Investing in Africa

What about the corruption?

If you want to be an emerging-markets investor, factor in the cost of political risk and corruption and think long term.
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Kenya is the Singapore of Africa in terms of infrastructure, according to Carole Kariuki
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<div style="text-align: left;"> Kenya is the Singapore of Africa in terms of infrastructure, according to Carole Kariuki </div>

At the first day of the inaugural Africa Investment Summit, hosted by FinanceAsia and AsianInvestor, the initial panel discussions were about why Asian investors should consider Africa as a destination for their capital. And where they should invest.

Speakers offered practical advice, starting with the obvious. Guy Lundy, deputy chairman of Wesgro, which is the official investment and trade promotion agency for the Western Cape, reminded the audience that Africa comprises 54 countries, with many different languages and cultures. “It’s good to go in and know a person on the ground who can pave the way and offer advice,” he said.

While we all know that extracting resources is high on the agenda of China’s state-owned entities, there are other industries worth considering. South Africa, eastern Africa and countries in the Sahara are increasingly encouraging investment in renewable energy — from hydropower to wind to solar. A rising middle class is leading a boom in consumer goods, telecoms and technology. And as urban areas develop, the Samsungs and LGs of the world see opportunities for manufacturing the goods that make cities run.

“Kenya is the Singapore of Africa in terms of infrastructure,” said Carole Kariuki, chief executive officer of Kenya Private Sector Alliance. She pushed Kenya as an option for Asian businesses to consider when looking to move to a lower-cost manufacturing country with good ports.

The panellists advised thinking long term – on the scale of a 40- to 50-year commitment – and building ties with local communities rather than suitcase investing.

“One should go in with as much research as possible and with a good partner,” said Paul Chong, chief executive officer of Creat Capital Company, which is a merchant bank that combines private equity investment with corporate finance and M&A advisory services. “If you have been successful in China or India, so what? Good luck. It’s different in Africa.”

How different?
“When you talk about political uncertainty, I have a visceral response,” said Anthony Desir, a partner at SAMI Funds, who co-heads the China-Africa investment consultancy practice. “Look what just happened in Australia. The government whacked the market with a resources tax. Suddenly a regulatory process squeezed profits. What’s the difference between that and political unrest that shuts down a mine?”

The answer of course depends on how long a mine is shut down. It’s emerging markets 101: the unforeseen is in fact predictable, and can be factored in. The more challenging question isn’t: Will there be risk? It’s how much risk can your wallet tolerate?

Desir was clearly not alone in his fatigue of the political uncertainty question.

“What’s 41 years of rule by Muammar Gaddafi? That’s stability,” suggested Chong. “What’s 22 years by Mahathir [Mohamad]? That’s stability.”

Put in that light, stability of government may not be the only thing you want to look at.

“Sure, we look at the political environment before we make an investment decision,” said Desir, adding that it’s only part of the process — political stability isn’t the be-all and end-all of the discussion.

Lundy pointed out that, to some extent, Africa has simply got a bad rep now. He wasn’t discounting headline news about civil wars and protests, but he noted that the Red Shirts demonstrations in Thailand barely affected investment and the markets for more than a few weeks, but it would have shut the spigot off for investments for some time in an African country “because we’ve done a bad job about managing our PR”.

And what about corruption?
Desir was on a roll, and prefaced his answer with the warning that no one in the room was going to want to hear it. When it comes to Africa-China deals: “[Large-scale] corruption doesn’t come from the African side. It comes from the buy-side first,” he said.

The money that gets smuggled out in suitcases and shows up in Hong Kong — where did it come from? It moves from Cayman Islands bank accounts to stocks, real estate and luxury goods in Hong Kong. Even China’s regulators know of the problem and are doing their best to address it.

“But paying $10 for passport processing, that’s retail compared to wholesale deals that are the real problem,” said Desir.

In short, political risk and corruption exist, but they are not exclusively the provenance of one continent. And if you’re thinking of investing in emerging markets, these are risks to factor in and hedge, but they aren’t deal breakers.

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