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Is it worth it? – For outsiders in particular, investing in Africa is strewn with hurdles
Apr 16th 2016 Economist

Last Ocotber MTN, a big South African mobile-telecoms company, hit a brick wall in Nigeria. The cash-strapped government there announced that the firm, which makes 35% of its revenue in the country, had broken rules about registering SIM cards and would be fined about $1,000 for every incorrectly registered account. The total came to $5.2 billion, nearly three times MTN’s annual profits in Nigeria. In November the fine was reduced to $3.9 billion on appeal. Last month the firm announced that its profits for the year had halved, largely because of its poor performance in Nigeria. As this special report went to press, the dispute between MTN and the Nigerian government had still not been resolved.

MTN’s story illustrates the problems that big companies are likely to encounter when they invest in new countries in Africa. Wherever they come from, they need to proceed with great care. Taking businesses across borders can be extremely lucrative—but also extremely risky. That is particularly true of investment in Nigeria, where MTN initially did very well. With its youthful and rapidly urbanising population of perhaps 180m, the country is a compelling prospect, but doing business there is fiendishly difficult. Last year the World Economic Forum (WEF) put it 124th out of 140 countries on the quality of its institutions; 133rd for its infrastructure; and last out of 140 on its primary education. Over the past five years the country’s position has worsened on almost every one of the WEF’s measures.

South Africa seems well placed to invest elsewhere on the continent. Its firms have access to capital, infrastructure and skilled labour that those in other African countries can only dream of, but a substantial chunk of its people are as poor as any Africans. Many observers therefore expected South African businesses to be pioneers of direct investment in the rest of the continent, especially in consumer markets. Yet over the past decade most of them have struggled. It is an ominous warning to companies from the rich world trying to follow in their path.

A few South African firms have done well. Standard Bank operates in 20 countries in Africa and is expanding quickly. “We want to go from being a South African bank with an African presence to being a genuinely pan-African bank,” says Peter Schlebusch, one of the firm’s top executives. SABMiller, a big beer company, has breweries all over Africa, some in difficult places. Last year it was bought for $108 billion by Anheuser-Busch InBev, the world’s largest brewer. Shoprite, a South African supermarket chain, has a quarter of its flagship outlets outside South Africa, including one in Kinshasa, the capital of the Democratic Republic of Congo, and has done well in Nigeria.

Yet hopes that South African companies would dominate the continent have been disappointed. “A lot of South African companies have gone into Nigeria and got burnt,” says Alan Healy of Arisaig Partners, a company that invests in many African consumer-goods firms. Last December the Nigerian business of Tiger Brands, South Africa’s biggest food manufacturer, was sold to Dangote for $1 after writing down the business by 1.9 billion rand (roughly $125m at current exchange rates). In 2013 Woolworths, a South African middle-class retailer, got out of Nigeria less than two years after opening its first store in Lagos. In 2010 Telkom, a South African telecoms firm, announced it was leaving Nigeria after losing 10 billion rand. MTN’s recent travails are just the latest wave in a sea of troubles.

Some say that South African businesses are at fault, being unwilling to take risks and commit themselves to difficult parts of the world. “The typical South African business leader is ignorant and Afro-pessimistic,” says Alan Mukoki, CEO of the South African Chamber of Commerce and Industry. “There’s a huge perception of corruption and a lot of South African businesses think, if they’re in Kenya or Congo, if there is a dispute, can I take him to court?”

In reality, though, South African firms have proved more optimistic than most about the potential of the African market. Where they have failed, it has often been because they were too sanguine about infrastructure and working of the law. In particular, they put too much faith in the power of innovative product design. “You can come up with an amazing product here, but that doesn’t help you sell it in Nigeria if you haven’t got the contacts to get it out of the port,” says Safroadu Yeboah-Amankwah, the South Africa director of McKinsey, a management consultancy.
One reason why Woolworths left was that the goods it was importing to sell in its shops were often stuck in the ports for months. But there were plenty of other vexations that contributed to the company’s decision to quit, including the cost of running generators, finding retail space and paying executives enough to maintain the sort of lifestyle that they had been used to in South Africa.

The firm did not mention corruption, but that is a pervasive problem. In Kenya, managers claim that demands for bribes are soaring ahead of a general election due next year. “Electioneering is in full swing, which makes life difficult for business,” says one Kenyan CEO. “The guys are already trying to raise funds, and the most effective way to do that is through corruption. Every bloody MP wants to come and bleed us.” In a survey in 2014 by Transparency International, an NGO based in Berlin, 42% of Kenyans who have had an encounter with the courts said they or a member of their family had paid a bribe, as did 37% of Kenyan users of other public services.

An insider’s game
In countries where the law is less than strictly enforced, getting permits is rarely just a matter of filling in the right paperwork. Even if no bribes are being paid, it can mean hassling politicians over long periods. And outside firms can find themselves at a big disadvantage over incumbents, which have the connections to break rules with impunity whereas newcomers can be shaken down. For Western firms corruption is a particular problem, not just because it slows business down and costs money but because it exposes them to the risk of prosecution and hefty fines in their home countries.

Rupert Wetterings, a Zimbabwean entrepreneur who set up an insurance brokerage in Angola, gives a flavour of the expenses of operating in some of the most difficult markets. To start out in Luanda he had to buy his licence from another broker, at a cost of $250,000, because getting a new one would have taken at least four years. When Angola’s economy began slowing as oil prices fell, he moved to Congo, but found it hard to get to see the people in the prime minister’s office charged with drawing up a new insurance code. “It’s not simple to have a meeting with these guys. They’re just not interested.”

Firms investing in Africa for the first time are generally advised to take their time to prepare carefully, or else to find a good local partner. Indeed, an entire industry has sprung up to smooth outsiders’ paths along the corridors of power. Kroll, one of the biggest and most expensive, has contacts across the continent, including former journalists, spies and government advisers. In the past 18 months the firm has scooped up plenty of new business, says Alexander Booth, its head of investigations, though much of this has been to help firms recover money from corrupt counterparties rather than make new investments.

All in all, investing in Africa is extraordinarily expensive, given that the markets most countries offer are still relatively small. This means that even investors who are keen to put their money into Africa are looking for juicy margins to cover possible losses. But then for some entrepreneurs it is precisely the challenge—and the reward—that make Africa appealing.

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I would like to think of myself as a full time traveler. I have been retired since 2006 and in that time have traveled every winter for four to seven months. The months that I am “home”, are often also spent on the road, hiking or kayaking.
I hope to present a website that describes my travel along with my hiking and sea kayaking experiences.

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