Asian investment into Africa totals billions, but the continent needs to focus less on commodities to keep the cash coming
As Africa reduces its reliance on aid as its traditional source of finance, it positions itself as a major business opportunity for overseas investors. Since 2008 the continent has seen a fivefold increase in foreign direct investment (FDI), with Asian economies leading the field.
More recently however, FDI into the continent, including from Asia, has tapered off. How can Africa ensure the continued inward flows of FDI it needs for its development? And how can the continent continue to attract investment from Asia, which offers opportunities for considerable growth? To answer these questions, we need to look at the continent’s Asian investment story so far.
Data from the 2015 United Nations Conference on Trade and Development (UNCTAD) World Investment Report shows China ranked as the top Asian investor in the continent, with more than $32 billion invested by 2015. Singapore follows, having so far committed more than $17 billion in project financing to the continent, mostly in gas, mining and energy projects. India has provided more than $15 billion in project finance, while Malaysia has invested more than $14 billion.
In the past decade, Nigeria, South Africa and Mozambique have attracted the most project financing from Asian investors. Japan’s investments in Nigeria have made it the top recipient country, with more than $22 billion, while South Africa was China’s top investment destination. The southern African country, which has seen its Asian investments rise to $11,7 billion in the past ten years, raked in more than $5 billion from Beijing in the same period.
Mozambique has seen its inward FDI rise to $9,6 billion; the majority of it from India. Malaysia’s Petronas – with oil interests in South Africa and Mauritania, gas interests in Cameroon, and extensive investments in Central and West Africa – has considerably increased its investments into the continent over the past decade. Other top recipients of Asian investments include the Democratic Republic of the Congo (DRC) – with
$6,9 billion mainly from Chinese investments – and Egypt, with
$5,9 billion from countries including Japan and Singapore. Morocco has also seen some significant investment – $4,9 billion – with Japan being its top investor.
“Despite the renewed interest in the continent, there has been a significant decline of FDI growth rate in Africa’s commodity-dependent economies, which traditionally have been attractive. However, we expect the inflows to return to a growth in the 2016 figures,”
Dr. Mukhisa Kituyi, UNCTAD secretary-general, said during a public lecture at Strathmore University in Nairobi late last year.
China’s capital expenditure and investment in Africa have increased dramatically over the past five years. Chinese enterprises, many of them state-owned, have expanded their footprints to reach almost every country on the continent. South Africa, Zambia, Zimbabwe and Ethiopia have been the top destination countries, with investments in railway construction, trade, services, mining, manufacturing, construction, and telecommunication. At the start of 2015, a quarter of China’s investments in the continent were concentrated on mining in South Africa, Zambia, the DRC and Zimbabwe.In Nigeria, China is financing and constructing the $12 billion Coastal Railway project – a 1,400 km line to connect Lagos and Calabar. It’s the largest finance deal it has attempted in Africa. Beijing is also financing and constructing Kenya’s Standard Gauge Railway Project ($4 billion); Uganda’s modern railway line from the Kenyan border to Kampala ($2,9 billion); and the Ethiopia-Djibouti railway line ($3,4 billion).
China also secured the $7 billion contract to construct a port in Bagamoyo, Tanzania, as well as a $6 billion development project for three mines in the DRC. Other projects include the $4,4 billion Dangote cement plant expansion projects in Ethiopia and Nigeria, and a $3 billion railway between Chad and Sudan.
Apurva Saghni, former World Bank lead economist for East Africa, says that China’s financing infrastructure in Africa has crowded out well-known local firms.
“The notion of ‘finance, build and … operate’ has given them the muscle to handle these multibillion dollar projects, but it is coming at a cost, mostly ethical concerns, trade imbalances and labour relations issues,” says Saghni, now the World Bank lead economist for Russia.
Chinese firms have apparently not sought many independent engagements. The firms usually ride on bilateral engagements between China and African countries to win investment opportunities on the continent.
According to David Dollar, a senior fellow at the Brookings Institution, China’s FDI into the continent is minimal when compared with the levels of FDI coming from other countries.
“Three years ago, Chinese direct investment to Africa was only five percent of the total inflows into the continent, making their contribution modest, but significant enough to contribute to African growth,” says Dollar in a report released last year.
Mozambique has also emerged as an investment playground for Asia’s top three investing nations, with India, China, and Japan jostling for Maputo’s attention. Last year China almost ousted India as the top source of FDI into the country, but the latter’s interests in energy in Mozambique still make it one of that country’s top investment partners.
In the past decade, India’s state-owned oil and gas firms have pumped more than $7 billion into Mozambique’s Rovuma gas field, with an equal amount expected in the next three years. Since 2012 the Bank of Mozambique has listed more than $650 million in non-extractive investments from India. Last year Indian Prime Minister Narendra Modi’s African tour began in Maputo, signalling Mozambique’s importance. The country has received more than $5 billion in FDI inflows from India over the past decade.
“India’s interest in Mozambique, just like the other Asian and African nations like South Africa, is its extractive sector, mainly the gas reserves. These countries are just seeking to diversify their sources of these liquefied products and that’s why we are seeing that keen interest in their investments in Maputo,” said Lourenço Sambo, director of Mozambique’s Investment Promotion Centre (IPC).
Japan and China have also been competing for Africa’s mineral imports, with Japan looking for gas deals in Mozambique and involvement in Zambia’s coal products, in exchange for $32 million in infrastructure development. Last year China also increased its investments in these two countries, with a similar focus on their commodities. But data from the IPC shows the country has seen a massive drop in FDI in the past two years, from a high of $7 billion in 2014 to $1,4 billion in 2015. An even lower figure was expected for last year because of the country’s challenging economic environment.
Japan’s investment into Africa has been growing, with its key focus on the energy, mining, and manufacturing sectors. Last year at the Sixth Tokyo International Conference on African Development summit in Nairobi, it announced a new $30 billion African investment package geared towards infrastructure development – including energy projects that will increase production capacity by 2,200 megawatts across the continent – and education and healthcare expansion over the next three years.
Andrew Jones, head of the Africa unit at global law firm Linklaters, says that Japan’s quieter approach to investing in the continent has been its key strength.
“When you look at the rankings, it is no surprise that the country is a serious investor. The government has pushed its firms to invest not just in mineral-rich countries, but beyond. That’s why we are seeing them spreading across Africa, sponsoring multimillion dollar projects,” he told Africa in Fact.
In 2015 Tokyo’s investments in Africa accounted for $3,5 billion, the majority of it invested in Nigeria, with a $1 billion monorail project in Lagos, and the Panasonic, Yamaha and Suzuki assembly plants. In East Africa it has financed a $220 million ports infrastructure improvement project and in Nairobi, a $130 million road project. Another project is a $199,3 million roads development project for Kampala. In Mozambique it is spending $300 million on the Nacala Port expansion, while Mitsui & Co., a general trading and investment company, has invested in Mozambique’s offshore natural gas.
“Tokyo’s overseas development has for a long time been tied to countries whose economies are commodity-driven, but the entry of China and the changing geopolitical competition between these two Asian tigers has seen them look beyond minerals and offer grants, concessional loans and aid in exchange for not just economic benefit but also geo-political support, especially its quest, together with the continents, for a permanent seat at the United Nations,” says James Mureu, chairman of the National Economic Diplomacy Committee at the Kenya National Chamber of Commerce and Industry.
In the coming years FDI inflows into Africa are expected to increase, depending on the economic growth performance of the various regions, with several greenfield projects already announced. Already Japan’s Toyota, Honda and Nissan have announced new investments in plants in Kenya, Nigeria and Egypt respectively, while China also announced new motor vehicle investments in Kenya and South Africa. Turkey has just bagged a $2,1 billion railway financing and construction project in Tanzania.
Kevin Tuitoek, an economic analyst at the International Monetary Fund’s Nairobi office, said that African countries have moved to ease doing business to attract more investments.
“We have seen what the vulnerability of commodity prices has done to several countries, including Angola, Nigeria, Zambia and even South Africa. We are seeing countries working on favourable policies to support FDI into the other sectors, including [the] services and manufacturing sector,” says Tuitoek.
It is clear then, that to keep this large-scale Asian investment coming, Africa needs to be more business-friendly and move away from its own focus on commodities.