African debate: Opening up Africa’s investment potential


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The continent’s main markets, such as Nigeria, Kenya, South Africa and Angola, are attracting growing interest from investors. Foreign and local emerging market financial specialists analyse this change of attitude.

Delegate biographies: Learn more about the panelists

Executive summary

• African countries with relatively large populations are core targets for foreign investors

• High commodity prices but also, crucially, improvements in economic and political governance and the growth of middle-class consumer spending are driving investment

• Frontier markets, a category that includes most of Africa, are particularly attractive to investors seeking outperformance

• Nigeria’s banking reforms, the growth of the equity market and middle-class demand have greatly stimulated the retail sector as credit has become increasingly available

• The credit crisis in the west has had a differential effect on Africa. Some investors have had to cut back on investment because of the need to sort out problems at home; others recognize that high-yielding opportunities that have become closed off at home are still available in Africa

• South Africa faces a softening economy, with food-price inflation and continuing electricity-supply problems. But there is underlying stability in banking, judicial and political systems 

Nigeria debate: Nigeria leads the continent
Published July 2008

Investor interest in Africa as a whole, and in Nigeria in particular, has increased markedly over the past 18 months. Why are investors and bankers more interested, and is this sustainable?HH, Merrill Lynch From an equity perspective, Africa consists of three zones. There’s North Africa, then South Africa, which is a deep, liquid market, with metals, mining, and cross-listing with London. And then of course the sub-Saharan zone is in between the two. Whenever an investor asks me about opportunities in Africa, they generally mean sub-Saharan Africa. So take our African Lions product, which is a basket index product. We’re focused on equities and public equities. One of the chief things when you construct an index is deciding on the criteria. How do you judge what’s in there? We’re not fund managers. We’re not telling you: "We love these companies and we’ve looked at that." We’re simply saying: "This is a good way to invest in this theme. This is an easy-access instrument." So we put hard constraints on the competition of, say, South Africa, which we limit to 10%, or Egypt, which is even less. If you simply do it by the size of the market you end up with a South Africa, Egypt, Morocco basket, and you lose out on the sub-Saharan piece altogether. So again, with a focus on the sub-Saharan we put those constraints in it. And the fact that investors want basket products like this could be taken to mean that from a macro perspective they view Africa as a single opportunity or investment play although they know that each country is a different story.BS, Helios I would define investors’ Africa as where the population centres are. Without being rude, a country with 100,000 people is not going to make a difference. What happens in four or five specific countries determines what happens in the rest. And it’s those four or five that I would refer to as Africa. These are: South Africa, Nigeria, Kenya, and Angola. The Democratic Republic of Congo is a country of 60 million people, with the biggest supply of copper in the world, but it is not yet stable enough to be included.NR, Citigroup And you do have countries like Tanzania and Uganda, for example, which could be the next Kenya. They have already shown a lot of progress.

Drivers of investment into Africa

Euromoney What is driving investor interest in these countries?GT, Standard Bank GroupThere’s been an evolution in terms of the underlying social and economic frameworks and, simultaneously, growth. There are four factors. Obviously, commodity prices have played a huge part in increasing exports and foreign exchange reserves for a number of countries, although not all. Second, there’s been a very positive shift in macroeconomic fundamentals in terms of how central banks are running economies. The Nigerian banking reforms and Nigerian pension reforms have been forward-thinking, for example, and that has given investors confidence in the future. Third, with some obvious notable exceptions there has also been an improvement in political landscapes. The fourth point applies to global emerging markets in general but Africa in particular. Consumer-led spending is growing, driven by an increasing middle class. NR, Citigroup Commodity prices underpin the story but the key is that basic reforms have taken hold in a lot of economies, making them more robust than in the past. The same growth in commodity prices 10 years ago would not have given you the outcomes that we see today. Countries, regulators, and governments have done a lot of work to improve the investment landscape, with legal and other reforms fundamental to the creation of debt and equity markets. The question is one of sustainability. That still requires work on the fundamentals such as education, transparency, accountability and basic infrastructure. To maintain the same rate of growth and to extend it and realize its potential, fundamental issues such as electricity and power, ports and roads need to be addressed. Even Africa’s most developed economies are being held back by infrastructure issues. HH, Merrill Lynch From a macroeconomic perspective Africa is worlds away from what it was 10 years ago with Brady bond debt from Côte d’Ivoire and so forth. The basic infrastructure, political and macroeconomic situation is much more stable. Africa has greatly benefited and will continue to benefit from the global demand for raw materials, commodities and so forth. Whether the current level continues or not, the growth rate will continue to be substantial, with India and China as well as the developed markets’ demand for that.BT, ABR/Nepad Business Group Fundamentally, every state in Africa is at least under a democratic system, if not under democratic rule. That is new. Secondly, there is a communication revolution in progress. History will come to record GSM as one of the biggest agents of change in Africa, allowing people to gain an understanding of what’s happening with their neighbours, in their region, and in the whole continent, and how they relate to the rest of the world. There are, of course, reforms in the banking and finance sectors of the economy, openness in the oil, gas and extractive industries, and greater accountability in both public and private sectors. All these, in addition to the removal of the debt overhang problem following the debt write-off deal from the G8 countries in 2005, have contributed in no small way to increase investment flows to Africa. The challenge now is to ensure that these modest gains are sustained and also to make them permeate the private sector as well as all countries in sub-Saharan Africa. That’s important. It is already happening, but the growth will come with the understanding of the element of competition, and a feeling of doing better than the next country.VO, PHB We tend to think the investors are focusing on Africa because Africa has reformed or is reforming but that’s not the only reason. We would have seen some growth whether or not these reforms had taken place. Citibank wants to remain a global player. If they’re not on site in some of these African countries, they might lose their local market to competition. If your international customers are looking to invest into a country and you’re not supporting that, you’re at a disadvantage. Therefore, investors also see investment opportunities in the emerging markets with returns far above what is obtainable in the developed market, and that also drives them. Yes, with a stable and favourable political and economic environment, this would tend to increase. MTN came to Nigeria and has been showing a strong performance. Now every telecom company wants to come to Nigeria. IFC invested in or partnered with a couple of Nigerian banks. And I can tell that they have had good returns on those investments far beyond what other markets outside Africa might hold. So there is a compelling investment case.HH, Merrill LynchAn investment manager that wants outperformance has to go beyond Bric to what we term frontier markets. And certainly Africa, with the exception of South Africa, fits into that category. So you have money seeking outperformance, you have Africa coming online as an attractive place to put money, and then you have banks such as Merrill Lynch moving into those markets and devising user-friendly ways for those institutional investors to put money to work on the continent. So over the past few years there has been more and more money: existing emerging market investors expanding into the sub-Saharan African zone but also dedicated sub-Saharan Africa market investment funds going into those frontier markets for outperformance. And that will continue.

The attractions of Nigeria

EuromoneyNigeria is clearly one of the most attractive markets but what have been the biggest and most important changes that will make the next phase of growth sustainable?EA, PHB Nigeria has witnessed a number of reforms, the most profound of which were the banking reforms of 2005-06, which saw most banks recapitalized and a reduction in their number from 89 to 24. That brought about the emergence of what we call megabanks. The top banks in Nigeria, for instance, have shareholders’ funds in excess of $20 billion. That large amount of capital has enabled banks to begin to finance large-scale and longer-term transactions, and also to finance some more risky sectors of the economy, which had been largely neglected. The pension reforms in addition affected the Nigerian stock exchange, helping to push market capitalization to more than $2 billion. Nigeria’s GDP has grown consistently. We have hit the 7% mark, well above the average of about 6% in the rest of Africa. And that’s non-oil GDP. These are some of the factors that have brought us to where we are today. As we consolidate on these reforms, if we successfully execute the reform in the power sector, in real estate, the credit bureau system, and focus on improving governmental accountability and transparency combined with reducing corruption and diversifying the economy away from its dependence on the oil industry, Nigeria will become even more attractive.Euromoney Is another factor that internal consumption is now a driver of economic growth, and that a "middle class" is being created to add a second leg to economies that were previously about primary production?BS, Helios The best example is Kenya, which has no primary resources. Kenya’s economy has been doing 6%, 7% a year, but Kenya produces no minerals. It has no gold, no copper, no lead, no zinc, no oil, no gas. And it is a very formal economy. You have housing markets. You have lots of retail chains. Most things are purchased in a formal way, so you can measure and record what’s going on. I would guess that probably 80% of retail in Nigeria is informal. It’s street-side. It’s individual traders here and there. It’s hard to have a real view of what’s going on, with measurable numbers. But to answer your question, yes, Nigerians are now working for telecom companies, for example, and the big multinationals are now paying UK-US-sized salaries. Husbands and wives are both working. There is construction going on. So you can see a middle class being created in Nigeria. EA, PHBWith the emergence of what is being called a middle class and reforms in the banking sector, the retail market has come alive with consumer loans and micro finance. People have robust access to credit, and that is driving consumption. Africa has close to 600 million people, about 10% of the world population. So Africa must be courted because of its consumption potential, despite the challenges.Euromoney How fast is your consumer loan portfolio growing? How much have you seen the consumer lending business change and develop?EA, PHB It has been growing quite rapidly over the past two or three years. As a percentage of the total loans, our consumer loans perhaps account for 30%, as opposed to 10% or 15% previously. There are special products designed for the retail end of the market that are templated, and simple to access. And the default rate is low. GT, Standard Bank Group As the middle class grows and wealth levels increase, consumer finance will grow. What is critical is having the underlying banking structures in place to facilitate that growth. In Nigeria, there has been a huge change in the banking structure and that has enabled banks to build consumer finance businesses and push in a more conventional way. The investors looking for alpha are a somewhat special case but for the mainstream to perform, there has to be a fundamental system in place. In the case of Nigeria, 80 banks had to become 24. In South Africa, from a policy framework perspective, you have a finance minister and a governor of the Reserve Bank who are hugely credible internationally. That gives investors a lot of confidence. It matters less what the specific rules of the game are as long as the rules are clear, and so if you’re inflation targeting and there’s an independent central bank and people know that, great. People have to have certainty around what they’re doing.NR, Citigroup The creation of a consumer-driven society or an economy that is demand-led to some extent is still evolving, outside the three countries we’ve talked about, and in a country as large as Nigeria it is still work in progress. It is obviously complicated by the fact that Nigeria has a very large informal sector. The potential is immense, and the reforms have given it the underpinnings to go much further. So it’s very interesting from an investor perspective, and not just financial investors but also from industrial and others in terms of what the latent demand in that market is, because with the growth of the consumer finance activity over there, the potential demand is a multiple of what we see today. So the process is beginning. In the rest of Africa the Ghanas, the Tanzanias and the Ugandas may be the next Kenyas. But if you look at the contribution of the financial sector, the small and medium-sized businesses are still under-banked, under-serviced, and that is another potential area of interest and activity. You see the emergence of an entrepreneurial class, which is not very well serviced. I would say Uganda or Ghana would benefit from the development of more robust SME financing. But it’s embryonic. We do not have a very mature consumer finance and SME culture in these environments and it’s an opportunity for us.EA, PHB While I agree that it’s work in progress, I would say that with the capacity that a number of banks have taken the bull by the horns to deepen their play in the retail end of the market, because it is a game of numbers. For instance, as an initiative, PHB visited a bank in India which has some similarities with Nigeria in terms of retail banking, with centralized shared services. So we’ve deployed some of their successful strategies and replicated most of what they are doing. GT, Standard Bank GroupYou can’t just transplant a western retail banking model into Africa, so looking at the Indian model and adapting it is innovative. Using the mobile phone for banking, where people don’t have access to a bank account, or can’t go into their branch – those are the sorts of innovations banks have to strive for.NR, Citigroup Absolutely. In Kenya, Safaricom has been very successful in terms of bringing in a segment of the population that does not normally have access to financial services, and giving them an infrastructure and the ability to settle payments. There have been some very interesting experiments in Mozambique, where they’ve looked at how electricity can be billed in terms of prepayment. There are alternative approaches that you will have to experiment with, given the nature of the current infrastructure.BS, Helios Nigeria had capital, and has had the necessary reforms. But Nigeria has also benefited from its people, who have worked for 10, 15 years in the west and are coming back to the country and applying their skills and networks and relationships. Other countries have different factors driving the growth. In Angola, there’s been 25 years of war, but they’ve now become the largest producer of oil in Africa. Kenya’s growth is due to investment in infrastructure, education and people, with proper tax collection and good policies. So Africa is not one size fits all.NR, Citigroup The question is, how do you keep progress going?

BS, Helios
My view is that it is about the people. It’s about having a large number of people who are internationally exposed and have the networks, connections and credibility to attract the help you need to make it happen in your country. That is the sustainability factor.

And the political climate too, which will engender consistent policies and sustainability.

Effects of the credit crunch

Euromoney Is the global economic situation going to affect developments in Africa? Or are they immune to credit contagion?VO, PHB Capital is still coming in but it is coming in both slowly and more expensively. The availability of trade financing is lower and that limits the extent to which the local banks can support local customers, and that in turn affects the business of these customers. Therefore, as long as the entire global banking environment is inter-related, mainly through offshore credit and trade lines, and as long as the credit crunch affects the capacity of some of the global players to lend to the local banks or their customers, we are not immune.Euromoney So through your correspondent banking relationships you can feel people’s risk appetite for Nigeria being reduced?VO, PHB That’s one way. There are many others. Some foreign companies whose parents are affected by the credit crunch and who were considering investing in the Nigerian market might find themselves slowing down. They have to first save their parents or consolidate in their domestic, primary markets. You can only export what you have. So a lot of institutions are engaging more in housekeeping than expanding, and that again is affecting the African market.GT, Standard Bank Group Some international banks are now spending a lot more time looking at emerging markets and a lot of bankers who have been focused on western markets are reinventing themselves as emerging markets guys – so the international credit crunch has actually led to increased focus on emerging markets and Africa. The market for talent is extremely tight in the main emerging markets compared with London, for example. So it’s an interesting equation.NR, Citigroup The talent pool available to the continent has expanded all of a sudden. It’s a by-product, but it is a plus.

HH, Merrill Lynch
The domestic African banking market has not been affected by the same systemic issues on structured credit and asset-backed securities as elsewhere. This is a positive thing. It means that they are not capital constrained, writing off bad debts like their western counterparties. But the reason they haven’t been affected is not necessarily because everyone was much smarter than the western counterparties in deciding not to do those things. It reflects the lack of securitization, legal infrastructure and balance sheet management being used by African banking institutions. It has turned out to be an advantage but it also offers a lot of opportunity and efficiency enhancement for the future for the sector, because that is an efficient way and a valuable tool to use. Africa is competing for the same pool of investment dollars as all the other global opportunities, theoretically speaking. Where that is most acute is in the structured credit market in terms of equity-backed lending, structured finance, private transactions for projects and so forth. So while the economic landscapes in Nigeria, in Kenya, in Angola, are the same or better than they were 18 months ago, the cost of capital that it takes to attract international investors to that opportunity have substantially increased. International investors now have lots of high-yielding alternatives, even with triple-B-rated paper from the banks and from other things, whose spreads have increased from 100 basis points to 400 basis points. So, while the risk is the same with the African opportunities, the amount investors demand for allocating money there compared with what it can do in Europe and the US with most investment-grade paper has also increased. So from the African business and entrepreneurs’ perspective, the cost of financing has increased, which makes it more difficult to attract funding and for that funding to be viable compared with domestic.EA, PHB Investment flows have definitely been affected and there are certainly risks in coming to invest in a country such as Nigeria. But look at MTN. Telecoms is one sector that has experienced a transformation in the country, and the potential is still immense. We hadn’t witnessed that kind of phenomenal growth in profitability in all the countries of Africa put together. Why has that happened? Nigeria has a captive population, captive markets, and the government reforms in the banking sector have put disposable income in the hands of consumers. They are able to access basic things. There was a time when the man on the street couldn’t afford to buy a telephone, couldn’t afford to make a call. Now you can buy a SIM card for less than a dollar. People in the rural villages are also connected. There’s huge potential. People are not so sensitive to the transaction costs, and that drives the return. The returns in countries like Nigeria far outstrip the returns in mature economies. We have a very stable government now and we have reason to believe that the president will be there at least for the next seven years. This might lead to some resurgence of investment into the country. But I would say right now that South Africa is a little ahead in terms of development.

South Africa’s challenges

Euromoney You mention South Africa. What can one say about trends in the economy, trends in banking sector governance and so on. Is there a danger of the country going the way of Zimbabwe?GT, Standard Bank Group South Africa clearly has some big challenges ahead. But there is strong rule of law. There are strong institutions. There is a good and independent central banking authority. There is a sensible monetary system policy. A comparison between Zimbabwe and South Africa is trite. South Africa is a much more mature and sophisticated economy. It’s got better and more established infrastructure. There’s a much bigger services component to the economy rather than relying on a resource and minerals background. There are some fundamental positives that will sustain South Africa. So what are the challenges? The economy is softening, clearly. Food inflation is high, and that’s hurting. The disparity in income, sadly, has widened since 1994, and that poverty gap is a huge issue. There is a lot of wealth but there is a lot of poverty, and that creates tensions in any country. That has to be overcome, and one of the key parts of that is education and educational infrastructure. In all the negativity, we forget where South Africa came from. In the late 1980s, Mandela was in prison. Newspapers couldn’t publish a photograph of him because he was a banned person. He was meant not to exist. We’ve since been through a relatively short period of pretty peaceful transition without a full-scale civil war – that is without precedent. It’s not surprising there’ve been bumps in the road, and one of those areas that attracts attention is crime. But remember that the police suddenly had to shift from enforcing apartheid and being a force looking out for 5 million white people, to a force for 45 million South Africans. There will be rough times, but the fundamentals are there and I’m positive about it.Euromoney Nigeria and South Africa are in a race to lead the continent: which one is winning?GT, Standard Bank Group Nigeria is clearly on the up. South Africa has had an incredible run over the past five to 10 years and it’s dipping off slightly now. But economies throughout the world go through cycles, and South Africa and Nigeria are no exception.

NR, Citigroup
Where South Africa came from is totally different to where Nigeria is. But the transition was remarkable. The scenarios you were looking at in 1994 were totally different to today. It was never going to be perfectly smooth. But in terms of what has been achieved, in terms of showing that institutions remain, there is a rule of law, there are fundamentals which operate, the transition has been remarkable. This is a period of transition, economically and, to some extent, politically. There’s concern about the change, but the rule of process, rule of law will prevail, in spite of what’s happening politically. I don’t think we’re dealing with a set of circumstances that are not manageable.GT, Standard Bank Group The election of Jacob Zuma proves to me that democracy is working within the ANC.

NR, Citigroup
And the surprise is a positive one.

I can’t see Zuma sustaining the economic policies of Mbeki and Mandela, and that’s the fear. There’s a thin line between political stability and consistency in economic policies. The other issue is the governance. Recently there’s been some violence, and that’s been rubbing off on foreign direct investment and capital flows. People are scared of going into South Africa to invest.BT, ABR/Nepad Business Group My concern here is the perception of the credibility of Jacob Zuma compared with Mandela and Mbeki. It’s not clear how he will govern, and people look at that. But the sudden opening up, the freedom of South Africa, brought with it this insecurity and crime. The government shouldn’t deny this, but go all out to stamp on it. Otherwise people will start to say they are hiding something, even though the problem may not be as big as the perception. Government transparency, accountability and credibility in South Africa should not be sacrificed on the altar of politics or else that great country will suffer loss of confidence from the international community and investors. In addition, the model which is put in place by Trevor Manuel needs to be sustained and that includes the Black Empowerment Act. Together with countries like Nigeria and Egypt, South Africa is a regional pole for developing Africa; it remains a major gateway for capital inflow into Africa. South Africa is very important to African development. Put Nigeria together with South Africa in terms of the market, and let them use their expertise to develop the ability to produce something which within Africa they are now importing from other sources. The leadership must understand these finer points, and address the challenges.GT, Standard Bank GroupYes, in company speak, what South Africa needs is perhaps less of a chairman and more of a chief operating officer – execution and delivery are key.

What are your clients’ views on South Africa at the moment? Are they increasing or decreasing exposure? HH, Merrill Lynch There’s been a more bearish outlook starting with the power cuts, because that wasn’t a natural disaster. It shows systemic mismanagement by the government. But South Africa is obviously at a different level of development for the rest of sub-Saharan Africa. It is an emerging market, but it’s very well developed. The concern is not so much that it’s going to implode like Zimbabwe or have this kind of digital-type event, as much as it’s just going to be cruising along, stagnating. In terms of capital flows coming in, of course South Africa is much more stable and it’s a known quantity, but it also offers much less return than the rest of sub-Sahara. It will continue to be a core piece of emerging market for metals, mining, natural resources investors’ portfolio, but people are not overly excited about it. They’re not overly fearful, but it runs the risk, with this administration and forthcoming ones, of stagnating and punching below its weight.

Investor segmentation

Euromoney What different classes of investment firms are you talking to, and what kinds of opportunities do they like? HH, Merrill Lynch There are all types of investor, from institutional long-only funds, hedge funds to private investors and private banks. In terms of how they like to invest, many are looking at specific companies, and we’ve mentioned the challenges regarding the quality of information there. Research does exist for some companies, and some investors do their own because they want to invest in a specific company or in a specific sector. But one of our key goals is bringing international investors to sub-Saharan Africa, and we aim to make it as easy and as cost-efficient as possible. We offer single stocks but we also put together investable baskets of shares, for example, in Nigeria and Kenya, or sector baskets in telecommunications, banking, food and agro. Earlier this year we launched a broad Merrill Lynch Africa Lions index, which gives exposure to the African continent, but through a wide range of means. This includes buying local shares but also buying shares of companies, in South Africa or in Egypt or Kuwait, that have extensive sub-Saharan operations, and even investing in some very Africa-focused companies listed in London or on AIM or in Canada, where their sole assets may be copper mines in Congo. So we’re taking the full gamut of opportunities to get as comprehensive a coverage as possible for those investors that don’t have the resources or the inclination to do specific company research, but want to capture the macro trends in Africa. Part of the process of making it easy is putting it in an instrument and in a currency investors understand, so in a Merrill Lynch certificate that is dollar or euro-denominated. We then do all the administrative work of local custodians, brokers and currencies. But we find that the economic story of Africa is compelling from the macro all the way down to the micro level, and if you make it easy for people to capitalize on that, more investors come in.EuromoneyWhat relatively are the amounts of money that you see looking at Africa versus the Gulf, for example?HH, Merrill Lynch Excluding South Africa, the overall amount focused on sub-Saharan Africa compared with the Middle East or central and eastern Europe is smaller because the available equity securities in terms of liquidity and so forth is substantially less. The Nigerian stock market trades about $40 million per day. Dubai trades about $800 million a day and Abu Dhabi trades $600 million. And as you go from Nigeria to Kenya and then to Ghana, Mauritius and so forth, it becomes harder and harder to put large amounts of money to work. The high transaction cost for trading in these markets hinders liquidity. And that’s for public equity. The other type of transactions, including private equity, structured credit-type transactions requires a much deeper set of analysis and due diligence. They have to look at the documents, the paperwork and the legal regime. Investors that are willing to spend the resources looking at opportunities can put relatively large numbers to work. Ordinary institutional investors just don’t have the resources to focus on private transactions, so they’re constrained by the liquidity of the markets and not being able to put enough money to work on it.Euromoney So accessing the market is difficult?NR, Citigroup Well there is a dichotomy between financial sector flows and FDI, and there are different reasons why they may or may not succeed. There is the issue of liquidity but, apart from in some of the smaller markets, with a bit of engineering, that is fixable. But once you move outside of the financial sector, you come up against more difficult issues which are more fundamental to these economies; accountability, transparency, education, financial infrastructure or hard infrastructure. We’ve mentioned the cellular telephony revolution but that infrastructure is relatively mobile, relatively easy to install and to fix. How replicable is that into agriculture, into tourism and into other elements of the economy which require investment? In agriculture, one of the biggest enablers would be land reform. Access to title, clarity of title, the ability to consolidate large tracts of land, to enable commercial farming at some industrial level... those are the real issues. You do need the financial underpinnings in the markets to extend capital to those sectors. But how do you get commercial farming into countries which have that potential? Nigeria used to be an agriculture-driven economy before they discovered oil. There is a limited agricultural set-up now. Because of limited infrastructure, the road networks are inadequate. There are shortages of electricity and power and limited educational facilities for children in the rural areas. One of the biggest challenges facing Nigeria is excessive urbanization. So how do you help people in rural areas develop a business so they can maintain a way of life? Land reform is a fundamental issue all across Africa, and agriculture is one of the sectors with the biggest unrealized potential within Africa.EuromoneyStandard Bank is creating funds to invest in Africa. How will they invest?GT, Standard Bank Group On the private equity side, in addition to a general consumer-driven investment focus we will have an infrastructure, resources and real estate sector focus. As these economies formalize more, and wealth levels increase we believe there will be tremendous opportunities in consumer-driven areas such as retail, leisure, services, non-bank financial and mobile-telephony, for example.Euromoney But do you want to take majority stakes and management control?GT, Standard Bank Group No. We’ll take significant stakes, 20%-plus. The private equity buyout model in western markets is totally hung up around control. In emerging markets generally, not just in Africa, there’s a different approach. You’re very often injecting growth capital. You have a shareholders’ agreement which means you can get liquidity after a reasonable timeframe, which is the ultimate thing that matters to us and our investors. If your partnership isn’t right and your legal protections aren’t right, owning more than 50% is irrelevant.

Infrastructure: problem and investment opportunity

Euromoney There are some substantial obstacles if one wants to invest in Africa in any meaningful way, and it’s everybody’s job round the table to help break down those barriers so that this foreign capital can be put to work. One area that needs it is infrastructure. To completely fix 24-hour electricity in Nigeria would apparently cost $85 billion. That’s clearly enough for any investor and would obviously be a long-term positive thing. But how do you invest in power in Nigeria? How do you build the financial infrastructure to make that happen?GT, Standard Bank GroupThere could be good returns in these markets from a private equity standpoint, but you need to have a network and a partnership. Standard Bank partnered with IBTC in Nigeria and that opens up that market to us in a way that helps us get through some of these issues and understand them. You can’t just apply a pure western model to it. There has to be a hybrid. Yes, there’s a huge need for infrastructure in Africa but it’s very different to a model that a Macquarie or a Babcock use in western Europe. It’s much more greenfield, and you’ve got to make sure you understand the political landscape. I don’t think infrastructure in Africa, from an equity standpoint, is yet a slam dunk. That being said, we are the leading African project finance provider, so we know and understand the infrastructure market in Africa better than anyone. We’ve also got a debt fund – the "emerging Africa infrastructure fund" of about $400 million – that is financing a lot of infrastructure projects. As far as capital flows into Africa are concerned, the traditional axes are shifting. China has put $5 billion in buying 20% of Standard Bank. We get a lot of interest from Chinese, Russian and Brazilian businesses, looking to invest. There is a shift away from the traditional G8-type powers. That is going to drive a lot of investment.

Security of supply

HH, Merrill Lynch Of course you have investors that are financially motivated but particularly with the Chinese, the Brazilians and the Indians they’re also driven by security of supply. A Brazilian or Chinese steel company needs steady supplies of iron ore, coal and metals. It’s the Chinese investors, which are private sector but come with the government attached, that are one of the drivers of infrastructure in the frontier-type markets, such as Angola and Equatorial Guinea. A steady source of supply also requires a railway or a road, a port and a loading facility, which is great for the country, because that can then be used by other investors too and can be the catalyst for much wider development.BT, ABR/Nepad Business Group Sub-Saharan African infrastructure requires a huge inflow of investment, because of the demand but there needs to be the political will in the public sector to encourage that inflow and to mitigate the risks. The public sector is the biggest spender in Africa and it controls and drives the investments when they come in. The public sector’s attitude has to change. Bureaucracy is very strong, and that determines how the investment moves forward. We need to reduce bureaucracy, encourage private-public partnerships and so on. The public and private are not currently sharing space. We need to solve that. We in the African Business Roundtable are working with Nepad on the Nepad infrastructure facility. We are also working with sub-regional bodies such as Ecowas [the Economic Community of West African States] to set up regional mechanisms for financing infrastructure. That, of course, is in addition to many instruments in the international system for infrastructure financing from the World Bank, for example, the African Development Bank, the G8 Africa Action plan, Millennium Challenge Corporation and a host of bilateral instruments.VO, PHBWhen we talk about successes in attracting investment in Africa, we need to understand critically what factors underpin them. It wasn’t the foreign investors suddenly waking up to realize there’s an opportunity in Nigeria. The government reformed and put a few things in place, the private sector in Nigeria caught up with that and then opportunity blossomed. If the central bank had not made the moves, the Nigerian banking sector would not be where it is now. Standard Bank might not have approached IBTC. So, when we ask: "How do we get Africa off the ground from where we are?", it goes back to the public sector making the right decisions – land reform, investing in power, basically taking the lead, and then private sectors latching on to that. There are many foreign and local banks and institutions interested in providing investment for an independent power supply. But you won’t see the necessary level of progress unless government provides the enabling framework, and the right policies, to ensure their investments are protected, that contracts are respected, and the rule of law is followed. And when you look at the sectors in government that have reformed successfully, it is often the sectors led by individuals who have private sector orientation, who know what needs to be done and are hungry for positive changes. The way forward for Africans lies within Africa. It’s up to us to put our house in order. And when we do that, FDI will multiply. When we have all the necessary frameworks and structures in place, then PPP when properly structured brings about the desired results. We need the right individuals to show interest in governance, and become the policymakers, not just advisers. We need the right people in strategic government positions, to help change the direction of governance. We need the right chief operating officers in those key ministries. When all these happen, Nigeria and, by implication, Africa, will record even more strong growth and performance on a sustainable basis. EA, PHB We’re beginning to see how private-public partnerships can work, and I don’t believe that public sector alone can do it. I attended a pre-summit meeting of the African Union, and the theme of this conference was how to partner the private sector with public sector – PPP. Heads of industry, Shell, all came together to prepare a communiqué for the heads of state who were meeting the next day. I chaired a lot of sessions, and the challenge, as we’d suspected, was in the execution. We lacked the discipline to follow through, so despite the intelligent discussions and positive strategies, it was a waste of time. We need to have governance in Africa, and the political will to power the private sector to drive infrastructure. There is a huge Chinese company that has recently come into Nigeria, wanting to partner with some state governments. They went to the state of Enugu, which has huge coal deposits. The government of Enugu said: ‘Come around, we’ll give you land, providing you let us keep the coal.’ A strategic alliance was struck, and today they have a wide expanse of land they are operating. They have provided employment. They have reduced crime and the government is going to reap huge benefit from that partnership. They’re going to address infrastructure, roads and a number of other things. China’s volume of trade in Nigeria in 2007 was worth $3 billion. China has seen huge potential in Nigeria. It’s come in, diagnosed the problem, diagnosed a solution, and come up with workable market strategies.