• Wednesday, May 22, 2024
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INVESTMENT SOLUTION: Does Africa’s political subculture stymie private equity investment?



Private equity was the African investment story to watch according to the 2008 Africa Economic Outlook (AEO) report by the Organisation for Economic Co-operation and Development (OECD). Efforts by African governments to encourage foreign participation in the telecoms industry and banking sector reforms were some of reasons put forward. The $3.4 billion private equity-backed buyout of Celtel, founded by Mo Ibrahim, in 2006 is emblematic of the rising opportunities in Africa’s telecoms sector; 4 out of 10 Africans have a mobile phone. And Africa was the first region in the world to offer free, mobile roaming services across several countries.
Nonetheless, socio-political troubles worsened in 2007. Fragile and often unrepresentative democratic institutions, freedom of the press, the rule of law and government transparency remain weak and corruption is widespread at all levels of politics and the economy. All the same, the long-term trend is viewed as positive.
According to a report by The Economist Intelligence Unit (EIU), Over the next five years there will be national, multiparty elections in nearly every country in SSA. It sounds a note of warning though more elections do not necessarily mean better governments.

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For instance, the return of the incumbent ie, continuity, can usher in a different ruling elite: ethnically, religiously and economically. Professed ideologies aside, Africa’s political elite have in the main continued down the same rent-seeking paths as their predecessors.
Their impact on African citizens, through higher or lower levels of intervention in the economy, can range from currency collapses as in Zimbabwe or economic development, attracting fresh investment and creating the conditions for local entrepreneurship to thrive.
Furthermore, the effects of the global downturn, raised in the 2008 OECD report, were highlighted in OECD’s 2009 report. But still, the positive role that information communication technologies (ICT) could play was emphasised.
Today, Celtel, which was renamed Zain, is in talks with Vivendi, the French multimedia firm. Zain plans to sell its African operations, valued at between $11 billion and $12 billion. Vivendi isn’t the only firm seeking to gain access to emerging markets. Vodafone now controls South Africa’s Vodacom. Meanwhile, Bharti-Airtel of India and MTN, Africa’s largest mobile operator, are discussing a merger. Also, African Finance Corporation (AFC) is partly funding a $240 million project by Main One, a Nigerian company. Main One plans to connect the whole of West Africa via fibre optic cables.
In 2006 Foreign Direct Investments (FDI) flows into the continent was $36 billion, double that of 2004. The $2.3 billion raised for sub-Saharan Africa (SSA) was up 200 percent in 2006. South African funds manage 80 percent of total SSA PE capital, followed by Nigeria with 10 percent.
Local sourcing of capital has also been on the increase. A quarter of funds raised for the continent were from South Africa eg, Pamodzi, a South African private equity firm, launched a $1.3 billion fund in 2007, Africa’s largest. Africa Capital Alliance, a Nigeria based private equity firm, recently closed its $200 million Capital Alliance Private Equity III (CAPE III) fund.
Private equity by primarily focusing consumer-related and communications sector have an arguably stronger impact on Africans’ daily lives, and stand out as a dynamic and diversified counterpoint to classic sources of foreign investment in Africa.
That said, Africa’s growth for 2009 is projected to fall to 2.8 percent; after growing above 5 percent for four consecutive years. Growth of 4.8 percent is expected for 2010. Economies, like Nigeria, heavily reliant on commodity exports will be the hardest hit. Persistent high prices of internationally traded food eg, grains and vegetable oils and moderately rising inflation will affect consumers, especially the urban poor.
Good governance and reduction of corruption are considered to be as important as ever. Deterioration of the economic situation could jeopardise some of the advances made toward greater democracy and better governance. Yet, compared to 10 years ago, wiser macroeconomic policies and recent multilateral debt-relief will stand African economies in good stead. Also, growing ties with Latin America and Asian emerging economies as development and trade partners will reduce the continent’s vulnerability to the global recession.
Innovative use of ICT eg, to scale up levels of bank-users, building on the ubiquity of mobile phones, is vital for breaking barriers to market development. For example, in Kenya, where only 26 percent of the population has a bank account, mobile-payment services have attracted over five million users in less than two years. Pan-African operators are already offering free roaming services across 12 countries. Africa is the only region in the world where this innovative business model exists.
Long term, Africa’s prospects are hinged on balancing macroeconomic fundamentals and structural reforms (infrastructure development, institutional improvements and poverty-reduction programmes); sustainable fiscal policies; transparent governance; socio-political cohesion; a business-conducive environment; removal of hurdles to ICT infrastructure development; improved regulation and regional economic development.

Micro, macro and governance matters
Paul Collier, professor of Economics at Oxford University, in a recent interview with Finance & Development, a quarterly magazine of the IMF, says aid to Africa hasn’t worked because the focus has been on macro issues. It’s largely a microeconomic agenda and so the macro depends upon the micro.
To Collier, The micro agenda that seems to work there involves freeing up firms to be able to enter quickly and exit quickly. Using the database from the World Bank’s Doing Business surveys, this is what we find. Where countries have easy entry and exit for firms, the consequence of a falling commodity price is much smaller for GDP.
Multilateral organisations, economists and analysts say Africa needs a prolonged phase of investment in physical infrastructure through public and private capital to catch-up with the rest of the world. According to Prof Collier, To catch up, to converge with other economies, [investment in Africa] needs to be over 30 percent. So they must move from under 20 to over 30. That’s a big change.
Governance also makes a huge change. The World Bank’s 2009 World Governance Indicators (WGI) lends weight to this. The report remarks that improved governance strengthens development, and not the other way around. When governance is improved by one standard deviation, infant mortality declines by two-thirds and incomes rise about three-fold in the long run.
For instance, the WGI report states that, governance reporting difficulties aside, one standard deviation is what separates low ratings (in the dimension of rule of law) of countries like Afghanistan from still low ratings of Nigeria. The rule of law provides stability. Stable laws mean businesses can predict, to some extent, future outcomes of risks. Risks are minimised when there are legal institutions that curtail corruption, enforce property rights and enforce contracts.
The Global Venture Capital and Private Equity Index
The key goal of venture capital (VC) or private equity (PE) transactions is to align risk and return ratios. To achieve this they trawl the world, and often set their sights on emerging regions remarks the preliminary (and yet to be published) results of the global venture capital and private equity country attractiveness index by IESE, the Barcelona-based international business school.
The idea behind IESE’s VCPE ranking is a measure, which captures specific factors like economic activity, capital markets, taxation, investor protection and corporate governance, human and social environment and entrepreneurial activities. The index ranks 66 countries, grouped into eight regions: North America, Australasia, Western Europe, Middle East, Eastern Europe, Latin America and Africa. The aim is to facilitate asset allocation decisions of VC/PE. Four African countries: Kenya, Morocco, Nigeria, South Africa, featured.
To measure their competitiveness, strengths and weaknesses, 66 data series from used data sources like the World Bank, IMF were collected. A scale of 1 (worst) to 100 (best) was used with the US as benchmark to facilitate country comparisons.
The index shows significant correlation with investment activity of VC/PE. For instance, 3-year average VCPE investment volume is closely related to the VC/PE index. On a year by year basis, the positive relationships between investment data for 2006-2008 demonstrate the predictive powers of the results. Thus it more or less provides a glimpse of the opportunities, or lack thereof, facing the featured African countries.
Africa maintained its 8th position in the 2008 and 2009 VCPE ranking. The region slipped down one point on the human and social environment sub-index. Key drivers of this factor are education, labour regulations, bribery and corruption and cost of crime. However, Africa maintained 2008 positions for the other seven factors. Africa’s capital market, though with the least value (10.4), ranked the highest (6th). At 94.2, the sub-index on taxation (tax incentives and administrative tax burdens) was the highest in value.
South Africa performed best of the four African countries. Factors such as investors’ protection, taxation and capital markets, similar to what’s obtainable in half of the countries surveyed, buoyed South Africa’s position.
South Africa ranked 45th overall and 4th among its peers. In descending order, Israel, UAE, Saudi Arabia, Oman, Morocco, Egypt, Nigeria and Kenya are the countries within this group. Between 2008 and 2009, South Africa improved in factors such as taxation and entrepreneurial opportunities. Nigeria, in contrast, performed poorly in terms of entrepreneurial prospects over the same period.
Innovation, starting, running and closing a business, and ICT infrastructure are the key drivers of entrepreneurial opportunities. Like South Africa, tax incentives in Nigeria were the only improvements between 2008 and 2009. Though other factors remained constant, Nigeria’s taxation sub-index increased by three points. Of the four African countries, Morocco’s capital market sub-index moved up the most by four places.
Overall Nigeria was ranked 63rd, one spot above Kenya. In Kenya, two factors: capital markets and human and social environment declined; yet opportunities for new ventures improved in 2009. Unlike Kenya, the capital market improved in Morocco. Ranked 56th and 6th, overall and among its peers respectively, Morocco’s taxation sub-index declined by two points at variance with the score and rank of other African countries.