16 August 2004
Since 1994, South Africa has become one of the biggest and boldest investors in Africa, looking beyond its immediate neighbours for investment potential and expanding its presence beyond the “old economy” of mining, retail and related industries.
A recent survey by the South African Institute of International Affairs (SAIIA) found that, in less than a decade, South Africa has become one of the top 10 investors in many African countries.
In 2002, in particular, while international firms shied away, local businesses took on the risks often associated with doing business on the continent – the SAIIA survey ranked South Africa the top investor in the continent for the year, with a total of R3.4-billion in investment deals north of the border.
This research is backed up by a 2003 report by online business information firm LiquidAfrica Research, which found that SA was the largest investor in the rest of Africa between 1990 and 2000, with investment averaging around US$1.4-billion annually, totalling around $12.5-billion for the decade – followed by the US with less than $10-billion, and substantially ahead of France, the UK, Germany and other foreign investors.
SA firms take more risks
Bernard de Haldevang, CE of political risk insurers African Trade Insurance Agency, told Business Day that the big reason Western companies stayed away from Africa was heightened perception of risk.
“European and North American business people, some of whom do not know the difference between the Democratic Republic of Congo and the Congo, are often hugely ignorant about African affairs and open only to hearing bad news from the continent”, De Haldevang said.
But return on equity can be as high as 30% – provided companies are prepared to do their homework. Investing in Africa often requires long and complicated due diligence investigations, De Haldevang told Business Day.
According to the South Africa Foundation, an association of top South Africa businesses, South African companies have focused on markets that are opening up in the global economy. These include financial services, information communication technologies (ICTs), retail and mining.
Beyond ‘old economy’ sectors
Recent research published by the Foundation notes that “Investment in the ‘new economy’ sectors such as ICT and financial services has tended to follow economic liberalisation, whilst investment in the ‘old economy’ of mining, retail and related industries has followed a less predictable path, with investment often despite, rather than because of, the prevailing environment.”
Although more difficult to track, the research says service sectors are becoming a bigger part of the South African presence. Besides the financial, ICT, retail and mining services sectors, new service sectors such as those in the oil industry, advertising, franchising and architectural design are gaining a foothold.
Beyond SA’s immediate neighbours
South Africa has also been looking beyond its immediate neighbours for investment potential, and SA business in West Africa – especially Nigeria and Ghana – and East Africa (Tanzania, Kenya and Uganda) has been picking up.
South Africans have traditionally found it difficult to do business in Francophone Africa. Language and cultural barriers, and the domination of the Francophone markets by Belgian and French multinationals, have made inroads problematic.
According to ThisDay, businesses have also been eyeing North Africa, particularly Morocco, for its investment potential. South African exports to Morocco spiked more than 43% in 2002. Algeria’s increasingly stable political climate and gradual shifts in economic temperament are also expected to produce new potential for exploration.
Although cultural challenges also exist in Lusophone countries, the proximity of Mozambique and Angola has forced the hand of local companies seeking profitable prospects closer to home.
The Economist Intelligence Unit’s regional director for Africa, Pratibha Thaker, told Business Day recently that South Africa was involved in half of the projects privatised in Mozambique in 2003.
State enterprises lead the way
Both private sector and state-owned companies have made investment headway on the continent. But the South Africa Foundation says state-owned enterprises are a key link for development on the continent, “whether in their own right or as levers for private sector development and investment in other markets in Africa.”
Before 1994, only power utility Eskom and rail parastatal Spoornet worked north of the border. Since then, however, cross-border investment activity has increased sharply, with Eskom, Transnet, state ICT group Arivia.kom and Denel all venturing into new markets.
Eskom operates in 20 African countries – and has its eye on another 10. Transport parastatal Transnet is Africa’s largest transport logistics company, and together with its subsidiaries has agreements and operations in about 35 African countries. Among Transnet’s better-known subsidiaries are South African Airways (SAA) and rail parastatal Spoornet. It operates 80% of Africa’s total rail infrastructure, while SAA continues to dominate air transport on the continent.
The South Africa Foundation research concludes that SA’s economic domination on the continent is neither “predatorial” nor development-orientated. Rather, its expansion is part of global forces at play.
“Companies operating in other African markets, more often than not, are basing investment or project decisions on the merits of each case, and more importantly the desire of the host country to attract foreign direct investment into the country”, the foundation says in its report.
Some major SA companies in Africa
Cellphone operator MTN’s 2.2-million subscribers in Uganda, Rwanda, Cameroon, Swaziland and Nigeria contributed R1.194-billion to its net profit in the 2002 financial year. MTN reported a R4.4-billion profit for 2003, thanks in part to high margins in its African operations.
Vodacom, MTN’s main rival in South Africa, had 773 000 customers in Lesotho, Tanzania and the DRC by the end of the 2002 financial year. While Vodacom’s highest growth is in South Africa, it recently reported strong growth in both the DRC and Tanzania.
In March 2004, global brewing giant SABMiller, in conjunction with French partner the Castel Group, set up two joint ventures worth $46-million in Algeria and Morocco. In Algeria, SABMiller acquired a 25% direct interest in two Castel carbonated soft drink plants and one brewery, together with a 15.78% stake in a second brewery in which Castel is a majority shareholder. In Morocco, SABMiller acquired a 25% interest in a holding company which has controlling interests in three breweries, a malting plant and a wet depot. Given SABMiller’s existing 20% stake in Castel’s African operations, the new joint ventures are effectively owned 60% by Castel and 40% by SABMiller. “The size of the beer market in Morocco is approximately 1 million hectolitres per annum, with reasonable growth prospects over the next five years”, SABMiller said. “The joint venture commands a 95% market share and has a capacity to brew approximately 1.3 million hectolitres per annum.”. SABMiller is listed on the JSE and the London Stock Exchange.
In June 2004, tourism group Tourvest detailed plans to positioning itself as a dominant force in Zimbabwe. The group has bought several small companies in the Victoria Falls area – including Adrift, African Sports and Leisure, and other operations which have merged under the Wild Horizons brand – together valued at US$7-million. Tourvest has now increased its stake in elephant safari operation Wild Horizons to 60% of the combined business. Although tourist numbers have declined recently as a result of the instability in Zimbabwe, the company believes the situation is improving and that a turnaround is imminent. The earnings of the acquired businesses are mainly US dollar-based, providing Tourvest with another foreign exchange income stream.
Shoprite Holdings is now the largest food retailer in Africa, with 692 stores in 15 countries. Operations outside South Africa contributed R2.6-billion or 10% to the group’s revenue in 2002. In June 2004, less than a year after opening a supermarket in Angola, Shoprite opened a US$8-million store in Kampala, Uganda. Together with another SA retail group, Massmart, Shoprite built the Lugogo shopping centre in which the store was opened. Shoprite and Massmart’s chain retailer, Game, are also expected to be the anchor tenants in two new shopping centres in Abuja and Lagos, Nigeria.
In June 2004, retail group Massmart opened a US$7.5-million Game store in Kampala, Uganda. Massmart operates 55 other stores in eight other African countries, but the Kampala store represents Game’s first ever direct investment in the premises from which it trades. All of the chain’s other African stores operate from leased premises. Together with food retailer Shoprite, Massmart built the Lugogo shopping centre in which the store was opened.
Truworths and Woolworths regularly feature among the new crop of shopping centres springing up in the continent’s capitals.
NuMetro cinemas are setting up shop in the Lagos, Nigeria shopping centre which has attracted both Shoprite and Game.
South African fast food franchises such as Steers, Nandos, Chicken Licken and pizza chain Debonairs are household names in many African capitals.
Key trading partners
Trade and investment are closely linked, and large capital investments by South African-based multinationals in African countries have frequently resulted in increased trade flows between South Africa and the investment destinations.
Southern African countries remain South Africa’s key trading partners, particularly Zimbabwe (R6.5-billion in 2003) and Mozambique (R5.6-billion), the country’s top two African export destinations.
Nigeria is rapidly becoming South Africa’s biggest trading partner in West Africa. The growth of the oil and gas industries along Nigeria’s west coast is expected to boost shipping volumes to the country, as South Africa is increasingly seen as a good supplier of high-quality raw and prepared materials for coastal oil-producing countries on the continent.
After Zimbabwe and Mozambique, South Africa’s top export destinations on the continent are Nigeria, Zamiba, Angola, Mauritius, Tanzania and Kenya. Top countries for imports are Nigeria (R2.7-billion in 2003) and Zimbabwe at just under the same amount.