HomeRegional NewsAfricaWill 2019 attract a bull or bear FDI market?

Will 2019 attract a bull or bear FDI market?

African Renaissance 2.0 has emerged as a cultural ideology and belief in reigniting the economic and intellectual potential of a continent. ESI Africa explores whether this can influence foreign direct investment, resulting in a boost in infrastructure build and presenting unique opportunities for foreign and domestic market players.

This article first appeared in ESI-Africa Edition 5, 2018. You can read the magazine’s articles here or subscribe here to receive a print copy.

Power is the most basic and essential of resources, necessary to drive economic development and innovation. The World Bank’s 2017 State of Electricity Access report also emphasises that the UN Sustainable Development Goals (SDGs) are all dependent on consistent, reliable access to energy. Motivating the delivery of the SDGs, it was believed that rural communities in Africa without electricity would receive American-style grids. However, the route deviated and delivered an uptake of renewable energy and decentralised generation solutions, which facilitated many startups capitalising on business opportunities.

Mini-grids of various sizes and technologies are popular solutions. It is the International Energy Agency that estimates 140 million people in rural areas will gain access to electricity via minigrids by 2040. The trend has seen the emergence of entrepreneurs making a business out of installing solar panels on which customers pay a down payment followed by monthly instalments until they own their home solar kits. These kits usually include a panel, a battery, a phone charger, a radio, and LED lights. Payments can be made by buying scratch cards at kiosks or via mobile phone.

Coupled with an emphasis on electrification is the need to connect and the proliferation of mobile phones, in order to conduct all manner of public and private sector business, is evident across the continent. According to The Economist, a 10% increase in mobile phone ownership among citizens of developing countries boosts per capita GDP growth by about 1% per year.

Mobile money is one of the biggest drivers of growth and the continent’s biggest mobile money service M-Pesa had over 30 million users in 10 different countries as of early 2017.

African Renaissance 2.0 on the horizon

Even though a great deal of innovation is giving rise to commercial opportunities, massive change in Africa’s power sector is slow to follow suit. Unless the industry adapts to and embraces new models and technologies, it risks its future profitability.

Willie de Beer, power expert and chairperson of the POWER-GEN & DistribuTECH Africa advisory board, said the power sector is operating in a disruptive landscape, in which the kw/h business is no longer sustainable and change is driven by customers. According to De Beer, “this industry has tended to keep out competition through rules, laws and regulations. The reality is that customers don’t care about rules, laws and regulations”.

“Smart grids, renewables and alternative energy are expanding and solar PVs on roofs are proliferating, and unless the industry adapts to embrace and capitalise on the changing environment, we will have a problem remaining relevant into the future,” De Beer stated, explaining that the time is ripe for stakeholders across Africa to integrate, and respond to challenges and opportunities as an African collective. “We need to look for new opportunities collectively, and create an environment conducive to investor confidence.”

The manager for technical regulations at the Electricity Control Board of Namibia, Maxwell Muyambo, echoed De Beer’s sentiments, noting that times have changed and in order to meet growing demand, utilities and stakeholders have to look to new models and new technologies. “There is often a resistance to change among established players in the power sector, but we have to look at balancing the equation between maintaining utilities and enabling the growth of renewables, new players and new technologies that support our goals,” Muyambo said.

Chijioke Okonkwo, power specialist and senior consultant: West Africa at CPCS Transcom, noted that Nigeria’s power sector reforms, which have seen the unbundling of the former monopoly into multiple companies overseeing power generation, transmission and distribution, have created both challenges and opportunities for the country. Critically, Nigeria must find solutions to the challenge of generating sufficient power for Nigeria’s 150 million-strong population, cost-effectively and reliably, Okonkwo urged.

Musa Mukulu, senior electrical engineer and manager: new business ventures at the Uganda Electricity Generation Company, admitted that Uganda’s multi-billion dollar power infrastructure expansion strategy, in terms of which capacity will more than double within the next two years, requires services and advanced technologies to support the strategy to successful delivery. “Uganda is growing its generation capacity from 1,000MW currently to over 2,500MW by 2020 as part of an ongoing rapid expansion plan,” said Mukulu. “The country’s power infrastructure expansion strategy includes new hydro and solar plants as well as thermal and biomass, the upgrading of aging infrastructure, massive distribution expansion, and possible public private partnerships on smaller scale power plants.”

Clearly, market expansion is taking place and opportunities abound in the African power sector. However, policy restrictions, political risk and unstable financial markets can make the continent’s investment landscape quite off-putting.

Reflecting on the data

ESI Africa examined EY’s 2018 Africa Attractiveness report Turning Tides for the facts and figures regarding Foreign Domestic Investment (FDI) across the continent. According to Ajen Sita, EY Africa CEO, 2017 was in many respects a key year for the continent. “We saw multiple changes in leadership across a number of countries, including South Africa, Zimbabwe and Angola. In addition, Kenya’s election was drawn out which created uncertainty at the time. Changes in leadership have in turn led to a renewed urgency to implement fresh policies as new administrations move to address slow economic growth.” Emerging market investment trends include:

  • 2017 saw a noticeable decline in emerging market investment flows into Africa. This is a major turnaround from the previous year when Asia-Pacific investors strongly increased inbound investments.
  • South Africa’s outward investment project numbers held steady as weak domestic growth saw companies continue the search for external growth opportunities across the continent.
  • North American (primarily the US), and Western European FDI flows to the continent remain strong.
  • The US remains the single largest country investing in Africa, followed by the UK, France and Germany.
  • South Africa, Morocco, Kenya, Nigeria and Ethiopia were the dominant anchor economies within their respective regions, collectively accounting for 40% of the continent’s total FDI projects.
  • For the first time ever, East Africa became the single largest beneficiary of FDI with 197 projects (27% of total projects).

Whilst South Africa remains the continent’s leading FDI destination when measured by project numbers, for the first time ever the country’s lead is under threat with Morocco increasing its FDI projects by a sizeable 19% to share the top spot with South Africa.

“Over time and as Africa’s growth accelerates, we anticipate that South Africa’s share of inbound FDI will continue to decline, relative to the rest of the continent. This will be driven by sustained strong growth, particularly in the Eastern-hub economies, and revived growth in the West hub. It illustrates the need for South Africa to ensure its leading economic role across the continent is sustained”, stated Sita.

Driving policy reforms

According to Sita, major opportunities have surfaced after the recent political leadership changes. However, she stressed that emboldened leadership is required to drive renewed policy reforms and implement new initiatives that encourage inbound investment flows. “There are some outstanding examples of how this has already worked in some countries, not least Rwanda, which is able to attract FDI well ahead of other economies of similar size, and indeed, ahead of much larger economies. By focusing on improving public sector efficiencies and finances, minimising bureaucratic processes and partnering with the private sector on major projects, more countries can stimulate much needed FDI,” she advised.

In South Africa, President Cyril Ramaphosa has told investors that there would be no meaningful growth or job creation in South Africa without a massive surge in productive investment in the economy. Ramaphosa has sought to reassure investors that the rot in state-owned enterprises was being cleaned up and that the country was “a land of untold opportunity”.

Coupled with innovation, a positive view of disruptive technologies and the spirit of entrepreneurship, the scope of opportunities for foreign and local investors is as vast as the continent itself; everyone can find their seat at the African Renaissance 2.0 boardroom table. ESI

This article first appeared in ESI-Africa Edition 5, 2018. You can read the magazine’s articles here or subscribe here to receive a print copy.

Where can you continue this discussion?

POWERGEN Africa on 14 –16 May 2019 in Cape Town, South Africa. POWERGEN Africa is the electricity industry’s forum that brings together international business leaders and technical experts in a commitment to CONNECTING THE ENTIRE POWER ENERGY AND WATER VALUE CHAIN. Co-located with African Utility Week, the event features a comprehensive conference programme and extensive exhibit floor.

14 – 16 May 2019, Cape Town, South Africa 

Registration is open:  www.african-utility-week.com