Investors balance risk against rewards

KPMG study shows willingness to deal with tough conditions if resources attractive enough

A KPMG analysis of the factors that attract investors to Africa shows corruption, poor infrastructure and onerous business conditions do not in fact scare off investors if the mineral, oil or gas resources are attractive enough in the context of global demand.

But the analysis warns that even tough mining companies stay away from politically unstable regions.

The report, released last week, said South Africa was paying a price for its issues with industrial action, power shortages and onerous labour laws, despite its reputation of having a more investor friendly business environment.

KPMG said South Africa achieved the highest foreign direct investment (FDI) inflows in Africa during 2014 and 2013, although it should be noted that FDI inflows to the country declined by 33 percent from $8.3 billion (R129.6bn) during 2013 to $5.7bn during 2014.

It said during the past few years, South Africa experienced subdued gross domestic product growth rates as a result of protracted industrial action, policy uncertainty relating to the mining industry and power shortages. These were also reflected in the World Bank Ease of Doing Business Survey, in which South Africa fell to 61 percent last year, down from 77 percent in 2014.

KPMG said that these factors collectively translated into a significant reduction in the attractiveness of South Africa as a destination for foreign investment.

Weighing stability

It said FDI inflows to South Africa during last year declined to $1.5bn, an effective reduction of 74 percent.

Robbie Cheadle, an associate director at deal advisory at KPMG in South Africa, said the lure of significant natural resources was always measured against the stability of local political and business environments, which were impacted by security factors, infrastructure and government policies.

KPMG said the Democratic Republic of Congo, Nigeria and Mozambique featured in the top five FDI inflow of host countries in Africa in 2014, despite their low rankings in the 2015 Transparency International Corruption Perception Index and the 2015 World Bank Ease of Doing Business Survey.

Nigeria and Mozambique were also both cited as notable recipients of FDI inflows last year in the UN Conference on Trade and Development’s Global Investment Trend Monitor published in January.

Worth the risk

It said other African countries with high-potential natural resources but challenging business environments that received high levels of FDI inflows during 2014 are the Democratic Republic of Congo, Equatorial Guinea, Tanzania and Uganda.

Cheadle said this showed that if natural resources in a country were sufficiently attractive to investors, they would look for solutions to difficulties in starting and running a business and issues of corruption in particular.

“The biggest deterrents to FDI inflows, regardless of the quality of a country’s geological base, are armed conflict, political uncertainty and security threats, as can be seen from the reduced inflows to north and west Africa in recent years to 2014. Egypt, which is gradually addressing its security issues, experienced increased FDI inflows during 2014 of 40 percent,” the report said.

The report said the distribution of FDI inflows to the different regions has changed significantly over a five-year period, with southern Africa’s share increasing from 7.9 percent in 2010 to 20 percent in 2014.

It said other FDI gainers were central Africa, whose share of total inflows grew from 18.9 percent in 2010 to 22.4 percent in 2014, and east Africa, whose share increased from 10.3 percent in 2010 to 12.6 percent in 2014.

“FDI inflow losers are north Africa, whose share of total FDI inflows has declined from 35.7 percent during 2010 to 21.4 percent during 2014 and west Africa, whose share has declined from 27.2 percent in 2010 to 23.7 percent during 2014.”

KPMG said political instability, including terrorism and security issues, as well as policy uncertainty of the sort being experienced by investors in the extractive industries in Zimbabwe, were two of the biggest deterrents for investors.

“North Africa has paid a high price with regard to investor confidence due to the regional conflict that has occurred over the past few years, as has Zimbabwe, with its continuously changing government policies.”