Speech delivered Wednesday, 1 August 2012 at the Africa Risk Conference at the JSE.
Ladies and gentleman – why are we all here at the JSE discussing Africa and the issue of Risk?
I believe it because we are optimistic about Africa but aware of its complexity. The continent is transforming beyond recognition – and for the better.
The challenge for Africa – is how to make the last decade’s improvements in governance, peace, stability and economic growth sustainable.
But let us also first acknowledge that there are many real risks and issues facing Africa and its investors. There is a need for caution when generalising about the complexity of 54 independent states.
Recently Brand South Africa commissioned a study of companies invested in South Africa, which found that the top obstacles to further investment for local and international companies were issues like: crime, corruption, inefficient bureaucracy, labour regulations and skills levels. These issues are exhaustively explored each day in the South African media.
Likewise Ernst & Young’s 2012 Africa Attractiveness Survey identified political instability, corruption and security as the major risks associated with African investment.
This is well illustrated by the upheavals in North Africa – which it must be said were largely unpredicted by the ‘risk industry’. Today the Arab Spring still continues to dominate North Africa and the Middle East, severely effecting investment and growth. According to The Financial Times’ 2012 FDI report, which measures only new investment projects or significant expansions of existing projects, for 2011 there was a 29% decline in FDI projects into Egypt and a 14% fall in Tunisia.
That said, despite the political upheaval in North Africa, as a whole, Africa remained a so-called hotspot with a 24% increase in recorded FDI projects in 2011.
This has been the trend for the last five years right through the global financial crisis. Drawing on the fDi intelligence data up to February 2012, Ernst & Young found that the number of FDI projects in Africa have grown at a compound rate of close to 20% since 2007.
Here I am glad to report that South Africa was the best performing country in the Africa in 2011 recording a 57% increase in project numbers and an 87% growth in capital investment.
But what does this tell us about risk and why investors are choosing Africa?
To recap: the various continental scourges are well known. Political infighting, weak institutions, poverty, poor infrastructure and trade regulations, graft, lack of skills…. one really can construct and exhaustive list of woes which beset many countries on the continent.
The risks are definitely there, so it must be the potential rewards which are attracting unprecedented and sustained investment growth.
Despite the economic upheaval in global markets, Africa is the world’s 2nd fast growing region and delivers the highest returns on FDI in the world. But it is also a confusing continent of 54 nations each with their own risk profile, internal and regional dynamics. This makes accurately identifying, weighting, contextualising and pricing these risks – and of course the rewards – a truly daunting task. In fact Deloitte’s Africa Risk Map about which I am sure we will hear more later has created a service precisely to provide insight into this very complexity.
There are many reasons why the many risks I’ve already mentioned seem to be outweighed by the huge potential rewards, but let me list some of them.
The commodities super-cycle has served African growth well. It is a prime source of the vital resources which are sustaining emerging economies in Asia and elsewhere. The massive new investments in extractive industries from energy to minerals is well documented. And, as food security rises up the international agenda so too will the demand for arable land. By some estimates 60% of the world’s available unexploited cropland lies in sub-Saharan Africa.
But what about the people?
Africa is young, increasingly wealthy and urbanising. By 2050 about 60% of Africans will live in cities – cities which will need infrastructure to be financed and built; and which will become concentrated markets for consumer products and services.
According to UN, Africa will have a population of about 2 billion by 2050. At present the median age is 19.7 compared to 32 for BRIC nations and 40.1 for Europe. These figures describe the millions of workers and middle class consumers who are already creating economies of scale and becoming the growth markets of the future. The rise of mobile telephony, the internet, and increasingly wide access to financial services are both driving and demonstrating that the Africa of today and tomorrow is very different from that of the 1970’s, 80’s and 90’s.
While we must celebrate the greater democracy, peace and stability there is no credible risk model that will not be conscious of how difficult it is to predict or quantify political risk or economic contagion.
What we do know is that perceptions of risk vary dramatically depending on who you speak to; and where you stand.
This is why I am representing Brand South Africa and speaking to you here today.
Brand South Africa, which is the new name of the old International Marketing Council of South Africa, has as its mandate: “to build South Africa’s nation brand reputation
in order to improve South Africa’s global competitiveness.” This mandate reflects a greater focus on driving international investment and trade.
Let us be clear. Every country, or region has a “brand” – a way in which the country is perceived. If it has a reputation as a safe or profitable investment destination this reputation will improve its competitiveness – leading to further investment and a virtuous cycle of trade, development, stability and economic growth.
This is what we as Brand South Africa try to do for South Africa. As such we are acutely aware, as you will be too, that perceptions of risk, as with anything else are not based on uncontested facts or immutable laws.
The questions I ask of you, is whether we need to question our perceptions and understanding of risk when considering Africa?
Put differently – should we recalibrate the way we view risk when considering Africa?
Why do I say this? Investment risk models require a blend of subjective judgements and objective data inputs. But for some countries the quality of the objective data is far stronger than for others. South Africa’s excellent auditing and reporting standards – rated no.1 in the world by the World Economic Forum – mean that we have a high degree of comfort that our data is assured, peer reviewed and can be relied upon. In fact I suspect you would feel more comfortable trusting the financial statements of many South African listed entities than for instance some of the European banks…
But this level of assurance is not the same in all African markets. The appraisal and weighting of risk – being less informed by rich sources of assured data – becomes far more reliant on perceptions, in-market intelligence and other more subjective decisions.
And what informs these more subjective decisions?
Subjective perceptions will be influenced by prejudices – by which I mean pre-judgements both positively OR negatively.
The more you know about a country or region; the more you have a feel for it; the more you understand its political and business culture – the more context you have and the more likely you are to make fair and informed subjective judgements. Language, cultural affinity, experience, insider access, personal history all play a crucial role.
Clearly there is a very strong experiential aspect which informs our subjective judgements.
Common sense? Absolutely.
But there are also authoritative research which backs this up in the African context. According to Ernst & Young’s 2012 Africa Attractiveness Survey – executives already doing business in Africa are overwhelmingly positive and rank Africa’s relative attractiveness above every other region except Asia – which only just pushes us into second place. But executives with no business presence in Africa were overwhelmingly negative –citing risk factors such as political instability, corruption and security as major obstacles.
Now, you and I, and the well-resourced international company executives who form these judgments all have access to the same sort of statistics, media and professional analysts’ research reports. In fact if the truth be told we are drowning in information.
So we can only conclude that the differentiator when making a judgement on Africa is not so much the objective data – but rather experiential factors. It is the subjective knowledge of doing business in Africa that must account for the radical difference in perceptions about Africa Risk.
For South African business, indeed for all businesses and even African governments this has profound implications.
It is in everyone’s interest to have the most accurate and realistic view of African and South African risk. Reliable risk appraisals will of course not only decrease the chance of bad investments but will also reduce the expensive risk premiums that attach to African investments and debt. In effect – more reliable risk assessments will improve our national and continental competitiveness.
So what can we do to generate more informed risk assessments and drive investment in Africa?
When asked what Africa should do to change its attractiveness executives speak about political stability, curbing corruption, improving the ease of doing business, better local access to finance and several factors relating to more coherent regional integration, such as one-stop border posts and tax harmonization.
I am glad to say this is precisely the direction events are taking
That companies already invested in Africa can make very good returns; and that the prognosis for the future is good, is largely known to us here today. But to cement these gains, to attract the capital, trade, technology and the business relationships needed to continue and enhance Africa’s growth we need to also speak to those who are not yet ‘converted’ to the African growth story.
So we must become activist in telling our story. After ten years or more, awareness of the ‘African growth story” of rising incomes, growing GDPs, expanding consumer markets, increased regional integration, improved governance, development and greater stability, is starting to spread.
South Africa believes that no country in Africa can reach its full potential by working in isolation. This is as true of our collective political and economic destiny as it is of our efforts to explain ourselves as countries and regions to each other, and to market Africa as an investment and trade destination to the world.
As South Africans we are learning that our greatest strength on the world stage, indeed our greatest competitive advantage and most exciting opportunities for sustained growth and development, lie in our being in, and part of, Africa.
This is why South Africa champions what is known as an ‘African Agenda’ – a raft of policy proposals which support sustainable and diversified economic growth, development, security, deepening regional and continental integration, unity and increased international influence for the continent as a whole.
We are proud to be amongst the 26 African countries which signed an agreement in June last year to create a free trade area that covers more than half of Africa. We hope that by June 2014, nearly 60% of the economy of Africa with a combined GDP of $1trillion and encompassing 600 million people will be a single free trade area, covering the Southern, Eastern and Central Africa.
Ultimately we hope to achieve the African Union’s plan for a Continental Free Trade Area which will create a virtuous cycle of economies of scale, lowering the costs and risks of doing business, and maximising Africa’s competitive and comparative advantages.
But non-tariff barriers to trade and investment also need to removed. These are the border facilities, regulations and procedures which inhabit efficient African trade routes; the lack of road, rail, port and other infrastructure that isolates vast swathes of the continent; and the poor economic diversification which restricts Africa to exporting commodities not creating our own industries.
Already plans are in motion to achieve this in South Africa and across the continent.
To drive development and attract local African and international investment and trade we need to encourage greater collaboration and cooperation in how we position ourselves.
This is a collaboration not just between business and governments but also between African nations, and between their state, private and transnational institutions.
Many of the best opportunities for attracting foreign direct investment and trade will lie in highlighting our regional competitive advantages – such as integrated markets and development corridors which may span many countries.
For example to fully understand the risks and opportunities within the greater Ibadan-Lagos-Accra urban corridor will require a grasp of the risk and opportunities in Nigeria, Benin, Togo and Ghana. The potential of the East African Community will accrue to five countries – and investors need to understand them.
Likewise, regional infrastructure projects like the North-South Road and Rail Corridor project, which is chaired by President Zuma, will unlock potential and change the dynamics of eight countries in eastern and southern Africa.
This is not simply about upgrading road, rail, power and port facilities, as well as simplifying cross-border regulatory procedures, so that producers and traders can access regional and international markets more easily.
To fully benefit from the raft of proposed and existing infrastructure projects linking African countries to each other and to international markets we need to promote our regional as well as national advantages.
South Africa’s business and government are putting both effort and ‘money where their mouths are’ in Africa by developing mutually beneficial capacity and opportunities – particularly in relation to infrastructure and investment.
Over the last decade South Africa has been the leading Foreign Direct Investor in Africa though it is now being joined by China and other developing nations. Our business sector has a strong track record of developing innovations suitable for African markets in areas such as:
o Banking and financial services
o Retail and mining
To encourage further growth and mitigate risks South Africa is orientating government policies, regulations and institutions to support African investment and integration. A few examples will serve to illustrate this:
South Africa hopes to leverage our membership of BRICS to increase trade and investment into Africa and support the African Agenda.
We are of course actively backing the African integration agenda while also investing hundreds of billions of dollars into infrastructure both in the region and in South Africa.
Our relatively advanced infrastructure of roads, ports, rail and communication networks offers a trade link for the landlocked countries in southern Africa to the world and positions the country as a regional transhipment hub for sub-Saharan Africa to deliver on NEPADs regional integration agenda.
In terms of investment it is not just our private sector which is investing heavily in Africa.
Together with its partners in business and government South Africa hopes to build on the many successful examples of mutually beneficial regional cooperation such as joint maritime anti-piracy programmes, the Maputo Development Corridor, the Lesotho Highlands Water Project and the successful joint 1.5 billion dollar plus programme with eight other African countries (and Australia) to build the Square Kilometre Array – the world’s largest and most technologically advanced radio telescope.
Recently, the Public Investment Corporation – which mainly manages government workers’ pensions and has over R1trillion in funds – has been authorised to invest about 10% of its funds internationally of which half – or about R50billion will be in Africa. Of this between 40%-60% (up to $3.8billion) will be earmarked for Private Equity.
Likewise the IDC has expanded its remit to include African investment and will consider new or existing companies within Africa with funding needs from R1million to R1billion. The IDC’s Africa Strategic Business Unit has already established relationships with Development Finance Institutions and regional forums in 34 African countries.
The JSE already offers a wide range of investment instruments focused on Africa outside of South Africa. The differentiation (for listing purposes) between African and non-African companies will end and the decision to offer a Depository Receipts (DRs) service to African companies will allow for greater exposure and diversification.
These are just some of the policy and investment changes which are supporting African growth. But South Africa has many competitive advantages which it should use for our own and Africa’s benefit. Our strength in professional and financial services is widely recognised. While confidence in global financial markets is low – our financial market development was ranked in 4th place globally in the 2011/12 World Economic Forum’s (WEF) Global Competitiveness Index.
We are rated number one for the regulation of the securities exchange and for the strength of our auditing and reporting standards. The WEF also rated us 2nd for both the soundness of banks and for the efficacy of corporate boards. South Africa is in 3rd position for the protection of minority shareholders’ interests and the availability of financial services and 4th for financing through the local equities market.
This means that South Africa is well positioned to become a deal-making, financial and professional services hub for the entire region. Here we are not competing with our neighbours but with New York, London, Hong Kong and other international finance centres. Our existing nexus of excellent banking, legal, advisory, risk and other professional services, along with our continental experience and globally integrated capital markets should be utilized to provide access to capital for African businesses and support inward investment and trade.
We should understand African risk better than anyone else. Our business has a long and distinguished track record on the continent. We are part and parcel of risk mitigation activities – whether this be peacekeeping and regional security, improving institutions and regulations or investing in infrastructure.
As Africans we have an experiential advantage in interpreting African risk which should make up for deficiencies in the published data. Business, academics and government should be championing better and deeper knowledge of Africa not simply because we are well placed to do so, but because we are talking about ourselves.
To summarise – we need more and deeper dialogue between countries, government, business, media and the public to dispel out-dated myths and to recalibrate how risk is seen in Africa.
I believe this conference is one of many such forums in which we will do just that.