Leveraging investment in Africa | Interview with Nick O’Donohoe, CEO, British International Investment
As the UK’s largest investor into Africa, you have a unique insight into cross-border trade and investment. Following two years of a global pandemic and decreasing FDI flow into African markets, what is your current view on the status of UK-Africa trade & investment?
Covid has had a very significant impact on Africa in terms of slowing economic growth. It has been a significant health crisis but also a humanitarian one, driven by very low levels of vaccination across the continent. Due to a lack of domestic capital markets, Africa relies heavily on foreign direct investment and international investment has slowed down dramatically. As is usual in crises, investors tend to retreat from markets that are furthest away from them, which is what has happened across Africa and other frontier markets, which were hit hard by a lack of risk appetite.
Overall, however, I still believe the investment case for Africa is strong, driven in large part by demographics. By 2050, there will be 2 billion people, a quarter of the world’s consumers, living in Africa, which will drive significant cyclical growth. The other important driver in the longer-term African context is the growth of technology and the digital economy. Fintech, for example, is transforming financial systems in countries like Nigeria and Kenya. Although this technology has been slower to develop in Africa due to a lack of infrastructure, it nevertheless enables businesses and economies to grow in an unprecedented manner.
Over the last decade, there has a move within the DFI community towards embracing the idea of risk, return and impact in investment decision-making. In June 2021, we were instrumental in establishing a consortium at the G7 meeting to commit $80 billion of impact-focused investment in Africa over the next five years. The impact asset class approach to investment is growing quickly alongside an increase in available blended and concessionary finance. As people become more conscious of the impact of their investments, the hope is this will have a beneficial effect on Africa. Overall, looking at the challenges in the medium-to-long term, we are quite optimistic. 60% of our investments go to Africa. That is likely to continue in the new strategy cycle, in which we are planning on investing $2.5 billion a year.
“60% of our investments go to Africa. That is likely to continue in the new strategy cycle, in which we are planning on investing $2.5 billion a year.”
You mentioned some of the factors that have hindered FDI flows into Africa. How can the DFI community as a whole help to overcome some of these challenges?
There are constraints we can overcome in collaboration with our partners and government, and there are some we cannot.
It is much easier for the private sector to grow in countries that have scale - the challenge with Africa is that it is fragmented, 54 countries in total. If you look at India, a country in which we invest heavily, once you get the basic enabling infrastructure in place, the private sector can drive growth quickly. The fragmentation in Africa means that businesses tend to be relatively small. For example, Ethiopia has around 20 companies with revenues over $50 million, whereas the UK has 10,000 businesses of that size. This fragmentation makes it much harder to grow large companies, and that holds Africa back.
The Africa Continental Free Trade Area (AfCFTA) will be instrumental in allowing businesses to scale and we are eager to see fast progress in this area. In the same way that the European Union, over 50 years, made Europe a much more homogeneous scalable market, AfCFTA can offer the same potential for Africa.
We try to find companies that can grow across borders, whilst recognising that there are challenges and costs associated with such growth. Liquid Telecom is a good example - they were established in the UK, headquartered in Johannesburg and their ambition has seen huge investment in ensuring they build a fibre network that is pan-African.
Another issue holding back trade and investment into Africa is currency risk and the perception that currencies in Africa have largely been weak, which in turn leads to less availability of local currency. If you look at West Africa, the Ecowas common currency zone has been relatively successful and has helped the region to develop. We aim to address this issue by providing more project finance in local currency. As part of our next strategy cycle, we are hoping to increase the amount of local currency and hedge the local currency risk we will take through our Catalyst portfolio, in which we are mandated to take a flexible approach to risk in exchange for pioneering impact. We’ve used this strategy, for example, to make currency loans to home solar businesses in Kenya and Uganda and we anticipate more local currency loans over the coming years.
This lack of liquidity through local capital markets leads to a huge reliance on international institutions and banks. That was particularly important at the start of the pandemic. As many international banks withdrew funding, we saw organisations like BII and other DFI partners stepping forward to provide liquidity through instruments such as trade finance. DFIs can help in that respect, although it’s worth noting that we are not a substitute for domestic savings.
Finally, all of this builds into a greater perception of risk of investing in Africa. Whilst there is some truth in the level of risk, it is not as high as people perceive it to be. For example, there is recent data from Moody’s that shows default rates on infrastructure projects in Africa are much lower than in Western Europe and that demonstrates that there are some areas where I think the risk in Africa is more perception than reality.
It is encouraging to hear that there has been some progress, particularly on the issue of fragmentation through the AfCFTA. What other policy areas do you think could help improve the perception of Africa as an investment destination?
One thing that would help increase investment flows into Africa is the creation of scalable investment ecosystems. We spend a lot of time thinking about how, as a DFI we can channel more concessionary capital and technical assistance to Africa. It is, however, a two-way street; governments have an important role to play in driving the real commercial flows to Africa. For example, stable macroeconomic policies are needed to moderate fiscal deficits, which in turn leads to lower inflation, lower interest rates and more stable currencies. These improve governance, transparent tax policies and bidding processes, all of which helps to attract international investment. BII, and DFIs more generally, can support these areas, and the FCDO has a lot of experience in developing institutions and governance processes. Again, looking at India, the government has implemented several steps that have enabled investments into the country, whether that is their procurement policies in renewable energy, or the low-cost ID verification banking systems they have made available. These are the types of infrastructure that make a country investable.
Outside of more traditional policy areas, development finance can also help to develop infrastructure in its broader sense, not just hard infrastructure like power which remains critical in Africa. For instance, if you look at mobile money in Kenya, a country in which 80% of people work in the informal economy, cash has disappeared. Initiatives like M-PESA, although slow to find its way around Africa due to potential conflicts it brings between other mobile companies, banks and regulators, has created an enabling environment to allow businesses to prosper and reach a much larger part of the lower-income population.
Finally, we need to break the link between economic growth and carbon emissions and build green infrastructure and green power that can help support development in Africa.
