TOPIC OF THE WEEK
THE RISK – REWARD FACTOR
Can taking the RISK in East Africa, provide profitable REWARDS?
Renee Horne-London 21 October 2011
Wars, corruption, piracy and tottering economies, that’s what you likely to hear and read about East Africa. The pessimistic outlook indicates that it’s a risk for an entrepreneur or an investor, due to the instability in the region. However the optimists would argue that Africa is on the move with vast potential. “I’m optimistic for the future of Africa, it’s about balancing the risk and the reward, Kenya is doing remarkably well in the manufacturing sector, there is now a common market for more than 100 million people in East Africa, this is due to Kenya being a dominant player in the manufacturing sector”. That’s the word from Christopher Hartland-Peel, who has worked extensively in emerging markets, with the African Development Bank, USAID, Standard Bank and Exotix in London. Speaking after the East Africa Conference in London, Hartland- Peel may be an optimist but warned that there are some areas in East Africa where the “risk may not turn into rewards”. Also, East Africa is unpredictable; just recently neighboring Kenya invaded the south of Somalia blaming the al-Shabab militants for kidnapping tourists within Kenya. Countries in the region have grown frustrated with the militant group as it is likely to undo all the calls that articulate an economically prosperous and viable region. “Of course, Kenya going into Somalia raises the risk profile for Kenya, but the economies may not change as it is all localised within the region. It’s probably good as it could ultimately stop the piracy off the Somali coast”. Indeed when there’s talk of Kenya’s military moves into Somalia and piracy, does this not raise alarm bells for an entrepreneur or an investor? If one takes a look at East Africa, does the risk supersede the reward or vice versa, or is it a delicate balancing act between the risk-reward factor. Read More….
THE RISK
Hartland-Peel argues that the region is under researched with limited information pertinent to make a business decision, such as “relatively small economies, foreign exchange reserves are slow, import of commodities subject to inflationary stocks, as a result government finances suffer”. He adds that there a few places where it may be too much of a risk, “The Democratic Republic Congo is one with considerable risk and virtually no economic systems and governance. It’s worse than the Wild West. If investors go there, the risks may not turn into rewards for it is an unpredictable environment. Likewise, Angola and Ethiopia are close to being uninvestable. I am not looking at the Katanga (South Eastern Province of the DRC) here which is more stable. Of course, with Zambia next door where the copper deposits go across the border, now this is predictable, in terms of being democratic, a judiciary system, rule of law and the taxation system works. The Copper Mining sector in Zambia has many European companies”.
THE REWARDS
While small economies maybe the crucial risk factor, there could be the reward that East Africa has become one bloc working to create a formidable economic region. “With the exception of the DRC and Ethiopia, when doing business in East Africa, the legislation is transparent and clear, there’s the East African common market with the tariff free area of trade. Nairobi is a dominant manufacturing sector that extends from Cairo to Johannesburg. There has been substantial investment in mining, for example Tanzania with Angloplats, also Kenya may not have material resources, but it has diversified its economy with a strong manufacturing and banking sector. There is no capital gains tax; the corporate tax rate is about 30%. Uganda by 2014 will be an oil exporter which will increase their GDP significantly. Kenya, Uganda, Tanzania and Rwanda, there is high levels of profitability if you look at the listed companies on their stock exchange. Look at the Rwandan Breweries listed on the stock exchange with a small economy. In Kenya there is great deal of private sector involvement, with electricity, manufacturing, hotel and tourism sectors”. Regarding the issues of corruption and instability; this is rapidly changing to more reward than risk. “Corruption is reducing; Kenya is a young country, about 48 years old. Apart from the elections in 2007, Kenya is expanding into the region. These economies are growing, this [corruption and instability] has become less of an issue and now you see more transparency. The public sector in Kenya has become smaller, there are plenty of privatisation opportunities and patronage is declining.” When speaking about the rewards for big companies, are there any positives for small entrepreneurs? “The difficulty with the entrepreneur is that they are stuck for capital. However in East Africa you are seeing an increase in the well-educated moving into business, for example in the food sector where less capital is required. Tourism is another sector, we seeing the same level of four star hotels as here in the UK”.
LOOK EAST AFRICA OR WEST AFRICA
When one decides where to do business, is it the East or the West where the rewards supersede the risks? “Of course West Africa is a preferred sector because of oil. Some economies are growing at 6 %. Banking reforms are shaping up. In Ghana, Tullow Oil listed in London also started producing oil this year, about 12% this year”. One will have to see who wins out at the end of the day. “Oil has now been found in western Uganda this may extend into Northern Kenya. So if Kenya becomes an oil producer then the dynamics will change. Uganda has oil but is not producing anything due to lack of infrastructure”. Undoubtedly, Hartland argues, “I would choose West Africa now, if Kenya in East Africa found oil tomorrow, it will take three to four years to set up infrastructure and reap the rewards. Nigeria also has strong reforms, topping a population of 140 million people as compared to Kenya’s 36 million people. Nigeria’s has a major urban market where consumer goods are in demand. Lagos the population alone is close to twelve million, more than some African countries. It is an urban centre for consumer demand for food, beverage and services. Lagos is full of entrepreneurs and home to the biggest manufacturing sector in West Africa. This is probably double the size of the manufacturing sector in Nairobi especially in food production and sales. The regions may have similar tax rates, and capital gains, however, Nigeria does have more corruption than Kenya”. So indications are that investors and entrepreneurs should look West rather than East, “The risk is more in East Africa than in West Africa, in East Africa investors are now taking money off the table” argues Hartland. So if investors are taking money off the table, it appears that East Africa is more of a gamble, where the risks ultimately surpass those profitable rewards. Have your say……