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Investors in Africa need a sense of adventure, says Frost & Sullivan

There is currently significant optimism about Africa’s improving business environment. However, many hurdles remain and investors shouldn’t get carried away with the hype about the continent. During a recent webcast Hendrik Malan, operations director for Africa at Frost & Sullivan, highlighted some of these challenges.

1. Growth is off a low base

Although the economies of many African countries are expanding at a rapid pace, Malan says that “growth is still off a low base compared to the economic giants of the world. Africa’s combined economy as a continent can be compared to India as a country. Great income disparities still exist and the continent’s progress towards the Millennium Development Goals has been slow and uneven. Africa is not the next China; it currently provides only 2.5% of world output …”

2. Development is still fragile

“The development is also still fragile and could be pushed back at a country level … We’ve seen it in countries such as Rwanda, Kenya and more recently Egypt from a political perspective.”

3. Massive diversity

“Massive diversity exists on the continent – 54 countries, 1,500 languages … many religions. The sheer size of the continent is intimidating. It is a landmass equal to Europe, US, India, China, Argentina and New Zealand combined.”

4. Low intra-regional trade

“Intra-regional trade is very low – currently at about 13% – with logistics, tariffs and crime often cited as the main issues. This is very low compared to regions such as Asia Pacific (currently at 39%) and eastern Europe (at 31%). It makes it very difficult to service across borders or to take approaches to regional market development. Despite having more than a dozen regional economic unions and trade groups, the majority of them are not very effective. SADC and the East African Community are doing not too bad, but ECOWAS on the west and AMU in the north are not doing particularly well.”

5. Lack of credible data

Malan noted that the lack of credible data makes effective planning and performance evaluation extremely difficult. He added that there is also a lack of information for investors on how to address basic market and operational challenges on the continent.

6. Not a comfortable environment

“If you are expecting shopping malls and paved highways, think again. The majority of Africa is not a cosy and comfortable destination. Identifying managers who are actually willing to move there and spearhead an operation is not an easy task.”

7. Many teething problems

“Bribery, bureaucracy, weak infrastructure, lack of standards, etc make setting up shop very difficult. These are typically teething problems and things do tend to get a lot better once you are up and running, but they are still significant challenges. Expanding is typically also a challenge, with a lack of capital availability due to weak financial infrastructure and high perceived risk … You need a good sense of adventure to go out for the spoils that Africa has to offer.”

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