Successfully investing in West Africa Reflections from the Africa Strategic Growth Forum 2013

2 | The East Africa boom is real and it is growing. Reflections from SGF 2013

The principle of risk and return dictates that to overcome risks associated with investment, return needs to be of a sufficient magnitude that such risks become acceptable to the investor. Returns on investment in West Africa far exceed those currently seen in more established markets, which begs the question: just how risky is an investment into the region?

A conservative view may dictate that in relation to the European, or other more established markets, West Africa simply represents too high a risk to invest based on a lack of infrastructure, lack of power, regulatory or political restrictions and the significant need for skilled labour. Negative sentiment abounds and for many, a safe but low return in other markets is the trusted alternative.

However, unlike many established economies in Europe and the US, West Africa currently represents a demand-driven economy. As opposed to having to strategically negotiate the impact of oversupply and market saturation, whilst protecting local business from foreign competition, West Africa (most notably Nigeria and Ghana) is in a position where government’s key focus is to meet the ever growing demand for housing, power, infrastructure, skills development and pharmaceuticals. With more than 170 million people, Nigeria was the 8th most populous country in the world in 20121 which means that not only is there demand, but demand on a huge scale, making foreign investment into the region favourable. This is evidenced by the fact that over the last decade, Nigeria has been Africa’s largest FDI recipient, totalling US$116 billion between 2003 and 20112.

Current consensus is that approximately 900 000 housing units are required annually in Nigeria in order to bridge the gap in the housing deficit. This is similar to the need faced in Ghana. Power supply of a mere 4000 megawatts in Nigeria for a population of its size is grossly insufficient and indicates just how much potential for growth exists in almost every industry reliant upon a power supply.

An ever-increasing global awareness drives the demand for international consumer products with West Africa being no different. The significant proportion of the population yet to gain access to global commodities and technology represents untapped waters for retailers and the subsequent golden ticket for supply chain and logistics companies.

In this case, what is ‘not there’ represents as big an opportunity for those looking to expand their business into the region as the challenges that are associated with their absence.

1 EY Strategic Growth Forum West Africa Fact Sheet

2 EY Strategic Growth Forum West Africa Fact Sheet

3The East Africa boom is real and it is growing. Reflections from SGF 2013 |

The unseen riskRisks need to be understood in order to be managed. While the risks associated with a lack of infrastructure or power may seem insurmountable, the demand for solutions in these areas means that these challenges will be met, in some cases sooner rather than later.

Power sector reform is currently underway in Nigeria. Previously, the power sector was controlled as a government monopoly but the sector is now being opened up to private investment. With an estimated US$11billion needed over the next 10 years in order to meet the need for power in the country, this represents a lucrative growth opportunity for investors previously unable to bid for contracts. As such, results are expected to be seen by 2014.

Overcoming the need for power significantly reduces the barriers to entry for other industries responsible for developing infrastructure, telecommunications and health care - further reducing the risks of investment.

The most significant risk to understand and manage is perhaps not power, skill shortage or infrastructure, but rather a lack of understanding. Cultural differences, language barriers and history represent obvious but neglected challenges which investors from a Western culture in particular need to pay attention to in order to succeed in West Africa.

The word Ghana means “Warrior King”3, both symbols of strength, respect and power which are indicative of the characteristics revered by those indigenous to the region. Failure to recognise the importance of these characteristics to local businesspeople will almost certainly lead to mistrust and failure.

West African businesses are not looking for a new foreign employer but rather partners who respect the value that their businesses contribute to their personal standing in society. Similarly, local governments are wary of investors who show no alignment with their key objective to provide for the fundamental needs of their countries. Trust needs to be earned for income to be earned and this represents a challenge for many investors who have identified the opportunities but are unwilling to trust the principle of risk and return by ignoring the unseen risk of business isolation (through poor reputation and arrogance).

3 EY Strategic Growth Forum West Africa Fact Sheet

So just how risky is an investment in West Africa? The opportunities are as evident as the fundamental challenges in infrastructure, power supply, legislative reform and skills development.

Also evident is that these challenges will be met (either in the short or medium term). The population size is driving demand for housing, pharmaceuticals and consumer goods through a ‘safety in numbers’ principle for which supply is currently woefully inadequate. The region is also rich in natural resources namely oil and gas, coal, iron ore, gold, labour and arable land for sustainable agriculture. These may be used to trade with, in order to meet the demands of the population.

To see the full benefits of their investments, investors must be willing to invest more than just capital. It is advised that they spend time on the ground trying to understand the unseen risks. They should partner with local business as equals and transfer skills and expertise. They should gain the trust and respect of West Africa as a partner for the future, while being seen as a partner for the solution in the here and now. Those waiting to overcome the risks are those waiting for the safe, low returns. Both approaches abide by the principles of risk and return. You decide on your route into Africa.

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Creative Services ref. 130722. Artwork by Moloi. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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