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Africa Becoming More Attractive to Indian and Other Investors

Tinus de Jager

JOHANNESBURG, Jun 15 2011 (IPS) - A reduction in red tape and an improvement in political conditions means that sub-Saharan Africa is becoming a more attractive destination for foreign direct investment, especially from India.

The South African Institute of International Affairs brought together experts from India and Africa in Johannesburg, South Africa, on Jun. 9-10 to look at the scope for deepening engagement between South-South economies and most are of the opinion that economic opportunities abound.

Oti Ikomi, group head of corporate banking products at the Ecobank Group, argues that the decrease in political risk and incidents of conflict in sub-Saharan Africa is creating opportunities. Ecobank is a regional banking institution with branches in west, central and east and southern African countries.

“Added to that, GDP (gross domestic product) on the continent is up 70 percent to 1.76 percent of the global total. While this is still very small, it is a substantial increase. Average inflation is dropping from 13.6 percent in 2008 to eight percent in 2010.

“Africa is the third fastest-growing region in the world, after the Middle East and Asia. But foreign direct investment is currently relatively flat compared to numbers from 2008.”

Ikomi says in addition to the favourable political conditions, red tape is also disrupting business less in Africa. In general, economic conditions are becoming more favourable: “It now takes two days, and three steps, to set up a company in Rwanda.

“Government debt is still comparatively low in comparison to the first world and access to this capital should be used to uplift communities in Africa. The fact is the African middle classes are growing rapidly. This means there is more money to spend on goods, creating more opportunities for investors,” Ikomi enthuses.

However, there still remains some caution about the overall conditions for foreign direct investment in Africa. Problems include the substantial lack of human resources and economic skills on the continent. Closer cooperation between African states and India and China could “do much to better the situation”, believes Ikomi. But the interaction must create a win-win situation for all parties.

Stephen Gelb of the University of Johannesburg says statistics show that trade between India, China and South Africa are steadily increasing. Figures from the South African Reserve Bank show that trade totalled 18 million dollars between South Africa and India in 2002. By 2009, these numbers had shot up to 342 million dollars.

Gelb says these numbers may be “a serious underestimation” of the actual trade that happens between India and South Africa. “The investment from Tata Holdings, alone, could be as much as 1.6 billion dollars.

“A large share of Indian investments moves via Mauritius, which then does not reflect on the score sheet. This is done for tax reasons.

“Another factor may be that the official data is simply wrong, as can be seen in the discrepancy between the South African and Indian trade statistics.” This makes a guess on the true value of the trade relationship between South Africa and India very difficult.

Gelb’s research shows that, in 2010, there were 93 Indian companies operating in South Africa, compared to 47 Chinese companies. Some 45 South African companies were operating in India and 32 in China.

Statistics show that four dollars out of every 10 dollars spent on investing in South Africa goes towards the manufacturing industry, despite local countries taking their money out of manufacturing, Gelb argues. “Another interesting trend is that these companies are looking to sell in the local and regional markets and are not looking to export the products back home.”

The Indian pharmaceutical company, Ranbaxy Laboratories, is also putting up the first new medicine production plant in South Africa in 20 years.

Gelb says statistics go far in alleviating fears that Africa is being unfairly treated in South-South trade. “A big fear is that both Indian and Chinese investment comes with imported labour. However, statistics show that this is simply not true. Both countries operate with more than 90 percent of their labour recruited in South Africa.”

Anthony Rayment, CEO of South African Coalmine Holdings, which belongs to a large steel manufacturer in India, agrees. “Perceptions are often not the reality, and that is certainly true of investment in Africa. Many companies are actively persuing direct investment on the continent.

“What helps Indian companies to invest is that the operating environment in Africa is similar to what they are used to. It is an emerging market; there is a lot of value that can be exchanged between the continent and India. The markets are well regulated. Entrepreneurs exist in both spheres. All of these factors lead to a similar feeling for investing.”

Africa receives some 12 percent of India’s outward investment, which is about 10 times higher than the global average. And this creates competition with western investment, which also benefits the continent in the long run.