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The Vacuum of Investments in Africa

China’s economic engagement in Africa has expanded over the past two decades to encompass raw materials, agriculture, infrastructure and other business ventures once considered the near exclusive preserve of Western corporations and U.S.-dominated multilateral institutions. As Beijing’s footprint has grown, so too have Cold War-esque warnings that the opaque nature of China’s financial dealings in Africa mask an effort to exert control over the continent’s politics and resources.

Cold war goggles obscure the nuanced nature of China’s engagement with Africa, the agency of African nations and businesses to choose their own partners, and the opportunities that exist on the continent for non-Chinese investors. As Karma Insider Thando Mhlambiso, Director of Allan Gray Proprietary Limited, puts it, “We’re yearning to modernize and develop our countries… So part of that requires capital and we would love for that capital to come from the U.S., from Europe, from wherever. And even from other African countries.”

It’s Complicated

China has evolved from a bit player in Africa at the turn of the century, to its biggest trading partner and infrastructure investor. China’s trade surplus with Africa has grown as Beijing has shifted focus from resource rich countries to rising consumer economies. But the West is not sidelined. The U.S. remains the largest net donor to Africa and has sent more FDI into the continent than China in all but three of the last 15 years. Britain and France rank second and third.

Critics accuse Beijing of engaging in imperialist practices in Africa, including land grabs, failing to employ and train locals on its African-based enterprises, and predatory lending practices. However, it turns out most land grab stories are fake. Researchers at Johns Hopkins SAIS investigated 57 reports of alleged large scale land purchases or negotiations by Chinese firms in Africa. Nearly one-third of the reports were untrue, while the remainder had grossly exaggerated the amount of land acquired.

89% of employees at Chinese-owned enterprises in Africa surveyed by McKinsey were locals, while nearly two-thirds of those firms provided some level of skills training. But less than half the managers at the surveyed firms were African.

Debt is a worry. According to SAIS-CARI, between 2000 and 2015 the Chinese government, banks and contractors extended U.S. $94.4 billion worth of loans to African governments and state-owned enterprises. And China has seized plum assets in other parts of the world when governments have defaulted on loan repayments. After Sri Lanka defaulted on a Chinese loan, Beijing took a 99-year lease on a naval facility strategically located along the long and vulnerable shipping lanes Persian Gulf oil must navigate to power China’s economy.

Which might explain why U.S. Treasury Secretary Steven Mnuchin told participants attending the IMF’s 2018 Spring Meetings that the U.S. would not allow IMF bailouts to be used to repay non-transparent excessive loans from Chinese entities. And also why the Trump administration recently announced “Connect Africa,” a $1 billion investment credit plan. The money, pending congressional approval, would buy down risk through the U.S. Overseas Private Investment Corporation (OPIC), targeting sub-Saharan Africa’s infrastructure, communications and supply chain projects.

The Opportunities

Though extremely diverse and impossible to frame with sweeping generalizations, Africa – and SSA in particular – is home to some of the fastest growing economies in the world with a rapidly expanding consumer class. Growth looks sustainable despite lingering political and sovereignty risks.

Backing this up, consumer spending in SSA is projected to reach $2.1 trillion by 2025, up from just $800 billion in 2012, according to McKinsey. And China’s infrastructure efforts do not meet SSA’s infrastructure demand, estimated by Ernst & Young Global Limited as a $90 billion annual gap if Africa is to reach global norms.

Thoughts from The Karma Network

Speaking with insiders in The Karma Network, there was no shortage of opinions on China’s work in Africa to date. Aubrey Hruby is a senior fellow at the Atlantic Council and longtime advisor to companies doing business in Africa. “The SSA startup ecosystem is thriving,” said Aubrey, and often focused on helping Africans to adapt digital technology to overcome the lack of indigenous banking or urban infrastructure. But there’s a paucity of VC funding. “I put it up over 500 million but that 500 million is like a drop in the bucket for a billion people especially compared to the venture capital penetration in India or China.” And China is not really taking advantage of VC opportunities, according to Hruby. “There aren't that many Chinese venture into venture firms going into Africa.”

Steven Grin is Managing Partner at Lateral Capital, which accelerates and invests in early-stage and growth ventures in SSA. “You have 70 million legitimate, small, high growth businesses in these [SSA] markets not being served by traditional capital... DFIs and large sort of household name private equity funds.”

Charles Robertson is Chief Economist at Renaissance Capital. “Every African country should be growing at least 3 to 4 percent a year just because of the number of kids coming into the labor market. The average age in Nigeria is about 18 or 19. Half of the 190 million people are children. And millions are coming into the labor market every year. So that’s already a huge opportunity.” He adds that China is not alone in their efforts to industrialize Africa. “If there’s a next country rival for China [in Africa] it’s probably India because India too is now on its industrializing path.”

Thando Mlambiso continues, “Don’t be afraid to go into places because of perceived risk. Really try to assess whether or not the actual risk is what you believe.”If he had to choose a country, Mlambiso’s pick would be South Africa. “There are companies which I think are still pretty good as South African players… some of them have the potential to grow into other parts of Africa and perhaps globally as well.

The Risks

All in all, Africa is a frontier market where the ground can shift quickly under investors’ feet, and the risks very much reflect this. Coups and uprisings still occur, but with far less frequency than in the past. Africa’s rule-of-law rankings are far below other regions, according to The Global Rule of Law and Business Dashboard, an annual journal published by the U.S. Chamber of Commerce. Contract enforcement can be challenging and political patronage can put a license to operate at risk when the head of government or even just the leader of a particular ministry changes. And SSA debt-to-GDP topped the 50 percent mark in 2017 for the first time in decades. While alleviated with sweeping forgiveness by the West in 2005, debt has crept northward again, often propelled by opaque Chinese loans.

The Karma Factor

Prudent investments in Africa that leverage the money both China and many others are pouring in can bring what impact investors call “a double bottom line” - great ROI and the satisfaction of directing capital to one of the places where humanity needs it most.

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