NEW APPROACHES TO FINANCING RAPID ECONOMIC GROWTH IN AFRICA
As we all know, financing rapid economic growth is one of the greatest challenges facing the continent today.
However, I am confident that with the right approaches, we can overcome this challenge and unleash the full potential of Africa’s economies.
The challenge with funding Africa has never been a lack of ideas. It’s always been one of political will and implementation, especially against backdrop of active resistance to the economic development of the continent by external beneficiaries.
My contribution is to underscore the emphasis placed on certain potentially useful ideas and introduce one or two more ideas that may get us started on
implementation.
Let me start by stating you what I believe I can add to these discussions:
As Chairman/CEO of Blackstone PE – not to be confused with Blackstone Group out of New York – we are unapologetically focused on Africa. That means we begin where the arguments against investing in Africa are concluded.
As a result, we are focused on Alternative Financing Strategies and Mechanisms.
We start by asking how African Governments, Businesses, and Entrepreneurs can access pooled capital if they have to be subjected to inflexible Regulatory rules designed for developed economies.
I personally have been in this space for thirty years and that means I have a pretty good idea of what I will be talking about.
I know we are aware of the oft-repeated challenges regarding Growth Finance in Africa.The Need to improve the business environment, foster political stability, invest in infrastructure, promote regional integration, provide incentives like tax breaks, develop local industries and so on.
While I agree, I believe what is important is how all of thses should be funded. I have put together 10 suggestions I believe will generate the finance needed for Rapid Economic Growth in the Continent.
But first, let us be clear about the Role of Government because that will never change:
Government should focus on policies and regulations that create an enabling environment for private sector investment in key sectors.
It is also important to stress the active resistance from External Funding Sources for the development of Africa. We have to wake up to the reality that Africa’s wealth – human and natural resources – can only benefit the rest of the world if it is retarded in some way for as long as possible.
How would you explain the fact that the largest funding sources in the world site foreign exchange and country risks that include everything from corruption to terrorism for their reason to hold back investments while the data clearly show something very different.
According to the latest available data from the OECD (Organization for Economic Co-operation and Development), the overall default rate for DFI (Development Finance Institutions) loans to Africa was 1.7% in 2019, which is lower than the average default rate of 2.5% for all developing countries.
So, WHAT NEW APPROACHES DO I RECOMMEND FOR FINANCING RAPID ECONOMIC GROWTH IN AFRICA?
Global Business & News Network with an Africa-First Perspective
Africa has a long history of being underrepresented in the global media landscape, with only a fraction of global news coverage dedicated to the continent. This has led to a lack of visibility for African businesses,
economies, and innovations, which has in turn limited the ability of African countries to attract bothforeign investment and local capital to grow their economies.
To address this challenge, there is a need for a Global Business & News Network with an Africa-First Perspective. Such a network would provide a platform for African entrepreneurs to showcase their products and services to a global audience.
It would provide more visibility for African businesses and economies, which would increase the likelihood of foreign investment and trade, and in turn, would create more job opportunities and help to drive economic
growth.
Second, it would help to counter negative stereotypes and biases about Africa that are perpetuated by the global media. An example would be the data mentioned on default rates. By showcasing the positive developments and success stories from the continent, the network would help to shift perceptions and promote a more accurate and positive image of Africa.
Africans can tell their own stories and shape the narrative about their continent. This would help to promote greater cultural exchange and
understanding between Africa and the rest of the world.
New Generation of Capital Market Products, on top of an African Stock Exchange with Unified Regulations
African stock exchanges account for only 1% of the world’s stock market capitalization, indicating a huge untapped potential for growth. To address this, there have been efforts to establish an intra-African stock exchange, which would facilitate cross-border investments and promote economic integration on the continent.
The African Securities Exchanges Association (ASEA) has been championing this initiative, and in 2019, it launched the African Exchanges Linkage Project (AELP) to facilitate the creation of an intra-African stock exchange. The AELP aims to establish a network of connected exchanges, allowing for seamless cross-border trading of securities.
To differentiate this Exchange from others around the world there is a need to develop new capital market products that are tailored to the needs of African investors and businesses. One current such product is the green bond, which is a debt instrument designed to finance environmentally friendly projects. The issuance of green bonds in Africa has been on the rise, with issuances reaching $3.5 billion in 2020, up from $1 billion in 2019.
Another Debt Instrument is the social bond designed to finance social projects such as healthcare, education, and affordable housing is also on the rise, with issuances reaching $6.5 billion in 2020, up from $1.5 billion in 2019.
To ensure success there is a need for unified regulations that promote transparency, investor protection, and market integrity.
Capital Inflows from Africa Diaspora
According to a report by the World Bank, remittance flows to sub-Saharan Africa increased by 5.6% to $51 billion in 2022, up from $48 billion in 2021. This increase is due to the growing number of migrants from Africa to other regions of the world. The report also notes that despite the challenges posed by the COVID-19 pandemic, remittance flows to Africa remained resilient in 2020, with a decline of only 2.4%, compared to a global decline of 4.8%.
Add to the remittances, the diaspora’s knowledge, skills, and networks to foster economic growth and create an enabling environment for diaspora investment, such as incentives for investment, easing of regulations and processes, and building a positive investment climate.
The African Diaspora Investment Bank (ADIB), which was established in 2019 to mobilize capital from the diaspora for investment in Africa has led the way but a more robust and individual country approach is needed, especially in agriculture, infrastructure, energy, technology, financial inclusion, and
entrepreneurship.
“Project Wakanda” driven by the Global Black Diaspora
According to recent data, the total net worth of Black Americans alone is estimated to be over $4 trillion. By tapping into this massive pool of capital, African economies can gain access to the funding they need to expand and create new jobs. At the same time, Black investors can benefit from the exciting opportunities available in emerging markets, with the potential for high returns and meaningful impact.
“Project Wakanda” will involve the creation of financial instruments that give confidence to investors, can trigger the “Brain Gain” by prioritizing the participation of ALL Blacks in Diaspora in procurement of consulting, engineering, and other opportunities that can help drive the success of African businesses. This will create new opportunities for skilled professionals and entrepreneurs, while also fostering greater collaboration and knowledge-sharing across borders.
Accelerated Public-Private Sector Partnerships
This is not a new idea so the emphasis here is on the verb “Accelerated”. PPPs can help reduce the burden on governments by sharing the cost of financing projects with the private sector. This allows governments to redirect their resources to other areas of development. PPPs also allow the private sector to invest in projects that may not have been feasible without government support.
In 2019, the total value of PPP projects in Africa reached $31.8 billion, a 25% increase from the previous year. The energy sector was the most significant recipient of PPP investment, accounting for 36% of the total value of projects. The transport sector followed, with 33% of the total value of projects.
PPPs have also been used to finance infrastructure projects. For example, the African Development Bank’s Africa50 Fund is a PPP that aims to develop and finance infrastructure projects in Africa. The fund has mobilized $870 million in capital from African governments, the African Development Bank, and institutional investors.
Leveraging Regional Competitive Advantage
Each region in Africa has a competitive advantage that can benefit from Concentrated Capital because of availability of data, and a track record.
For instance, in West Africa, agriculture and natural resources like oil, gas, and minerals present a significant competitive advantage. According to the African Development Bank, the West African Economic and Monetary Union (WAEMU) region alone produces 80% of the world’s cocoa and has the
potential to become a major player in the global cashew market. Investing in these industries and improving infrastructure to support them can help drive economic growth in the region.
In Southern Africa, mining and industrialization are key drivers of economic growth. The region is rich in natural resources like gold, diamonds, and platinum, and has the potential to become a major global player in the
automotive and aerospace industries. The African Development Bank also notes that the region has the potential to develop a vibrant renewable energy sector, given its ample sunshine and wind resources.
In East Africa, Science & Technology, and telecommunications present a significant competitive advantage. The region has been a leader in mobile money and digital innovation and has the potential to become a major player in the global technology sector. Agriculture also remains a key driver of economic growth in the region, with the potential for increased investment in value chains and agribusiness.
Prioritized Investment in Intra-African Transport & Haulage Systems
The Trans-African Highway network, which spans 57,000 kilometers across the continent, has the potential to boost trade and economic integration. Intra-African trade is currently low, accounting for only 16% of total African trade in 2019, compared to 68% within the European Union. However,
improving transport infrastructure and reducing trade barriers has the potential to significantly increase intra-African trade. According to the
African Export-Import Bank, implementing the AfCFTA could increase intra- African trade by 52% by 2022.
The African Union’s Agenda 2063 prioritizes the development of transport infrastructure, including the establishment of a Pan-African High-Speed Rail Network and a Single African Air Transport Market. Additionally, the African Continental Free Trade Area (AfCFTA), which went into effect in 2021, aims to create a single market for goods and services across the continent, making investment in transport infrastructure even more crucial.
Investment in intra-African transport and haulage systems can also lead to the creation of new jobs and the development of local industries. For example, the development of transport infrastructure can lead to the
growth of local logistics companies and the creation of jobs in transport- related industries.
Build Africa’s Military-Industrial Complex
What has this got to do with Africa’s Economic Development? Think again! Notice how the DCR cannot find investments for mining the world’s largest deposit of natural resources but can find enough money to fund endless armed conflict. Why?
But since African Governments MUST also spend on Security, then building military-industrial complexes can be a strategic move for African economies to spur growth and development. These complexes focus on the production of military equipment and technology, but they also have the potential to boost education, research, and design of consumer products, thereby
creating jobs and driving economic growth.
For example, countries like Egypt and South Africa have established military- industrial complexes that have proven to be vital in developing their be domestic industries. Egypt has a well-established defense industry, which employs more than 60,000 people and generates over $1 billion in annual revenues. The country has also been able to transfer its defense technology to other countries in the region, which has helped to establish Egypt as a regional military power.
In South Africa, the Armscor Defense Research and Development Institute (DRDI) has been instrumental in developing new technologies and innovations. The DRDI has produced a range of military equipment, including missiles, rockets, and unmanned aerial vehicles (UAVs), and has also been involved in the development of civilian products such as medical devices and agricultural equipment.
If Africa agrees to purchase even 10% of its Military and Security needs from within the continent we will see an explosion of Economic Growth on the Continent.
Create a Tax Haven within Africa
According to the African Development Bank, African countries lose about
$50 billion each year due to illicit financial flows, which includes capital flight. This is a huge loss of potential investment capital that could be used to fuel economic growth and development in Africa.
By creating a tax haven within Africa, countries can offer incentives to businesses to invest in the continent, such as lower tax rates, tax exemptions, and other benefits. This can help to attract Foreign Direct investment (FDI) and encourage local businesses to keep their capital within the continent, ultimately boosting economic growth.
African countries that are already making efforts to establish tax havens include Mauritius, Seychelles, and Rwanda. These countries have put in
place favorable tax policies and regulations that make them attractive for businesses looking to invest in Africa.
Tax havens should not be confused with Free Trade or Export Processing Zones.
African Private Equity Companies to Embrace AfCFTA
The African Continental Free Trade Agreement (AfCFTA) represents a
significant opportunity for Africa-focused Private Equity (PE) firms to drive rapid economic growth.
We – and this is my immediate business constituency – the PE Firms can Increase Investment in Key Sectors as trade barriers are reduced and significant opportunities emerge in manufacturing, infrastructure, and agriculture. That is why I am desperately in love with AfFCTA.
At Blackstone Private Equity we are developing Cross-Border Investment Strategies that take advantage of new market access opportunities, especially through Portfolio Companies well-positioned to benefit from increased trade flows.
We are looking to work with counterparts across the continent and bring in Regional Investment & Development Banks, so that collectively we can invest in larger deals, share expertise, reduce risk and increase returns.
ESG factors significantly when identifying potential investments, as these considerations can improve long-term portfolio performance. However, as an Investment Framework it also has potential downside for Africa which would be nice to address during Panel discussions or post- Summit. Suffice it to say that PE Firms in Africa could help counterbalance Politically motivated Capital in this regard.
Prepare for a World where De-dollarization is a Reality.
There is an eleventh aspect to note, we need to address possible impacts on Africa’s Economic Growth as we consider the possibility of a world without the US Dollar as the exclusive Reserve
Currency.
In conclusion, I believe that with the right approaches to financing rapid economic growth in Africa, we can overcome the challenges facing the continent and unleash its full potential.
I have put forward a few ideas that could lead to Rapid Economic
Development of Africa – from Diaspora involvement to increased Private Equity – buy I hope I have made the point that going forward it is the Private Sector which must roll up its sleeves and get to work. The rewards are well worth the effort.
Governments across Africa should set a tightly reduced timeframe for concluding all legislation needed to support these rapid Economic Growth.
I urge us all to put hands together to make Africa’s rapid economic growth a reality.
Dr Sam Ikoku jr, presented this speech at the Africa Economic Summit 2023. Dr Ikoku is the Chairman/CEO of Blackstone PE, Nigeria .
