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Can Greed Save Africa?

January 7, 2008


In an earlier post, I discussed the John Templeton Foundation’s roundtable discussion about aid and Africa [Will Money Solve Africa’s Problems?]. The answer to that question was a qualified “no.” Africa certainly needs money, but it also needs better governance to ensure that money coming into African states is spent wisely. Roben Farzad, writing in BusinessWeek, asks another provocative question, “Can Greed Save Africa?” [10 December 2007 print edition]. The subtitle to his article provides a partial answer: “Fearless investing is succeeding where aid often hasn’t.” One does not get this warm and fuzzy feeling about investment in Africa from Farzad’s opening paragraph.

“It isn’t easy for Masoud Alikhani to check on his investment. The Iranian-born Briton owns a facility in Mozambique that turns jatropha, a hardy, drought-resistant plant, into biodiesel. An October visit starts with an 11-hour flight from London, his home base, to Johannesburg. From there he jumps into a four-seat Piper Seneca II for a wobbly three-hour flight to Maputo, Mozambique’s capital, during which one of the passengers, this writer, gets violently ill. On landing at Maputo’s airport, where soldiers stand guard on the roof, Alikhani spends an hour wading through the bureaucratic muck of visa clearance and immunization checks. Then it’s back on the plane for a 90-minute flight along the Indian Ocean coast to the province of Inhambane. At the 7-Eleven-size airport there, Alikhani is met by his brother and business partner, Said, for a 90-minute drive past wayward livestock and random brush fires to the village of Inhassune. At the end of a long dirt road, on a vast tract of reclaimed scrubland, sits the Alikhanis’ massive biofuel complex. They try to visit every two months.”

In this “past meets the future” scenario, rests the hope of Africa. The conditions described by Farzad — poor infrastructure, shaky security, and inefficient bureaucracy — are the reasons that African nations have remained mired in poverty. The “massive biofuel complex,” however out of place it may seem, represents jobs, connection with the global economy, and hope.

“The brothers are among a growing cadre of intrepid investors looking for treasure in the 30-plus sub-Saharan African nations stretching from Mauritania and Somalia in the north to the continent’s southern tip. There’s no blueprint for this kind of investing: The best opportunities must be dreamed up and then created from scratch. The Alikhanis saw upside in a fallow cotton plantation. In Nigeria, U.S.-based private equity firm Emerging Capital Partners last year helped acquire an abandoned factory in hopes of supplying the continent with desperately needed fertilizer. South Africa-based microlender Blue Financial Services, energized by an investment from Wall Street last year, now has 171 branches in nine countries, with offices opening soon in Rwanda, Cameroon, Swaziland, and elsewhere. All told, at least $2.6 billion in private equity deals have been struck this year in the region (excluding more-developed South Africa), nearly seven times the 2005 figure. This is the investing world’s final frontier, so undeveloped and impoverished that it makes other extreme emerging markets like Colombia and Vietnam seem like marvels of modernity. Airports open and close arbitrarily. Roads are often unpaved and clogged. Gasoline and diesel are scarce, and rolling blackouts common. The medical precautions are even more forbidding: Traveling to mosquito-infested interiors requires a round of injections and weeks of antimalarial pills that often induce hallucinations.”

As I have written before, few governments in the developing world can afford to fund education, offer healthcare services, provide security, and build infrastructure — even if they weren’t plagued by corruption. Yet all of these issues must be addressed simultaneously. That is where foreign direct investment and public/private partnerships come into the picture. Africa, however, is the poster child for corruption and waste.

“In many ways, Africa’s economic situation seems hopeless. While $625 billion in foreign aid has poured in since 1960, there has been no rise in the region’s per capita gross domestic product, notes William R. Easterly, economics professor at New York University. What’s more, from 1976 to 2000, Africa’s share of global trade dropped to 1%, from an already negligible 3%. The U.N.’s scale of human development, which considers health, education, and economic well-being, ranks 34 African nations among the world’s 40 lowest. Thus far, foreign aid hasn’t made a dent.”

This begs the question, why does Farzad believe that greed can save Africa? The answer, he believes, lies in the growing importance of African commodities.

“Thanks to the global commodities boom of the past few years, sub-Saharan Africa’s economies, after decades of stagnation, are expanding by an average of 6% annually—twice the U.S. pace. And like bees to honey, investors are swarming into the region in search of the enormous returns that ultra-early-stage investments can bring. Blue Financial, for example, has already netted its early private equity backers a ninefold gain thanks to the 385% rise in its stock since its October, 2006, initial public offering in Johannesburg. Emerging Capital Partners has bought all or part of 42 African companies this decade and cashed out of 18, with gains on their investments averaging 300%. ‘The money we can make is matchless,’ says Emerging Capital Partners CEO Thomas R. Gibian, a former Goldman Sachs banker. The region’s public stock markets are attracting foreign investors, too. Stocks in resource-rich nations such as Botswana, Nigeria, Zambia, and many others are rising to record highs. In recent months, investment bank UBS and others have published thick reports on Africa’s investing opportunities, hailing as a major virtue the fact that markets there don’t move in tandem with those of the rest of the world. Demand for African stocks is so robust, in fact, that it has created a bottleneck. Because these markets are tiny and illiquid—Zambia’s total market value is just $2 billion—foreigners can’t pile in all at once. Those who don’t want to wait on the sidelines must find their own opportunities away from the stock exchanges. ‘The private equity skill set is really in demand here,’ says Gibian. His firm has invested more than $400 million in sub-Saharan Africa this year, vs. $325 million in the previous six years combined.”

So far what Farzad describes sounds more like neo-colonialism or carpetbagging than investment leading to development. There is nothing new about exploiting natural resources or cheap commodities. Those markets, however, are historically volatile and relying on them has never proven to be a path for sustainable development. In addition, money coming in has more often than not gone right into the pockets of corrupt politicians. Farzad acknowledges as much.

“Of course, these investors may well be courting disaster. International monitors consistently place the region in the lowest tier of their rankings for business friendliness. Some governments, such as that of Zimbabwe President Robert Mugabe, expropriate assets outright, while others bleed businesses dry over time. If those problems don’t do lasting damage to an investment portfolio, a commodities crash certainly would. A mass exodus of investors would snuff out Africa’s flickering progress in a hurry—not only its GDP growth but also the burgeoning informal economy that isn’t counted in official statistics: backyard and roadside bu
sinesses that have suddenly arisen to tap the continent’s growing income.”

Farzad strikes his hopeful note about Africa because, unlike government or NGO aid programs of the past, the new breed of investor looks like it is going to hold politicians accountable. They are looking for a return on investment and many of them have long-term plans — not simply get in and get out with as much money as you can strategies.

“Many African leaders have come to regard private investment as the only route to sustainable economic development. ‘Investors put their money down for what they will get as a profit,’ says John Agyekum Kufuor, Ghana’s President, in his palace in the capital city of Accra: ‘It’s business.’ Botswana President Festus Gontebanye Mogae even appealed directly to private equity and hedge fund managers during a September trip to New York. Over time, these leaders hope, the benefits accruing from private investment will give locals more of a vested interest in the permanence of historically volatile institutions—governments, currencies, banks—and put sub-Saharan Africa on a path to self-sufficiency. But for that to happen, the region must first prove that it can be hospitable to cold-eyed investors. Masoud Alikhani is no moral crusader; he thinks the ‘We Are the World’ movement of the 1980s, which sought donations to end African hunger, ‘made beggars of whole nations.’ The burly 66-year-old is among the new wave of investors at the tenuous nexus of venture capital and agribusiness in Africa. Five months ago he pitched a large hedge fund in New York on the merits of ESV Biofuels, as his company is called. The fund’s partners agreed to take a tour of the facility in January. ‘We are capitalists and opportunists,’ says Alikhani. ‘We are doing this to make money. That’s the only way to help.'”

As an entrepreneur, I am in full agreement with Alikhani. The Enterra Solutions® Development-in-a-Box™ framework is grounded in the belief that helping countries help themselves using an investment and profit bottom line is the best way forward. There is still a need for foreign aid and other philanthropic programs — in fact a great need. These programs must be mutually supportive and they should be since they all have the same purpose — to make developing countries self-sufficient. Alikhanis ESV Biofuel company is a good example of a private venture can benefit local and national economies.

“Last year, it bought a long-abandoned cotton plantation in a malaria-laden stretch of Mozambican bush, grabbing 27,000 acres with a lease for 198,000 more. It expects to plant nearly 17,000 acres, harvest its first jatropha seeds, and press its first batch of oil by this time next year. Assuming the Alikhanis and their two other partners succeed in wooing outside investors, ESV could break even by 2011—and sooner if biofuel prices keep rising. Already, ESV has become the province’s biggest private employer, with a staff of 620. Locals who hadn’t earned money in years are making from $60 a month to as much as $2,000 for managers. ‘When we started, we told people it is a startup, a cash-eating animal,’ says Said Alikhani. ‘The faster we begin production, the sooner the benefits come to all.'”

I can almost hear myself giving Alikhani’s speech to investors. Beginning a start-up company requires courage because you are asking investors to risk their capital on your vision, often with no promise of a quick return. That is the situation in which Alikhani finds himself. There are immediate benefits to others, however. Investors may not think of themselves as philanthropists, but in cases where they are investing in emerging market companies they often become part of the development community. ESV Biofuels is a good example.

“Inhassune’s revival is already under way. Mosquito control, power lines, and potable water have quickly arisen from a barren stretch of bush. ‘I’d be the last person in the history books to go down as a philanthropist,’ says Renier van Rooyen, ESV’s South African on-site manager. ‘But you cannot run a business when your workers are out with malaria or sick from dirty water.’ On a warm weeknight, villagers greet the season’s first rainfall with dancing and singing. ‘There was nothing here before,’ shouts Ineve, a fieldworker, over beating drums. Others proudly brandish newly issued government ID cards. ESV employees have been lining up behind the schoolhouse for hours to register to vote for the first time in their lives. Women stand out as the most eager beneficiaries of the ESV experiment. Many walk as far as five miles each way to get to the plantation. (The Alikhanis say they plan to import bicycles from London.) Women are also disproportionately willing to budget the time and money to tend small patches of onions, maize, and papayas, which they sell at Inhassune’s new 20-stall marketplace. In a nation haunted by AIDS, ‘women who work are not subordinate to the will of men with risky behaviors,’ says Pablo Smango, a public-health inspector in Beira, Mozambique’s second largest city. ‘They control more of their own destiny.'”

Consistent readers of this blog will recognize some of arguments I have made in the past. Employers want healthy and educated workers and so they are willing to invest in preventative measures to help keep them healthy and training to make them more effective. And occasionally, as noted above, there are beneficial, if unanticipated, results — helping keep women at risk to HIV safer. There are other benefits as well. In the case of ESV, they provided jobs in area that had few. Good jobs mean that people (especially children) are going to eat better. Money often means the difference between sending children to school or sending them to work. Farzad goes on to discuss other investment opportunities, especially in agricultural.

“The most obvious investing opportunity in Africa lies in its most pressing need: food. The continent supports one-seventh of the world’s population and holds nearly a quarter of its land. But according to UBS, sub-Saharan Africa produces just $178 worth of goods per agricultural acre, compared with $457 in Latin America and $1,077 in Asia. A crippling fertilizer shortage is the main problem. Emerging Capital Partners, the biggest U.S. private equity firm operating in Africa, sees opportunity there. Among its most daring investments is a $35 million stake in Notore Chemicals, a massive fertilizer project in the oil-producing Niger Delta, home to daily kidnappings and an ongoing armed rebellion. Government graft and neglect ran the 12-year-old plant aground in 1999; Emerging Capital bought its stake in the shuttered facility in 2006. ‘The government figured a dollar in its pocket was more valuable than the $10 it would make by fixing the conveyor belt,’ says Genevieve L. Sangudi, a 31-year-old Tanzanian-born, Columbia University-educated MBA who shuttles in from her home in Washington to oversee Emerging Capital’s portfolio.”

Although some environmentalists prefer options other than fertilizer to increase agricultural production, Farzad’s example demonstrates how shared challenges can result in better connectivity between national economies. Chemicals produced in Nigeria have market throughout sub-Saharan Africa. In order to get the fertilizer from the plant to where it is needed, a supply chain, including all necessary transportation and supporting infrastructure, needs to be built. With a profit motive driving such activity, there is a better chance it will actually get built and be maintained. Currently, “‘If someone in Lagos sees a pothole,’ goes a local saying, ‘he doesn’t ask why it isn’t filled, or where to find the gravel to fill it. He wonders: Where can I buy tires big enough to ride over the pothole?'” Foreign direct investments and public/private partnerships could change all that.

Farzad reports that micro-finance is also becoming a commercially viable business.

“Agriculture isn’t sub-Saharan Africa’s only investment draw. Microlending—the making of small, unsecured loans to ordinary people—is bringing in big profits for a raft of publicly traded companies all across the continent. Blue Financial is among a new breed of so-called salary-microlenders, which make loans only to formally employed borrowers and take payments directly from their paychecks. The set-up helps Blue manage its risks: Bad loans are only in the 3%-to-4% range, remarkably low in a part of the world where fewer than one in five people has a bank account.”

Many non-profit micro-finance organizations help the self-employed, so Blue Financial’s services should complement rather than displace other programs. Greed may not be the end-all solution from Africa’s gripping poverty, but any program that creates jobs and holds politicians and governments accountable is a good thing. Investments are still too small to save Africa, but as in many areas, things are looking up. As they say in the agricultural sector, however, there is still a long row to hoe in Africa.

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