Secretary Alok Sharma speaking at the UK-Africa Investment Summit. Credit: Michael Hughes, DFID
The UK-Africa Investment Summit was held in London on 20 January, bringing together businesses, governments, and international institutions to catalyse investment across Africa. While the impetus for the summit is surely in part preparation for the United Kingdom’s post-Brexit future, it is also an acknowledgement of the investment possibilities in Africa that are not being fully utilised. While foreign direct investment into the continent has been growing over the past couple of decades, it is far below what many countries would like to see. And it is very patchy – many countries risk being left behind.
“One of the limiting factors is a perception that Africa presents a high risk,” explains Tom Adlam, Team Leader of the UK Government-funded Impact Program, which focuses on increasing the flow of impact capital into Sub-Saharan Africa and South Asia.
This is due in large part to a lack of familiarity with the continent. When the majority of investors’ knowledge on the continent comes from the news, they start associating the entire continent with insecurity, poverty and poor governance, increasing their perceptions of risk.
“In reality, more than 95% of the continent is peaceful,” Tom says. “And Africa isn’t a homogeneous whole. It’s a patchwork of different economies that present a wide variety of risk profiles.”
Not only do some investors still cling to the old cliché of Africa being a country; many investors are also not aware of the investment opportunities and levels of return from Africa portfolios.
Perceptions are Changing - Slowly
While misunderstandings persist, perceptions about investing in African countries are changing.
“Recently, there has been some pressure on organisations like the International Finance Corporation (IFC) and the United Kingdom’s development finance institution, CDC, to start talking about realised returns from their investment portfolios,” Tom explains. “This has led to a slew of data showing that larger development finance institutions are generating high single digit net returns, and in many cases better than that, from Africa-focused private equity funds.”
Investors are therefore becoming more aware of tangible evidence that well-managed Africa portfolios can generate returns that are highly competitive in the global environment. The change in perceptions is aided by the fact that many African countries are marketing themselves more effectively than before.
“Investment promotion agencies have done a good job promoting Africa as an investment destination to both traditional and non-traditional markets,” Tom adds.
It is well known that many markets around the world are struggling to report figures of more than one or two percent annual growth - there is not enough new economic activity. In contrast, Africa’s economy as a whole is growing quickly, and some regions continue to demonstrate well above average growth. In 2018, for example, East Africa as a region grew by 6 to 7% percent. Economists predict that this level of growth will continue in the medium-term, driven by a range of factors including population growth, improved infrastructure, and financial inclusion.
Technology, too, is making certain sectors more accessible to investors. Better information and communication technology has the potential to create a more nuanced understanding of the various risk profiles across Africa, as well as offering a means to reach markets that were previously shrouded in mystery.
A Push for Greater Investment
Despite changing perceptions, FDI into Africa is far below global rates, leading international organisations and donor governments to step in to help promote investment in the continent. This has ranged from promoting de-risking facilities to creating more enabling environments for investment in African countries. It also includes government-organised investment events such as the summit in London.
But the key to Africa’s growth lies in the ability of Africa’s own finance and investment sector to attract both domestic and international investment and to deploy it in the dynamic, resourceful, and entrepreneurial private sector which has taken root across the continent. This will build the kind of track record that ultimately will mean that Africa is able to drive down the cost of capital and compete effectively in global markets.
The Impact Programme is implemented by Palladium and funded with UK aid from the British people.