Anglo African Cooperation

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Poverty Alleviation and Investing in Agriculture in Africa

By Bamidele Seun Owoola and Nick Harriss

African Agriculture:  Unexploited Potential

Historians and anthropologists have long maintained that the development of agriculture made civilization possible, as it allowed for the support of an increased population and labour specialisation, leading in turn to larger societies and eventually the development of cities.

While agriculture has modernised and intensified in most of the world, Africa has remained predominantly at the subsistence level, leaving the continent as the last major land mass with potential to be a major player in global food markets.

The agricultural population in Africa stands at 530 million people, and is expected to exceed 580 million by 2020. The population working primarily in agriculture accounts for 48% of the total African population (and almost 70% in East Africa), plus many more who work in the sector part time.  By comparison, roughly 2% of the UK population work in agriculture.

Agriculture and Poverty Alleviation

With more than half of all people living in Africa depending on agriculture for all or part of their livelihood, the encouragement and adoption of methods that would grow agricultural output would result in incomes being boosted, increased economic growth and a general improvement in living conditions. The poverty alleviation benefits of agricultural investment is confirmed by recent evidence from the International Food Policy Research Institute

A widespread body of evidence from many settings around the world shows that agricultural investment is one of the most important and effective strategies for economic growth and poverty reduction in rural areas. GDP growth in agriculture has been shown to be at least twice as effective in reducing poverty as growth originating in other sectors (World Bank, 2007). Productivity growth in Agriculture generates demand for other rural goods and services and creates employment and incomes for the people who provide them. Africa also has the largest share of the world’s uncultivated land with rain-fed crop potential. Unlike many other parts of the world, in Africa there is room for agriculture to expand.

Investment by existing farmers, as well as the public and private sector in agriculture and supporting sectors can increase the availability of food on the market and help keep consumer prices low, making food more accessible to rural and urban consumers.

A Wealth of Undeveloped Agricultural Resources

Unfortunately African agriculture is very far from reaching its potential. In Africa, only about 6 per cent of the total cultivated land is irrigated, compared with 37 per cent in Asia. It is estimated that irrigation alone could increase output by up to 50 per cent in Africa. Likewise, farmers in sub-Saharan Africa use less than 13 kilograms of fertilizer per hectare. This compares with about 73 kilograms in the Middle East and North Africa, and 190 kilograms in East Asia and the Pacific.  Small increases in organic or inorganic fertilizer use in sub-Saharan Africa could produce dramatic improvements in yields.

Today, small farms represent 80 per cent of all farms in sub-Saharan Africa. They contribute up to 90 per cent of production in some countries. Yet too many smallholders are ‘poor’; but this could change with investment. Small farms are often more productive per hectare than large farms, and in Africa, they have the potential to be key suppliers to growing urban markets as well as rural markets.

Furthermore demand for food and higher-end food products is growing across the continent from Africa’s increasing middle class, and there is growing foreign interest in the untapped potential of Africa’s fertile land.

Drawbacks within the African Agricultural Sector Include:

  • Poor infrastructure in general;
  • inadequate cold storage facilities;
  • unexpected disruptions in commodities trading;
  • lack of adequate feeder roads to production areas;
  • inadequate dry storage facilities; and
  • congested ports prohibiting the export or import of products on time.

Opportunities in Agricultural Products and Investment

Opportunities exist in the processing of agricultural products such as cereals (maize, rice, millet) starchy crops (yam, cassava. sweet potato, plantains), vegetables (carrots, cabbage, aubergine, tomato), fruits (pineapple, paw paw, banana, mango), plantation crops (rubber, sugar cane, cotton, oil palm, cocoa, coffee), livestock (cattle, pigs, poultry, sheep), fisheries (tuna, tilapia, catfish), and rearing of silk worm for the production of raw silk.

Investment opportunities exist in the agro-processing industry to add value, reduce post-harvest losses, promote price stability and expand demand for local agricultural produce. For example, with the processing of cocoa beans into cocoa products and fruits into fruit juices, dairy products and others.

Investment opportunities also exist in the agricultural support sector and technologies that aid in the production and distribution of food. This notably includes the development of irrigable land through irrigation. There are further opportunities in standards, training and certification; capacity building for management and market-oriented enterprises; market intelligence research and in the development of agricultural finance and insurance.  Other areas could include alternative fuel producers/distributors, grain storage facilities and water treatment companies.

Generally agricultural investment performance has moved in very different cycles from traditional asset classes like stocks and bonds; as a result, adding farmland to an investor’s portfolio enhances diversification and can result in lower volatility. Over the past 40 years, agricultural land has demonstrated a low correlation with both stock and bond indices. Moreover, a globally diversified portfolio of agricultural investments can further reduce risk, as it spreads its exposure among a variety of crops, government structures and climates. Returns on farmland investments have historically outpaced inflation in a variety of market environments. The NCREIF Farmland Index’s Total Return has consistently provided returns more than double the inflation rate since 1991.

 

 

 

Investing in East Africa

Investing in East Africa

By Peter C. Thoms, CFA

June 2014

 

I traveled to East Africa last month to examine the investment prospects of several companies in the region that we consider to be promising.  In this article, I will touch on the general investment considerations for East Africa; in subsequent articles I will delve into specific industry and company-level investment prospects.

Depending on whose definition of East Africa you use, the region, in the broadest sense, may include Burundi, Comoros, Eritrea, Ethiopia, Kenya, Rwanda, the Seychelles, Somalia, South Sudan, Tanzania and Uganda.  For investment purposes, we at Africa Capital Group LLC think of East Africa as the five countries that make up the inter-governmental organization called the East African Community (EAC).  The EAC members are:  Burundi, Kenya, Rwanda, Tanzania and Uganda, and it is in these countries that we see the region’s most promising investment opportunities.

The EAC countries have a combined population of about 141 million people and aggregate GDP of approximately USD $100 billion.  While there are still strong rivalries between these countries, they have generally recognized that it is in their collective economic interest to pursue improved trade relations, cross-border infrastructure projects and closer political cooperation.  Talks concerning the development of a common currency and centralization of the region’s capital markets functions are ongoing, but, for now, we believe such advancements remain years away.

East Africa is one of the world’s fastest growing regions.  Its GDP grew roughly 6.0% in 2013 and is forecast (by the U.N.) to grow by about 6.3% in 2014.  While agriculture is still the single most important sector for the region, consumer services such as telecommunications and financial services are rapidly taking share of GDP.  Thus, the electricity grid and transport infrastructure are also increasingly vital parts of the region’s growth equation as countries invest to provide for their rapidly growing and increasingly urbanized populations.  Traffic snarls on the roads and bottlenecks at the ports and on the rail system make movement of goods slow and expensive.  In fact, in our view it is this infrastructure development (grid, port, road, rail and pipeline) that holds the key to unlocking significantly higher economic output and living standards for the region.

Kenya has the most developed capital markets in East Africa, followed by Tanzania and Uganda.  Rwanda has the smallest exchange, whereas Burundi does not have its own stock market.  All of these markets are small and illiquid by developed market standards, but collectively they contain intriguing opportunities from a variety of industries, including telecom services, banking, insurance, energy, advertising, food and beverage and infrastructure.

While the region has attracted substantial interest from foreign companies of late, we believe East Africa’s home-grown firms hold the most investment potential because of their intimate knowledge of the local business environment.  In particular, we believe dominant and well-managed local companies like Safaricom, Equity Bank, ARM Cement, KenolKobil, Bank of Kigali, CRBD Bank and Scangroup all offer interesting long-term growth prospects for investors.  In future articles we will examine such companies in greater detail.

Why Investors Should Look to Africa

by Nick Harriss, Founder and Chairman

Over the years many misguided pronouncements have touted the improved economic prospects of Africa, home to a large proportion of the world’s billion poorest people.

Many business leaders in the West remain sceptical about Africa. Past perceptions of matters such as:

  • corruption;
  • inefficient bureaucracy;
  • lack of transparency;
  • weekly enforced regulations;
  • insufficient/inefficient trade and investment incentive packages; and
  • cumbersome investment legislation and procedures

still linger on many potential investors’ minds.

However, the progress that has been made in reforming governments,achieving greater political stability, improved macroeconomic environment, and an energized business environment are becoming too significant to ignore. For example, several countries halted their deadly conflicts, reduced inflation, cut budget deficits, lowered trade barriers, cut taxes, privatized companies, and liberalized many sectors, such as banking.

Financial Reforms

Another perception about investing in Africa is that its financial sectors are inefficient, but unknown to many Africa’s banking sector has both grown rapidly and demonstrated an impressive record of innovation in the last decade.  A significant contributor to this growth has been financial reforms. For example in Nigeria, banking reform promoted a swift consolidation (from 89 to 25 banks between 2004 and 2006) that unlocked the sector’s potential—bigger banks with better capabilities has driven down their costs, allowing them to penetrate a larger portion of the unbanked population and to ride on the back of rapid economic growth.

Emerging Sectors

The banking sector is just an example of where out-dated perceptions do not match with the Continent’s new realities.  Africa is now home to some of the world’s fastest-growing economies and offers the highest risk-adjusted returns on foreign direct investment among emerging economies.

Telecom, mobile banking, retail, and consumer goods are only some of the sectors that are showing great promise. While mining and oil remain big businesses, infrastructure investment and the consumer market are also major growth areas.It is estimated that consumer goods and services, natural resources, agriculture, and infrastructure could together generate as much as $2.6 trillion in annual revenue by 2020, or $1 trillion more than today, measured in 2010 dollars

Africa’s Growth

Africa’s growth acceleration has beenwidespread, with GDP rising more rapidly in 27 of its 30 largest economies—both in countries with significant resource exports and those without. Rising revenues from oil, minerals, and other natural resources accounted for just 24 percent of growth from 2000 through 2008.

The Continent now has more than 1,400 publicly listed companies. It boasts more than 100 companies with annual revenues of greater than $1 billion. Telecom firms have signed up more than 316 million new mobile-phone subscribers in Africa since 2000—more than the total U.S. population, while Africa’s future economic growth likely will be supported by several long-term trends, notably the world’s increasing demand for many of thecommodities the Continent is blessed with.

Africa’s Promise

Many years have passed since investors updated their view of Africa’s promise. The time is ripe for investors to rethink sub-Saharan opportunities and simultaneously to help the region achieve its promise by contributing much-needed capital, business skills, and global connections, whilebenefiting from the high returns on these investments.

 

 

 

The Rising African Middle Class

by Nick Harriss, Founder and Chairman

The stereotypical image in the West of Africa is that of a continent wracked by poverty, where electricity is intermittent, corruption soaks up development funding, political instability and tyrannical governments undermine confidence, and where kidnapping of Westerners is rife.

However these stereotypical views mask a rather different reality.  The Chinese have invested in Africa’s natural resource extraction for more than a decade, but it is only more recently that international investors are waking up to the potential from Africa’s increasing boom in consumer spending, which is set to rise from USD 860 billion in 2008 to USD 1.4 trillion in 2020, according to the McKinsey Global Institute.

Analysts say the rate of return on foreign investment in Africa is higher than in any other developing region. Over the last decade, six of the world’s 10 fastest-growing countries were African.  As a result, Africa now has the fastest-growing middle class in the world. Some 313 million people, 34% of Africa’s population, spend USD 2.20 a day, a 100% rise in less than 20 years, according to the African Development Bank.

The African Development Bank (AfDB) defines the African middle class as those spending between US$2 and US$20 a day. While by the standards of the developed world, this may seem low, the AfDB deems this range appropriate given the cost of living on the African continent.

 

Social and Demographic Factors

There are various social and demographic factors that are driving this new consumerism on the continent. Firstly, as African economies grow, this growth is trickling down, resulting in the people having more disposable income.

Secondly, Africa has a young population, with 62% of the population in under 25 years old. There is, therefore, a guaranteed consumer base for years to come in stark contrast to Europe, for example, which is characterised by a shrinking population. Europe’s workforce, for example, will reduce from 63% in 2010 to 51% in 2050.

Thirdly, there is trend towards urbanization, with African cities growing rapidly. Africa is defined along urban/rural lines and a move from a rural community to the urban area necessarily implies an increase in income, albeit informal.

 

Social Gaps and the Digital Divide

Finally, there is a connection between social gaps and the digital divide. A landmark and pioneering Deloitte study, for example, found that a 10% increase in mobile phone penetration is linked to an increase in a middle/low income country GDP of 1.2% due to the ensuing economic activity that people engage in as a result of being ‘plugged in’ and connected.

In Africa, the mobile phone is a tool that is, both equalizing and empowering and has allowed those marginalized in society to participate in the mainstream economy. Africa became the world’s second most connected region after Asia in late 2011, with 616 million mobile subscribers. With new mobile telephony applications continually being developed in areas such as banking, health, education, agriculture, it is clear that lives will also continue to change qualitatively.

 

 

 

The Growth of the African Economy: Research and Quotes

by Nick Harriss, Founder and Chairman

 

The growth of the African economy is illustrated in the following research and quotes:

 

Nkosana MoyoFounder and Executive ChairMandela Institute for Development Studies (MINDS) Johannesburg: 

“Africa’s remarkable economic growth during the past decade was based on sustainable drivers of performance, including a transformation in leadership and abundant natural resources.

The continent’s GDP growth is estimated to be approximately 4.5% in 2009–2010 and about 5.2% in 2011. Given the weak growth rates in the rest of the global economy, these numbers cannot be ignored

The world is coming to Africa because there are identifiable benefits, including Africa’s bountiful resources. Africa accounts for about 30% of the world’s solid mineral reserves, hence Africa’s trade with China. The world also has interest in Africa’s hydrocarbons. Africa accounts for 10% of the world’s oil reserves and 8% of the world’s gas reserves. These reserves are growing. Additional reserves are being discovered in such places as Tanzania, Mozambique, Kenya, Uganda, and Ghana.

There are also potential opportunities in renewable energies: solar, wind, hydro, and geothermal. Renewable energies are an opportunity space yet to be exploited. Finally, the African market comprises 15% of the world’s population, 1 billion people, and is growing; the majority of these people are young. A market of this size cannot be ignored.”

 

Making the Most of Africa’s Commodities:Industrializing for Growth, Jobs and Economic Transformation – United Nations Economic Commision for Africa

“Given its remarkable growth since 2000, the continent has been hailed as the next frontier for opportunity and a potential global growth pole.

Africa’s medium- term growth prospects remain strong, too, at for example 4.8 per cent in 2013 and 5.1 per cent in 2014.

Africa has about 12 per cent of the world’s oil reserves, 42 per cent of its gold, 80–90 per cent of chromium and platinum group metals, and 60 per cent of arable land in addition to vast timber resources.”

http://www.uneca.org/sites/default/files/publications/unera_report_eng_final_web.pdf

 

The World Bank

Economic growth in Sub-Saharan Africa (SSA) continues to rise from 4.7 percent in 2013 to a forecasted 5.2 percent in 2014. This performance is boosted by rising investment in natural resources and infrastructure,

Capital flows to Sub-Saharan Africa continued to rise, reaching an estimated 5.3 percent of regional GDP in 2013, significantly above the developing-country average of 3.9 percent. Net foreign direct investment (FDI) inflows to the region grew 16 percent to a near-record $43 billion in 2013, boosted by new oil and gas discoveries in many countries including Angola, Mozambique, and Tanzania.

Tourism also grew notably in 2013, helping to support the balance of payments of many countries in the region. According to the UN World Tourism Organization, international tourist arrivals in Sub-Saharan Africa grew by 5.2 percent in 2013, reaching a record 36 million, up from 34 million in 2012, contributing to government revenue, private incomes, and jobs.

http://www.worldbank.org/en/news/press-release/2014/04/07/africas-growth-set-to-reach-52-percent-in-2014-with-strong-investment-growth-and-household-spending

 

African Economic Outlook

West Africa is expected to continue its rapid growth with rates of 6.7% in 2013 and 7.4% in 2014. It has become the fastest growing region of the continent

http://www.africaneconomicoutlook.org/en/outlook/west-africa-will-be-the-fastest-growing-region-in-201314/

 

The BBC

Economic growth in sub-Saharan Africa should significantly outpace the global average over the next three years, according to the World Bank.

Foreign direct investment is forecast to reach record levels in the coming years, hitting $54bn (£35.3bn)a year by 2015, the Bank said.

http://www.bbc.co.uk/news/business-22156755

The Anglo African Co-Operative Society: An Opportunity for All

by Nick Harriss, Founder and Chairman

Background

Just like Asia 30 years ago, Africa offers the outstanding business opportunity for the next quarter of a century.  The UK is superbly placed to participate in this opportunity for a number of reasons:

  • Historic links with much of the African continent;
  • The same or similar time zones;
  • Good transport links;
  • London’s established position as the key financial and professional services centre for Africa; and, most importantly,
  • A large population of well-educated African diaspora who have family and cultural ties with both their homelands and the UK.

Many of this young and talented diaspora find that despite their education and enthusiasm that their opportunities in the UK are limited; however this is not about apportioning blame or undertaking some sociological research, but instead about offering a solution.

Why Africa?

 The African economy is developing rapidly due to a combination of:

  • The harsh medicine of Washington Consensus development aid imposed from the 90s onwards having taken effect;
  • Large infusions on Western and Asian capital targeted at certain areas, in particularly mining, oil and gas and commercial agriculture;
  • Increasing numbers of Africans who have lived/been educated in the West returning to start businesses;
  • The internet and mobile phones having a transformational impact on the behaviour of many African businesses and entrepreneurs;
  • Western countries, businesses and individuals finally realizing that Africa and Africans should not be treated like a rather slow learning child, but as a place of opportunity; and
  • Globalization slowly eroding some of the tradition approaches to society that impeded entrepreneurial activity.

Your Opportunity

There are great opportunities for business, trade and investment within Africa, but as an individual or small business, where do you start?

With many multinational corporations seemingly dominating world trade, how do you participate effectively in this international trade?

The Anglo African Co-Operative Society (the “Society”) has been established to provide a mechanism to allow individual businesses to compete on a more equal footing, creating a virtual multinational that operates for the benefit of its members.

As a co-operative society there are no external shareholders profiting from the hard work of the members; the shareholders are the members and only individuals or businesses who wish to participate in business, trade or investment between the UK and Africa are eligible to become members.  Instead of customers, suppliers and employees being squeezed for the benefit of shareholders and a few top executives, all members will benefit in an equitable fashion based on their level of activity with the Society.  Each member has one vote, however many shares they may hold in the Society.

Objectives

The primary objective of the Society is to encourage, assist and facilitate business, trade and investment between the UK and Africa for the benefit of its members.

As a secondary objective the Society will look to improve the economic situation of both Africa and the UK based African diaspora by the encouragement of business, trade and investment between them.

Benefits for Members and Activities

It is the intention of the Society to develop a growing number of services for the benefit of the members, particularly through the provision of collective purchasing power across a number of products and services.

Services

  • Marketing and PR services on behalf of members;
  • Liaising with and lobbying of governments and other official bodies both in the UK and African countries;
  • Freight forwarding and other trade related services;
  • Local agent representation in key African business hubs;
  • The provision of an internal market facility linking together members so that they may trade with each other more effectively and efficiently, including lead generation; and
  • Bulk purchasing of an increasing variety of goods and services for the benefit of the members.

Membership Goals (Long-Term)

Membership will eventually be open to any person (individuals or corporate bodies) who wish to engage in business trade and investment between the UK and Africa.  Each member has to subscribe for and retain at all times at least £100 of share capital in the Society.

The share capital of the Society is withdrawable and non-transferable.  It will not appreciate in value, but will attract annual interest, currently expected to be around 7.5% per annum.  The Society intends to apply for the initial offer of shares to be eligible for tax relief under the Enterprise Investment Scheme.

In addition, in order to benefit from the other listed services of the Society, each member has to pay a service charge of £25 per month or a discounted £250 per annum if paid in advance.