Africa Investment Report

Why Africa Must stop looking at FDI numbers – Kyendo Wa

According to a widely quoted UNCTAD report, Foreign Direct Investment( FDI) flows shrunk by 31 % to US$ 38 billion in 2015 down from US$53.9 billion in 2014.

The same report indicates that FDI flows into Africa were flat in 2014 compared to 2013. In other words, the rains began beating FDI flows into Africa in 2013. That was the time that the sun began to set for the commodities boom of the previous decade.
The Chinese economy, which was driving demand for commodities in the world market, so the narrative goes, began to slow down thus setting of a downwards spiral for commodity prices in the world market. This downward spiral has had a negative impact revenue on FDI flows into Africa say, experts. The same reports also indicate that there is a notable growth in FDI to Africa’s Manufacturing sector. Ethiopia is deemed a start performer in this respect.
While the decline in FDI flows has caused economic and financial turmoil in the countries that are heavily dependent on natural resources such as oil, gas, Gold, copper and other resources, it has had a limited impact on countries whose economies are relatively well diversified. It also had no effect on countries which have no known mineral deposits.

This leads to the question: Are FDI flows in Africa shrinking or have they shifted from the pricey extractive sectors to the relatively cheap Manufacturing and services sectors. Does Africa have to worry about the declining FDI flows or should we cheer?
Call me a false prophet and I will congratulate you for being wrong? My thesis is: Africa has no cause to worry as FDI flows are shifting to sectors that create jobs, more tax payers and a large number of Consumers.
Extractive industries by their very nature have very few linkages with the domestic economy because many are capital intensive. On the contrary, manufacturing sector has massive linkages with the domestic economy. Some set up to process local raw materials in, probably in combination with imported inputs into finished consumer goods. Manufacturing also employs local labour –both skilled and unskilled. The goods manufactured in the se outfits are generally sold in the domestic market thus creating more jobs.
In Ethiopia the star performer in the manufacturing sector the leading sectors were Textiles and leather which whose inputs are largely or can be sourced from the domestic market within the medium term range.
To conclude this line: Low investment in Manufacturing has a bigger impact in inclusive growth and development than a huge investment in extractive industries. Consequently, Africa should now attract more FDI into the productive sectors of our economies. To succeed in this regard, Africa must have the following in place: a market for manufactured goods, good transport infrastructure, electricity, Security and a well educated population.
The reports cited track only FDI and says nothing about ODA and public investment in Africa. The major drivers of Public investment especially in infrastructure are the Chinese and Africa development Bank. However, African governments and other multilateral financiers are also active in public sector investments.
Public sector investor investments are enabling projects that support the efficiency of the productive sectors including manufacturing and agriculture.

Port Of Mombasa
Port Of Mombasa

Last year for instance, AfDB invested US$2 billion in 16 logistic projects In Africa. Ten of the sixteen projects are in highways and cross-border transport corridors that will upgrade to Bitumen standard 2500 Km of road across the continent. The completion of these projects according to the transport department, will cut travel time by 51% from 51 hours to25 hours. That reduction in transport time will cut transport costs, increase efficiency in delivery of good to the market for 18 million people across the continent. And AfDB has committed an estimated US$175 billion over the next decade to finance sustainable road transport in the continent.
Investment in upgrading the Port of Mombasa for instance, coupled with structural changes within the Northern Corridor has reduced freight travel time between Mombasa and Kampala Uganda by More than one week and two Rwanda by More than ten days. This has made it possible for manufacturers to plan their import lead time from 90 days to just about 30 days. Still in East Africa, the completion of the Mombasa -Addis Ababa Highway will reduce travel time between Addis Ababa in Ethiopia and Nairobi Kenya from 30 hour to 10 hours, a third of the time previously traveled on this route.

Chocolate Manufacturing Factory In Ghana
Chocolate Manufacturing Factory In Ghana

Reliable all weather roads and cross -border highways are among the bottlenecks Africa need to remove in order to open itself for trade and unleash economic opportunities for the poor.
The second bottleneck is power supply. The continent is endowed with water resources, sun and geothermal power resources. Yet it is the only continent that generates less power than say Spain. Of course power generation is an expensive business which only governments can afford to invest in. There is encouraging movement in this direction and should be encouraged. We must invest to power our homes, village market and the like in order to encourage growth of small scale industries in Africa to keep our youth and women fully employed.
Ethiopia is also a star performer in this respect with a string of large project capped in the Renaissance dam which will generate 6,000MW of power part of which will be sold to neighbouring countries among them Kenya, south Sudan and Sudan.
The middle class generally drives economic growth and development in their home countries. It is estimated that some 300 million Africans are already in the middle class. This is consumer class and Africa should work to produce goods for this class in order to encourage development and poverty alleviation in the continent. Alleviating poverty means we are expanding the middle class that enlarging the market for our goods. The more the merrier.
To sum up, Africa should stop looking at the FDI numbers and ask where does the FDI go? What are our priority needs? How much of FDI is needed to build a milk processing plant in some rural area? For instance, some US$ 3.8 billion went to Nigeria as FDI last year.
How many large milk processing plants would Nigeria build with this kind of money? How many people will such an investment gainfully employ? How much taxes would such employment generate? How much precious foreign exchange would such an investment safe? What will be its impact on our current account?
Africa must move away from the colonial structures and create its own economic structures. The former structures fed manufacturing in the West as we exported raw materials and imported finished goods. We must now look inward produce for ourselves first and our neighbours next.
We must abandon market structures which directed our produce to Europe. Instead we must embrace market structures that direct our produce internally and to our neighbours.

Kenya’s largest market for finished goods is in Africa led by Uganda, Tanzania Rwanda. That is why Kenya has not felt the negative impact of commodity price decline.
Our milk goes to waste for lack of processing capacity. This discourages our farmers. I am told that certain parts of Kenya have never eaten bread manufactured in Kenya because there were no roads to transport the perishable product to them. But now that the Mombasa –Addis-Ababa highway is complete, they are eating bread and milk made 700 Km away. The journey, I am told, takes six hours down from three days in the past.