). According to the International Finance Corporation (IFC), the proportion of investments financed by banks in Africa in 2011 were highest in Southern Africa: South Africa (76.4%) and Mauritius (30.8%). Three countries
ranged between 50% and 75%: Namibia, Cape Verde, and Morocco, while the remaining 47 countries averaged 18%. Banks are reluctant to extend credit in countries where collateral is not enforceable and systems used to store debtor information are poor. Attaining financing, especially by larger concerns, can also be complicated by regulatory issues such as leasing and legal barriers, which make debt enforcement more challenging. Further limitations to accessing banking sector credit include poor credit discipline; high transaction costs; ceilings on bank lending rates; and insufficient collateral (as some banks only accept certain assets as surety). Aside from access to information, foreign banks are also challenged by the cost of credit and varied interest rate spreads. Despite the efforts of central banks to reduce interest rates by lowering benchmark rates (in countries where it is a primary monetary policy tool), commercial banks often do not respond accordingly. This is apparent in a country like Zambia. Commercial bank lending rates tend to be high as loan products are generally short term, resulting in higher money market rates. According to the WEF (2012/13), it is most difficult to obtain a bank loan in Burundi, Burkina Faso, Ethiopia, Côte d'Ivoire, Mozambique and Mauritania (these countries are also ranked in the bottom 15 in the world). Interestingly, it has become easier to acquire a loan in Cameroon and Zambia, which have improved by 26 and 23 places respectively since 2011. Kenya, South Africa, Liberia, Rwanda and Botswana are the five
Figure 43: Domestic credit provided by the banking sector (% of GDP) % 200
150
100
50
South Africa Morocco Mauritius Eritrea Tunisia Cape Verde Egypt Kenya Namibia Seychelles Gambia Mauritania São Tomé and Príncipe Malawi Nigeria Togo Guinea Senegal Liberia Burundi Ghana Swaziland CAR Côte d'Ivoire Mozambique Tanzania Sudan Benin Comoros Uganda Zambia Angola Burkina Faso Mali Niger Cameroon Guinea-Bissau Sierra Leone Gabon Madagascar Botswana Chad DRC Lesotho
0
Source: World Bank Data as at September 2013
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easiest countries in Africa to access bank loans (Table A15). This correlates well with the results of the World Enterprises survey which shows that Botswana boasts the highest percentage of firms with bank loans or lines of credit. Another source to analyse is the “getting credit” ranking in the World Bank's Doing Business Report 2012. It explores two sets of issues — credit information registries and the effectiveness of collateral and bankruptcy laws in facilitating lending. South Africa, Kenya, Zambia, Rwanda and Namibia ranked in the top five countries in Africa. However, only 40% of African nations were ranked among the top 100 countries (out of 183 nations) for the ease of getting credit. The bad apples, among others, include Djibouti, Eritrea, Madagascar, São Tomé and Príncipe, the DRC, Burundi, Mauritania, the Seychelles and Sudan. Non-bank institutions Obtaining financing from institutional investors like pension funds and insurance companies (barring South Africa), is very difficult. Insurance penetration rates average a mere 3% in Africa. In low-income countries, high levels of poverty prevent people from purchasing insurance or obtaining pension cover. Aside from Libya, the insurance sector is largely inactive in North Africa. The life insurance industry is dominated by stated-owned enterprises or firms that have no obvious competitive advantage in insurance. Morocco, Tunisia and Algeria’s markets are led by small local insurers and growth is limited due to low levels of income. Though present, foreign companies are fairly docile in these economies. The outlook for the sector remains bleak as recent political happenings have largely halted progress in the various insurance sectors. According to the African Insurance Organisation, there is rising demand for more sophisticated insurance cover. However, there is a shortage of firms in Africa with the relevant expertise to underwrite certain types of businesses, such as those in the oil and gas indusrty. Insurance portfolios are also largely unbalanced as companies compete on price and not service. Although political risk has slid down the list of problematic factors for doing business, recent events have shown that Africa’s political risk situation remains tenuous and cannot be ignored when contemplating a pan-African strategy. Political risks are broad-based and include the breach of contracts, regulatory changes, currency convertibility transfer restrictions, sovereign non-payment, confiscation, expropriation and nationalisation, political interference, bureaucracy, etc. Political risk insurance (PRI) can help mitigate and manage unpredictable risks, and facilitate better access to finance (PRI
generally gives comfort to lenders). It can be obtained through private PRI companies, public providers (usually national export credit agencies that support investors and lenders from their home country) and several multilateral agencies. In its last financial year (ending June 2013), the Multilateral Investment Guarantee Agency (MIGA), the political risk insurance arm of the World Bank, provided US$1.5bn of PRI to support investments in SSA. The region accounted for 53% of the total PRI allotted to developing companies by MIGA during 2013. This mechanism, however, is likely to increase project costs as MIGA demands strict environmental, social and other preconditions. As with any insurance undertaking, the purpose would be to formalise a contract ahead of an investment project rather than at the first sign of trouble.
From Umbrella Thorns to Jackalberry trees: Alternatives to traditional financing Development and microfinance Small and medium enterprises (SMEs) make up the bulk of firms in SSA and provide the primary source of employment in low-income economies (only second to subsistence farming). According to the UN Economic Commission for Africa, SMEs account for 70% of jobs in Nigeria and 55% in South Africa, two of the largest economies in Africa. However, the contribution of SMEs to GDP growth is negligible, partly due to financing constraints. Access to credit is restricted as small businesses are unable to comply with the conditions set by financial institutions. This means that capital is derived from retained earnings, informal savings or loan associations. Non-financial intermediaries such as microfinance institutions are particularly helpful in this regard. Although microfinance has low penetration rates in Africa, it is growing in prevalence as a preferred source of start-up capital for many small businesses. Historically, the interest rate charged on microcredit (i.e. small loans to new businesses) was extremely high due to large administrative charges. However, the burden on smaller firms has lessened due to increasing competition between microfinancing institutions and commercial banks. According to the African Development Bank (AfDB), one of the most effective policy instruments for gaining access to credit for SMEs is the provision of guarantees to ensure the timely repayments of loans to financial institutions. The AfDB, in conjunction with the Danish and Spanish governments, has initiated the African Guarantee Fund, which is a permanent regional conduit channelling guarantees and technical assistance to financial institutions with the aim of increasing growth in the SME sector in Africa.
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Private equity Private equity (PE) provides a useful alternative to selffinancing or capital market funding and should make local companies more attractive to trade buyers from other African countries. While a large proportion of FDI is channelled into raw materials and extractive industries, private equity tends to focus on consumer or communications ventures, characterising its dynamism and diversity as a substitute to classic financing. Moreover, PE partners can raise investment standards in Africa by bringing skill, savoir faire, technical support and networks to portfolio companies. According to the Emerging Markets Private Equity Association (EMPEA) 2013 Limited Partners Survey, SSA is viewed as the most attractive market for investment ahead of Southeast Asia and Latin America, with nearly 54% of all participants planning to include the region in their investment plans over the next two years (Figure 44). This reflects a strong and sustained increase in investor confidence. Although PE funds are still in their infancy in SSA, they are increasing in both size and reach. The participation of development finance institutions like the IFC have facilitated the deepening of this market. In its Attractiveness Survey for 2013, EY notes that PE firms have invested approximately US$12bn in and raised nearly US$10bn from the continent over the last five years. Private Equity International considers Egypt’s Citadel Capital SAE as the largest private equity firm in Africa in terms of assets under management (US$9.5bn across 19 platforms and 15 countries). There are various channels for investment but capital is still largely derived from developed markets. European
government-backed agencies such as France’s Proparco, the Netherlands' FMO and the UK's CDC have, in the past, served as guarantors of private investment funds in Africa. Closer to home, almost a quarter of African PE funding is raised in South Africa, with a third of the capital sourced through institutional investors. South African pension funds have the ability to invest 10% of their portfolios in private equity and up to 30% of their funds outside South Africa. Further afield, African pension funds have been slow to invest as regulations restrict investments in PE schemes. The tide has begun to turn in countries like Nigeria where pension funds are permitted to invest 5% of their portfolios in PE within the confines of the country. Kenya is also reviewing its pension investments regulations in PE. Local equity markets While 28 African countries have established stock exchanges, they vary in turnover and size (Table A19). The WEF’s latest statistics show that attaining financing through local equity markets is achievable in South Africa, Kenya, Tunisia, Egypt, Morocco and Côte d’Ivoire, implying that it is easier to raise money by issuing shares on their stock markets. When considering listed domestic companies, South Africa’s Johannesburg Securities Exchange (JSE) has the largest market capitalisation (roughly US$612bn as at the end of 2012). Egypt and Nigeria follow suit with capitalisations of US$58bn and US$56bn respectively. Though Egypt’s equity market remains below its pre-crisis level, it has not deteriorated markedly in response to the political unrest in 2013. Despite
Figure 44: Likelihood of private equity investment Decrease or stop investing
Begin investing
Expand investing
Western Europe US Russia Central and Eastern Europe India MENA Turkey China Brazil Latam (ex. Brazil) SE Asia SSA 0
10
20
30 % of respondents
Source: Emerging Markets Private Equity Association Global Limited Partners Survey (2013) Data as at September 2013
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40
50
60
its size, the Nigerian Stock Exchange is not as easily accessible as the JSE or Nairobi Stock Exchange, ranked ninth in Africa. Africa has slowly but surely been implementing reforms to urge companies to list on their local exchanges and increase liquidity. Certain countries have reduced corporate tax rates, listing fees are declining, trading hours are being extended, and new technologies are being introduced. Various initiatives to integrate the capital markets within certain regions like SADC, the EAC and ECOWAS have achieved some harmonisation of rules, technology and systems, which should pave the way for more cross-border listings and offer issuers access to wider
markets. The major stock markets, like the Semdex and NSE have performed well over the past few years largely due to portfolio inflows. However, more reforms are needed — apart from the JSE, Bourse de Tunis and, to some extent, the Nigerian Stock Exchange, African exchanges battle with a small number of equity listings (particularly by local companies), low liquidity levels, and inadequate market infrastructure. Aside from South Africa and Egypt, the annual turnover ratio averages 4.1% across 21 bourses (Figure 45).
Figure 45: Performance of major stock indices Number of listed domestic comtpanies
500 400 JSE (South Africa) 300 EGX (Egypt) 200
NSE (Nigeria) CSE (Morocco)
100
ZSE (Zimbabwe) BVTM (Tunisia)
0 1
12
24
36
48
60
Turnover ratio (%) Source: Bloomberg, RMB Global Markets Data as at September 2013
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Don’t get tangled up in foreign exchange complexities A key obstacle with operating in financial markets is the foreign exchange complexities: the ability to transact in a foreign currency can prove challenging, especially in countries operating managed exchange rate regimes (Table A17). Foreign exchange liquidity is often constrained in heavily managed exchange rate environments. Supply and demand dynamics are in many cases affected by stringent exchange controls and local tax obligations. Supporting this, liquidity conditions typically improve at month-end when local financing commitments are due — and US dollars are sold into the market — and tend to worsen towards the middle of the month when export proceeds begin to diminish. Managed currencies, like the Angolan kwanza, Ethiopian birr and Nigerian naira are predisposed to weakness when supply shortages escalate, increasing the cost of foreign loans. Aside from the intricacies involved in being able to buy foreign currency, corporates should be aware of foreign currency regulations, which are on average the 12th most problematic
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factor for doing business and pose one of the biggest challenges in Malawi, Ethiopia and the Gambia. While transacting in foreign currencies might be difficult in certain countries, there are measures available to hedge currency exposure. South African markets are deep and liquid and offer a huge range of potential risk management structures from simple forwards and swaps through to exotic options. A variety of countries have operational forward markets, although in many cases liquidity and tenure can be tricky to attain. Markets in Botswana, Kenya and Zambia can be considered liquid, with instruments out at least one year and occasionally longer. Ghana, Tanzania and Uganda have operational but less liquid (and occasionally completely illiquid) markets. When hedging instruments are not available, alternative (proxy) hedges are an option, i.e. a more liquid market to which the exchange rate is correlated. Strictly speaking, the euro and rand are proxy hedges for the CFA and CMA countries. Given the very limited risk of devaluations, they can almost be treated as perfect hedges. Outside of these two cases, proxy hedges are few.
I N F R A S T R U C T U R E
Chapter 7 Infrastructure Investment in logistical, power and telecommunications infrastructure is a significant factor in maintaining long-run growth in Africa.
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Infrastructure
While investment in infrastructure-related projects has expanded, the creation thereof has not kept pace with demand, resulting in a sizeable infrastructure deficit.
While many regions around the world are experiencing slow or stagnant economic growth, Africa remains a honey pot of untapped opportunity. However, the infrastructure deficit is an impediment to sustained levels of economic growth and investment. A lack of infrastructure stretches across all capital goods necessary to facilitate the business environment, an issue which is discussed more fully as we delve into the dynamics of construction and logistics in Africa. Investment in logistical, power and telecommunications infrastructure is a significant factor in maintaining long-run growth in Africa. According to the AfDB, bridging this infrastructure gap could increase GDP growth by an estimated two percentage points per year.
Assembling a sustainable future Infrastructure plays a pivotal role in refining competitiveness, facilitating international and domestic trade, as well as enhancing the continent’s integration efforts. While investment in infrastructure-related projects has expanded, the creation thereof has not kept pace with demand, resulting in a sizable deficit. Reflecting this, less than 40% of Africa's infrastructure population has access to electricity and only about a third of the rural population has access to paved roads.
income countries (LICs)9 relative to middle-income countries (MICs)10. African LICs are, for example, four times poorer than comparable nations outside the continent in terms of paved road density, while MICs are twice as poor relative to similar countries in other regions. In terms of power generation, African LICs are eight times more deprived (39MW per million people compared to 326MW), compared to MICs, which produce three times less electricity than its international cohorts. Figure 46 highlights the growing disparity between Africa and its emerging market peers.
Disparities are more pronounced for paved roads, internet access and power generation and more critical in low-
Figure 46: International perspective on Africa’s infrastructure deficit (normalised units) Improved sanitation (% of population)
Africa
Other
Improved water (% of population) Electricity coverage (% of population) Generation capacity (MW per 1 million population) Internet density (per 1,000 population) Mobile density (per 1,000 population) Main-line density (per 1,000 population) Total road density (per 100km of arable land) Paved-road density (per 100km of arable land) 0
200
400
600
800
1,000
1,200
Source: International Bank for Reconstruction and Development, World Bank Data as at September 2013
Note: 9. Low-income countries: GDP/capita less than US$745. 10. Middle-income countries: GDP/capita between US$745 and US$9,206.
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Infrastructure continued
The information and communications technology (ICT) sub-sector is characterised by tremendous differences across services. In 2008, four out of 10 Africans had access to mobile phones, with Africa having the fastest growing penetration rates compared to the rest of the world. Internet density, however, remains low with just over 80 people per thousand (less than one in 10).
t Resource-rich economies lag in infrastructure development, although they should be better suited to fulfil infrastructure needs. However, resources are leveraged against financial obligations and as such infrastructural maintenance and development are put on the backburner, as is the case with Angola. Of the 144 countries surveyed by the WEF (2012/13), only the quality of Namibia’s overall infrastructure ranks among the top 50, while Mauritius, the Seychelles and South Africa fall within the top 60. Namibia still boasts the best road, rail and port facilities in Africa while South Africa retains the best air transport infrastructure of the continent.
A contributing factor to Africa’s persistent infrastructure shortfall is prices which are, on average, higher than other developing states. This is evident in road freight which is roughly four times more expensive, power which is US$0.14/ kWh against US$0.05 – US$0.10/kWh and mobile telephony costs which equate to US$12 per month compared to US$8 elsewhere (Table 6).
Progress and pitfalls
The Programme for Infrastructure Development in Africa (PIDA) and the AfDB estimate that Africa needs US$93bn annually until 2020 to curb the existing infrastructure deficit. This is required to maintain, refurbish and develop infrastructure to satisfy the continent’s subsistence needs and equates to around 8% of total GDP over the next seven years.
ICT: The way of the future The establishment of significant ICT resources allows for innovation and the creation of new sectors as seen in the introduction of M-Pesa in Kenya. However, there is a need for more investment in fiber optics to urgently improve connectivity across countries.
Infrastructure requirements vary across African economies and are usually a reflection of the level of economic development. The World Bank distinguishes between four different levels: fragile states, low-income economies, middle-income countries and resource-rich nations.
The use of ICT is important in streamlining administrative processes related to importing and exporting, which is key for efficiency and transparency. Supported projects such as the Eastern Africa Submarine System (EASSy) cable project and the Central African Backbone Project are meant to enhance quality and reduce communication prices in mobile backhaul and mobile telephony. An assessment of these projects implies a reduction in wholesale bandwidth prices by at least 60% in Tanzania and up to 90% in Kenya. Nineteen new undersea cables connect to Africa, building on the three installed prior to 2005, increasing cumulative capacity from 2,900 gigabytes to 102 terabytes over the period 2005 to 2011. Ghana and Nigeria have taken it one step further by expanding into satellite communication technology. Investment in ICT is largely private sector driven. Major differences of available financing exist between coastal and landlocked countries.
t Fragile states face a burden of conflict reverberations, such as the DRC, and are in dire need of investment to rehabilitate destroyed infrastructure. Unfortunately, due to high risk profiles, investment into these economies is rather weak. t Low-income economies such as the CAR struggle to improve the productivity of existing assets and lack the funds necessary to maintain existing infrastructure. t Middle-income countries exhibit stronger institutional efficiency, which reduces the cost of infrastructure and are therefore better placed for development purposes.
Table 6: Africa’s high-cost infrastructure Sector
Africa
Other developing regions
Power tariffs (US$/kWh)
0.02 - 0.46
0.05 - 0.1
Water tariffs (US$/m3)
0.86 - 6.56
0.03 - 0.6
Road freight tariffs (US$/tkm)
0.04 - 0.14
0.01 - 0.04
2.6 - 21
9.9
Mobile telephony (US$/basket month) International telephony (US$/3 min call to US) Internet dial-up service (US$/month)
0.44 - 12.5
2
6.7 - 148
11
Note: 1. Ranges reflect prices in different countries and various consumption levels. Source: International Bank for Reconstruction and Development, World Bank Data as at September 2013
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Energy: Africa’s biggest infrastructure shortfall Forty-eight SSA countries, with a combined population of 800m, are estimated to generate roughly the same power output as Spain, a country of 45m. North African countries with an electrification rate of 94% fare better than SSA with 32% (Figure 47).
Figure 47: Electricity access in 2009 — regional aggregates %
Electrification rate
Urban electrification rate
Rural electrification rate
100 80 60 40 20 0 Africa
Developing Asia
South Asia
Middle East
Developing countries
Source: IEA, World Energy Outlook 2011 Data as at September 2013
Energy facilities are in dire need of new and innovative sources of investment, particularly for generation, transmission lines and distribution. Local firms are burdened with high costs as they attempt to provide the missing infrastructure or have to forgo the activities that require this infrastructure. In addition, ageing infrastructure and rising demand have led to intermittent blackouts across all regions of Africa, undermining the competitiveness of the sector. Beyond the much-needed investment, diversification is warranted as overreliance on hydro energy makes South and East African economies vulnerable to hydrological conditions, as seen by the major economic losses caused by the droughts of the 2000s. Greening up the energy space Africa’s gaps in conventional energy infrastructure make it well placed to pursue low-carbon solutions. Africa has more than
half of the world’s renewable energy potential — its wind, geothermal and hydropower potential have barely been used. The Grand Inga Dam (in the DRC) currently yields 650MW – 750MW but it has the potential to produce 39,500MW, almost half of the 100,000MW energy potential of the DRC. The East African Rift Valley could produce 7,000MW from geothermal sources. The AfDB has recognised the continent's green energy potential and has taken the lead by using US$57m to establish a fund with other foreign contributors for renewable energy projects. Promoting green energy could leverage more funds from development partners and private players than investment in non-green projects. A regional approach should be pursued, with urgent attention given to the development of energy infrastructure. However, to date only 130MW has been exploited in Kenya and less then 8MW in Ethiopia because of high upfront engineering costs and a lack of local expertise.
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Infrastructure continued
Construction: Building a way out Infrastructure is forecast to be the fastest growing sector of construction output through to 2015. By June 2012, the IFC had invested US$267m into property and construction in SSA. Slowdowns in available projects in SA coupled with rising costs have urged construction firms to seek prospects elsewhere in Africa. Regionally, construction spending remains constrained in North Africa. The rebuilding process could provide opportunities for construction growth though this is dependent on a subsiding of tensions and political accord. A mixed picture is emerging across SSA with certain countries, such as Nigeria (+8%), reflecting strong growth while continuing declines are apparent in South Africa. Nigerian firms are exporting thousands of tonnes of bulk cement weekly to Ghana to supplement their shortfall. With such rapid demand for inputs, private and commercial sectors should begin to benefit from the structural transformation in construction. Deloitte estimates that Africa is expected to have more than 100 cities of more than 1m inhabitants plus an additional seven cities with housing requirements for up to 10m citizens. Africa's largest city is projected to be Kinshasa, where PIDA expects the population to reach 24m by 2040. Cries for new cities are already being heard and new developments such as Tatu City in Kenya, the City of Light in Accra and King City in Takoradi, Ghana accommodating 178,000 residents between them are being built. Nigerians are taking up the initiative by building new cities on land reclaimed from the sea.
Nairobi is the perfect example of supply and demand imbalances. At the lower-end of the price spectrum, 150,000 new homes are required per annum, yet a mere 30,000 units are being built annually. Ghana, sits with a 1.6m unit housing deficit that is anticipated to grow to 3.6m units by 2022 according to the Consumer Protection Agency of Ghana. Accompanying the housing shortfall is the rise in middle class and small businesses creating demand for office space and retail outlets. Southern Africa is characterised by a spate of retail malls and mixed-use development projects. The tenants of these malls tend to be South African retailers as they seek new markets north of their borders. This construction is consistent with the changing demographics and a lack of formal retail infrastructure. Leveling before the build The continent resembles a massive construction site with real estate markets faring well. The value of prime property in the world’s key cities fell by 0.4% in the first quarter of 2012, while Nairobi’s rose by 25%, making it the strongest performer globally. However, access to funding for property developments in many parts of SSA is limited. Although some developments in South Africa are funded with up to 100% debt, in the rest of the continent, developers often need to put down 50% in cash. Construction costs and professional fees are high due to the non-availability of specialist building materials. Additionally, land is expensive in expatriot inhabited zones. Prime zoning can cost around US$2m an acre in Accra. Nevertheless, rental yields of over 10% for retail, residential and industrial properties tend to balance these costs.
Figure 48: Output shares of construction (1995 – 2010) 100
Initial
80
60
40
20
0 Oil-exporting countries
Middle-income countries
Source: IMF, World Development Indicators, and FAOSTAT Data as at September 2013
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Low-income and fragile countries
Fragile countries
Final
Given the continent’s infrastructure mandate, which is far from being realised, construction will continue to drive economic activity for years to come.
programmes need to be adequately funded and enhanced to reduce incidences of road fatalities. Several forms of road financing exist: s ,OANSANDTOLLING
Logistics: Making connections happen
s 2OADFUNDSSUPPORTEDBYFUELLEVIESAND
Supply chains are becoming ever more globalised and complex, requiring regional integration to facilitate diversification and increase the region’s competitiveness. Logistical links to ports are crucial to ensure growth, as illustrated by the ETI results, which show that landlocked countries lag behind the average for Africa in terms of availability and quality of transport infrastructure. North African economies (Algeria and Morocco) tend to perform better in terms of availability of transport infrastructure (with a score of 5.1 out of 7), though the quality of overall infrastructure is still insufficient (a score of 3.8). While Morocco and Egypt are well connected to global maritime routes (16th and 17th, respectively, on the Transhipment Connectivity Index), port quality in Algeria is poor, ranked 113th.
s !UTONOMOUSROADAGENCIESTHATOUTSOURCETOSPECIALIST maintenance agencies.
Meanwhile, the World Bank estimates that reforms leading to a more competitive transport sector could halve the cost of moving staples in West Africa over 10 years.
Port inefficiency results in higher logistical and import costs. In 2012, global welfare losses associated with port ineffectiveness were estimated at US$1.8bn for Tanzania and US$830m for neighbouring economies (Table 7). New capacity is essential and fortunately there are projects making headway. The port enhancement project in Dakar will increase both capacity by 50% and vessel productivity from 20 moves per hour to 61 moves per hour. Countries need to put in place measures to address the serious port capacity problems that, coupled with an ineffective inland transport system, proliferate in Africa.
Paving the way According to the WEF (2012/13), 53% of Africa’s roads were unpaved as of 2011, precipitating a vast number of road accidents, which according to the World Bank costs approximately 1% – 3% of a country’s annual GDP. Further costs in the form of time and productivity arise from severe congestion. To manage these problems, investment in road infrastructure and the development of road safety
Laying down tracks Road volumes are generally higher due to inadequate railroad networks increasing the cost of doing business on the continent. In South Africa, difficulties with rail transport have resulted in axle overloading on roads, tainting perceptions regarding the overall quality of the country’s infrastructure. In general, the amount of useable tracks have declined across Africa, dropping from 58,000km to 50,000km between 2005 and 2011, underscoring the need for rehabilitation and maintenance. Shipping the costs away
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Table 7: Comparative performance across East African ports and African sub-regions
Mombasa
Port Sudan
Dar es Salaam
8
5
28
7
5 - 28
4-8
11 - 30
