[Column] Wildu du Plessis: A new opportunity for African nations to work together, overcome challenges
As parts of the world appear to fragment or turn inwards, there is a new opportunity for African nations to work together and speak with one voice, now that the operational phase of the African Continental Free Trade Area (AfCFTA) has been launched. The AfCFTA is set to be the first continent-wide African trade agreement, with the potential to facilitate and harmonise trade and infrastructure development in Africa. It includes protocols, rules and procedures on trade, simplified customs procedures as well as dispute resolution mechanisms – all aimed at creating a single legal framework for the continent, and making it easier to trade and invest across borders.
Key to boosting this investment potential - and enabling African economies to make the most of their opportunities – is developing infrastructure. An important part of this is the creation of cohesive regional economic hubs by developing infrastructure that links countries together. This will increase the ease of cross-border transactions and grow investment across African regions organically.
According to African Development Bank, poor infrastructure has cost Africa a cumulative 25% in growth in the last two decades. Our recent report, ‘A Changing World: New trends in emerging market infrastructure finance’ shows that development finance lending is the most important factor in the funding of infrastructure projects in Africa and that the battle for influence on the continent between development finance institutions from China and the US was heating up. China put US$8.7 billion in sub-Saharan Africa infrastructure projects in 2017 alone, while the US recently repurposed OPIC to become a brand new US$60 billion agency to invest in developing countries. At the end of 2018, the US reiterated its commitment to strong partnerships with key countries in Africa and said it would also seek to promote intraregional trade and commercial ties with its African allies, shifting its focus from “indiscriminate aid” to one of trade and investment.
Further, China’s Belt & Road Initiative (BRI) has provided opportunities in major projects in the power and infrastructure sector and related financing in Africa. One advantage of the BRI for both African governments and project sponsors is that it is reported to assist in the speed of project implementation, an important consideration for investors. Other noteworthy advantages for countries in Africa who have already benefitted from the BRI, include the boost to the economy of the resultant growth of infrastructure, the development of new skills and the creation of jobs.
But there is also rising concern amongst African sovereigns who are worried about the long term effects on their dependence on China. China, however, has reiterated that wants to be considered a responsible investor in Africa. It remains to be seen whether this concern has an impact on Chinese involvement in the funding infrastructure projects in future years. Meanwhile, African countries have also begun building capacity to correct the imbalance between borrowers and lenders in the negotiation phase, so that more balanced agreements can be reached
Despite the launch of the AfCFTA, investors should never assume one country is the same as any other in Africa. Even if they are geographical neighbours, each country is vastly different to the next. The legal systems in many countries are also changing rapidly, stemming from a desire to encourage foreign investment, but also out of a need to protect the rights and resources of a country and its people. Investors must be able to negotiate a myriad of laws and regulations in a challenging environment. In order to close deals, investors must have access to real knowledge and data instead of having to rely on market perception, because while investors in Africa usually do not mind a challenge, they have no affinity for uncertainty.
In Saharan Africa, countries such as Rwanda and Ghana (despite some ups and downs) are getting it right in terms of striking the right balance between encouraging investment and protecting the rights of the country and its people. These countries do not have major governance concerns and they are attracting a lot of interest and investment. Botswana, although a lot smaller, is also a country that investors want to know more about. These countries have provided investors with certainty and clarity and they are now reaping the benefits of their good governance.
Countries that have the ability to attract investment but that need work include South Africa, Kenya and Nigeria. All three have large GDPs and big populations but there are concerns over governance and their ability to implement good policy. These countries need to focus on increasing certainty and clarity for investors and making sure that newly implemented policies are aligned and consistent.
AfCTA will enable the continent to become a more dynamic trade and investment environment, providing more clarity on cross-border trade and boosting investment across the continent.
This column a contribution to [Africa CEO Forum] What are the opportunities that AfCFTA brings for business?