Exx Africa INSIGHT

BY SECTOR

Agriculture

Agriculture is the backbone of Africa’s economy and is the largest contributor to the continent’s GDP. While most agriculture consists of subsistence farming, there are substantial opportunities in new markets for commercial agribusiness. Foreign investors are currently buying rights to massive sections of African land for crop development to improve their own country’s home food security. Investors should be wary of community protests in rural areas, a lack of basic infrastructure to get goods to market, and the risk of state expropriation in some countries.

Aviation & Airports

Africa’s aviation sector is booming, in both passenger and cargo traffic. Large international airline carriers are increasing their routes into the continent and establishing new aviation hubs. Meanwhile, countries such as South Africa, Ethiopia, Morocco, and Kenya have established successful carriers that are able to compete with more established European, Asian, and American carriers. The aviation sector also includes military and UN flights, as well as smaller airplane and helicopter flights in remote locations. We look at shoot-down risks across the continent, licence frustration, and unfair competition practices.

Banking & Financial Services

The financial sector in Africa is very diverse. Both foreign and African banks already dominate the continent’s retail banking sector, although there are opportunities for new entrants to market. International banks are the largest players in export finance, project finance, and structured commodity finance. There are also substantial opportunities in the nascent African insurance sector, especially in countries such as Kenya and Nigeria. Investors in financial services are at risk of contract frustration, increased taxation, and unfair competition practices.

Construction & Engineering

The large deficit in transport, power, and water infrastructure has opened up substantial opportunities for construction companies. South African, French, Brazilian, and Portuguese firms dominate in their respective spheres of influence. Yet Chinese construction conglomerates have a privileged position in many countries, especially where massive commodity-for-infrastructure credit schemes are in place. Construction companies are especially exposed to demands for bribes and other forms of corruption. The sector is also at risk of security perils, state non-payment or delayed payment, and discrimination.

Government

The public sector is at particular risk of protests and riots. Parliamentary, executive, judiciary, municipal buildings, as well as public utilities, embassies and consulates, public residences and office buildings are exposed to collateral and targeted damage during outbreaks of violence.

Hotels & Entertainment

The tourism and hospitality sectors are growing across the continent, even in some previously inaccessible areas. International investors are often encouraged to partner with local or politically affiliated partners. African sovereign wealth funds are also being applied to invest in the continent’s tourism sector. Increasing numbers of African consumers and an influx of Asian tourists will drive growth in the sector. Security risks, such as terrorism and protests and riots are primary concerns for the industry.

Manufacturing & Chemicals

Manufacturing is being touted by governments as Africa’s economic future and a crucial component of economic diversification, local beneficiation, and a local employment creator. However, manufacturing will be off to a slow start due to serious skills shortages, bureaucratic hurdles, and an infrastructure deficit. Governments will seek to force extractive sectors to add value to local economies by imposing raw ore export bans and differential pricing systems, as well as require local processing. Mining and oil and gas companies will face greatest risk of such government intervention.

Marine & Ports

Large sea port developments are under construction in both East and West Africa, primarily aimed at improving access to export markets for African commodities and for the import of manufactured goods. Road and rail networks, airports, and pipelines will be constructued on the back of these developments. The expansion of Africa’s marine cargo capability will alleviate pressure off large existing ports where strikes are increasingly common and cargo flows are systematically seriously delayed. The risk of piracy in the Gulf of Aden has been mitigated by an international naval response, yet kidnap risks and cargo theft are increasing in the Gulf of Guinea.

Military & Security

African militaries are ramping up investment in new hardware and weapons systems. Countries like Angola, Nigeria, Ethiopia, Chad, and Kenya have made significant new arms acquisitions over the past few years. African militaries are less involved in cross-border conflicts and are increasingly deployed in regional peace-keeping or peace-making initiatives. Foreign defence vendors will be exposed to demands for bribes and other forms of corruption, as well as preferential treatment for favoured partners. African governments will also increasingly require foreign defence companies to manufacture equipment locally.

Mining

The drop in global commodity prices has resulted in mine sell-offs, shaft closures, delayed investments, and restructuring resulting in mass retrenchments. In many countries, the risk of industrial action and associated protests and riots will increase on the back of these restructuring plans. Yet new and smaller investors, as well as larger investors from non-traditional investment origins, will see opportunities to invest in the sector. Foreign companies will face a wide variety of serious risks, including security threats, demands for kickbacks and bribes, increased taxation, and currency inconvertibility. The greatest risk to mining companies will be demands from governments to strictly implement local content requirements and to process more minerals locally.

NGO & UN

The NGO sector and other international or multilateral organisations face a new challenge as African governments are lowering their dependence on foreign aid, while increasing their reliance on foreign investment. NGOs and UN missions will still face a variety of security threats, especially in war zones or from terrorist and other militant organisations. Governments are also increasingly likely to close down or restrict NGO operations.

Oil & Gas

The fall in global oil and gas prices has resulted in the cancellation of a number of exploration and production projects. However, many projects will still continue in nascent producing countries such as Kenya, Uganda, Mozambique, and Tanzania. Large existing producers will however suffer from reduced or delayed investment. Expropriation and taxation risks will increase in countries where governments are under pressure to increase revenues from the sector. Energy operators will be at greatest risk from government demands for companies to strictly adhere to local content regulations. Foreign energy companies are also exposed to demands for bribes and other forms of corruption.

Power & Utility

The massive power deficit in a number of African countries has increased the need for both public and private investment in renewable and non-renewable sources of power. There are substantial opportunities for US, Asian, and European firms to invest in electricity generation projects, as well as water distribution. The greatest risk to such projects will be demands for kickbacks and other forms of corruption. Foreign investors will often be required to partner with local politically affiliated companies. Moreover, power projects face risk of non-payment or delayed payment, contract frustration and licence cancellation.

Retail

Africa’s consumer classes boom has not taken off as fast as expected and several large retail and distribution companies have exited the market in recent years. However, there are still substantial opportunities in countries with large or fast expanding populations. Multinational companies will face strong competition from African retailers seeking to expand on the continent, raising the risk of industrial action and discrimination. Retailers also face risk of theft and demands by governments to implement strict local content policies. Retailers’ supply chain will be under pressure from poor infrastructure, affecting timely distribibution and power supply.

Road & Rail

As part of the infrastructure expansion in Africa, massive new investments are being made in roads and rail networks across the continent. China has played a dominant role in the construction of roads and rail, yet its dominance is wavering as other foreign and African construction companies seek greater involvement in transport infrastructure development. Increasingly, roads and rail will be built and financed by African firms and banks. Such projects will face a variety of risk perils including security threats, demands for kickbacks, non-payment or delayed payment, and other forms of contract frustation.

Telecoms & IT

Africa’s telecoms sector is growing fast across the continent, though from a very low base in most countries. Foreign telecoms companies increasingly face competition from local operators and demands for improved service delivery. A change in government increases the risk of licence revision or cancellation. Security threats pose risk to telecoms infrastructure.

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