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Africa: now a business case, no longer a handout case

Talk with Lindsey, a 19-year-old living in Lusaka, capital city of Zambia, and she'll tell you more about who’s topping the American rock music charts than you'll ever know. Ask her about clothes, and she'll point to the couple of designer-label outfits (probably fake, but who worries) in her wardrobe, next to her line-up of cosmetics. Ask her what her ambition is, and she’ll tell you about the job she intends to get in the US, or Europe, after college, and how she wants to marry a European (not an American apparently, although she doesn’t say why).

Dream-world or reality? There's no doubting her aspiration – and after an hour or so in her company you’re certain she'll achieve it. Not bad for an African orphan, in a residential children's home, after a highly traumatic start in life.

But, if you believe her carers, Lindsey typifies ambition among Zambia's middle-class-to-be teenagers – not content to accept what their parents regarded as their fate: the swirling red dust, the mud huts, the lack of money to buy food, the potholes in the dirt roads, the hours it takes to walk everywhere when you haven’t got transport, the beatings men give to their women, the deaths from AIDS at a young age, the governmental corruption…

Zambia, like many of Africa's developing countries, will not change dramatically in one generation, but the pace of change is taking shape. And guess who are taking up the opportunities first: a huge roadside sign at a major Lusaka crossroads celebrates China's investment in new factories creating new jobs; a gleaming, glass-fronted Japanese embassy highlights the gap between rich and poor.

Economists from global bank Standard Chartered argue that sub-Saharan Africa is in a similar position economically to where Brazil was 20 years ago. It is, they say, an emerging market and a new global player, where investors are currently cherry-picking their opportunities, inspired by an abundance of natural resources, relative political stability and corporate pioneering.

The International Monetary Fund (IMF) points to sub-Saharan Africa's "virtuous circle" of factors that feed off each other, creating growth: exports and imports up; banks unfreezing lending; inflation low; private finance growing again; governance improving; and conflicts decreasing.

Its development seems encapsulated by the first flight touching down at Accra airport on a new Virgin Atlantic route between London, UK, and Ghana. The airline's leader, Sir Richard Branson, gets off the plane to announce: "This is a growing continent with growing prosperity." At a party that night, Sir Richard rubs shoulders with Westerners looking for an opportunity in a country that has recently discovered large reserves of oil and gas in its Jubilee Field, off the coast.

And Ghana is top of the list for US president Barack Obama who makes the country one of his first overseas visits. In the streets around his hotel, adverts for Vodafone, Standard Chartered and Barclays flutter, seemingly on every corner.

Standard Chartered's analysis of sub-Saharan economies, based on its interests in the Asian and African retail and corporate markets, refers to downsides, but the overall outlook is positive: growth and more growth, spurred on by increased consumption of goods, a growing middle class, an increase in agricultural production, and a rapid rise in commodity prices (for oil, gold, copper and platinum).

"Whereas in the past the West was the place where investments came from, and exports went to," says Standard Chartered chief executive Peter Sands, "the big story now is Asia. You see, particularly, Chinese investment in Africa and exports to China. But not just to China – to Singapore, India… many markets."

“It very much started as commodity-driven growth. Increasingly, there is now more interest in Africa as a source of agricultural produce and a place in which goods can be sold. In Nigeria, for example, China sees it as a market as well as a source of goods."

China confirms that Africa (rather than the US) is now viewed as its most important trading partner for growth: in South Africa alone, the China-Africa Development Fund and cement producer Jidong Development Group have backed a USD 218 million cement plant; the Industrial and Commercial Bank of China has made a USD 6 billion investment in South Africa's Standard Bank; Chinese car maker FAW has announced a USD 160 million investment in the country…

The Standard Chartered report shows that China's exports to Africa overall rose by 22% year-on-year in the first four months of 2010; China's imports from Africa surged by 160% in the same period. Africa now accounts for as much as 4% of all China's exports and 5% of its imports. And China's investment in Africa is expected to hit USD 14 billion by the end of 2010 – 15% of all Chinese investment abroad. Mining, oil and infrastructure projects are the leading sectors for investment from Chinese state-backed corporates in Africa – where, largely untapped, is 40% of the world’s natural resources.

"You go anywhere in Africa and the scale of Chinese involvement and the number of things it touches is everywhere," says Sands. "It is easy to underestimate because it isn’t on the radar screens. The number of business articles written about what’s going on in, let's say, Ghana, are few and far between."

Yes – there are exceptions among the sub-Saharan countries; but even in Zimbabwe there are signs of emerging growth. Wolfram Klingler, of Altira Group, which invests in southern Africa, says Zimbabwe "might have been a bad place to be, but that was true two or three years ago. It is coming out of deep trouble, with the dollarisation of the economy, and has one of the most skilled workforces in Africa". Renaissance Asset Managers’ Renaissance Africa Fund reinforces this view: its investments in Zimbabwe returned more than 70% last year – one of the fund’s best-performing assets.

By comparison with Asian investment, Europe and the Americas mostly view Africa through an outdated prism and fail to see the opportunities, according to the Standard Chartered report. With some notable exceptions, Europe plays "second fiddle" to Chinese competitors. When South Africa’s President Zuma visited London, UK, last year his message was succinct: some in the West have entrenched views about Africa (starvation, AIDS and coups) and underestimate changes taking place.

Yet some smarter financiers have had their eyes on (and their money in) Africa funds buying into telecommunications, banks and infrastructure. The Emerging Africa Infrastructure Fund, backed by USD 150 million from several European governments, then leveraged up to USD 500 million by development finance institutions and commercial banks, has invested in the development of a port in Ghana, a power plant in Kenya, hydro-electric projects in Uganda, and a steel producer in Nigeria. Governments behind this investment, in the form of the Private Infrastructure Development Group, did not do this as a charitable exercise but "to help mobilise private investment through a carefully crafted public-private partnership": suggesting the West is beginning to treat Africa as a business case, rather than a handout case.

And Africa's trailblazing corporate pioneers of former days are selling up handsomely to the big brand investors – people like the UK entrepreneur who took up a job at the University of Lusaka, developed Zambia's biggest mobile phone operation in his spare time, and sold it last year to Vodafone.

The benefit to Africa – and thus the world – of this intensive investment, in telecommunications in particular, is that it increases productivity: market stall holders can call for more inventory when demanded by customers, or they can access competitor prices elsewhere; and traders can securely transfer money over their phones, creating a much more liquid system.

There was a fear in 2008, during the global economic downturn, that Africa would suffer greatly, as a weaker player trampled underfoot by the recession, says Sands. "I actually think that sub-Saharan Africa has fared rather better through the crisis than you might have thought.

Its direct exposure was relatively limited and its indirect exposure was relatively short-lived. It didn’t benefit that much from the huge capital flows that were happening within the international financial markets, so didn’t have that much to lose when those flows stopped happening.

"The most significant impact was the drop in commodity prices which led to a loss of employment, but commodity prices went down sharply then bounced back sharply."

It would be naïve to claim that this is the whole story, of course. Africa is still flush with risks – corruption, accidents, incompetence, economic overheating – but risks can be priced in, says Standard Chartered. It argues that sub-Saharan Africa could now be in a similar position as was Brazil 20 years ago. But can it echo Brazil’s success in, say, the likes of Congo?

'In sub-Saharan Africa there are 800 million people(half of whom are under 16), with comparatively little infrastructure and poor access to 21st-century telecommunication.'

"There’s certainly the potential for Africa to play a much bigger role in the world," says Sands. “There have been issues around stability, but remember that is what they said about Brazil: 'it's got all this wonderful potential, why isn't it happening?' You look at Brazil now and it is becoming an important player in the world economy."

As Standard Chartered points out, the big mistake would be to think of Africa as one country, rather than as a continent made up of many countries, each with different cultures and business practices.

Equally, it would be wrong to think that corruption is being wiped out – far from it. Certain African countries still rank highly on Transparency International’s Perception of Corruption Index – Botswana, Namibia, Ghana and Malawi are all ranked near the top of the scale. "Mid-level corruption can be most aggravating for businesses," says Thomas Cargill, of UK think-tank Chatham House – access to bids, for example, may be restricted.

"But, nevertheless, there are many positive trends," says Sands, "alongside the still-shocking poverty and corruption across much of the continent. But nothing, of course, is wholly straightforward and true for all parts of Africa."

A related factor is the ease of doing business. According to the World Bank's Doing Business 2010, Mauritius is the African country that makes it simplest for investors looking to set up and run businesses; and both Botswana and Namibia are well up in those rankings. Rwanda is the world's most reformed country (up 76 places to No 67); it's a desirable location for investment because the country is being built up from scratch.

Overall, Standard Chartered recognises it's time to look further than at the BRICs countries (Brazil, Russia, India and China) for growth – Africa is the only major area of the world left to develop. Yet there is a disconnection between returns Africa is bringing to companies and the seriousness with which it is being treated in boardrooms.

As Martijn Proos, senior investment adviser with the Emerging Africa Infrastructure Fund, puts it: "Tanzania with 40 million people has approximately 900 megawatts of installed power-generation capacity: my country, the Netherlands, has 16.5 million people and approximately 20,000 megawatts."

In sub-Saharan Africa there are 800 million people (half of whom are under 16), with comparatively little infrastructure and poor access to 21st-century telecommunications.

"If sub-Saharan African countries gain anywhere near the capacity of European nations," he says, "it will lay the practical and economic groundwork for the creation of a gigantic middle class, the traditional drivers of political stability and financial growth."

Meanwhile, 19-year-old Lindsey waits impatiently for it all to happen, mobile phone at the ready.

UHY has member firms in key regions of sub-Saharan Africa, notably in Kenya and Nigeria, as well as in other parts of the continent.