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How to finance the AfCFTA ? A new game changer for Investment in Africa

If the implementation of the AfCFTA carries a large legal part, at least initially, other fundamentals are necessary for a real liberalization of intra-African trade. Starting with roads, all elements related to transport and logistics, energy, digital infrastructure … Works that require significant funds. The Initiative has put a figure on this need: one thousand billion dollars will be required for implementation. Will the alternative come from African public funds? 

The creation of the African Continental Free Trade Area (AfCFTA) could indeed change the investment landscape on the African continent. Some public funds are already active in certain sectors. 

But first, it is interesting to note that public funds are defined as “all the money belonging to the state and subject to the rules of public accounting”. In the context of the AfCFTA, this refers to investments that African states, each within its own perimeter, could allocate for the success of this common market. However, here we will refer to all the funds that are able to contribute to the construction of the largest free trade area in the world.

Clearly, the creation of the AfCFTA opens up opportunities for investment funds to identify sectors where profitability is more important than others. According to recent studies, two trends are emerging among investment funds in Africa: “focusing on specific sectors and multi-regionalizing investments.

1.7 billion raised in 2019

Thus, in early 2019, investment funds active on the continent managed to raise $1.7 billion, nearly 70% of which came from sector funds, said the Association of African Private Equity and Venture Capital Companies (AVCA). In other words, funds are specializing to better focus on identifying and leveraging opportunities in their areas of expertise. 

In fact, nearly 90% of the money raised in fundraising is taken up by only four sectors of activity, namely finance, consumer staples, industry and consumer discretionary (consumer durables, media, automotive, entertainment, etc.). 

Sign that specific opportunities are coveted by all, even generalist funds are increasingly interested in them. This is the case, for example, with the development of cutting-edge technologies on the African continent, which are attracting more and more investors. As Enitan Obasanjo-Adeleye, Director of Research at AVCA, attests, “fundraising in this area in Africa is increasing.”

That being the case, the AfCFTA, in its development, must not leave many people by the wayside at the risk of having a “backlash” against free trade. Therefore, it is up to the states, but also to the AfCFTA Secretariat, to put in place safeguards to avoid certain slippages, especially since, in recent years, investment on the continent is no longer the prerogative of international aid and certain large groups.  

“Sub-Saharan Africa will eventually get  a demographic dividend of $500 billion per year over a 30-year period…”

There are, with no doubt, real prospects for profitability, but also risks. Even in the field of health, we see “beautiful” promises in the years to come. Starting with the United Nations Population Fund (UNFPA), which estimates that “sub-Saharan Africa will eventually get  a demographic dividend of $500 billion per year over a 30-year period if governments invest in health and education, improve governance, put in place the necessary infrastructure, promote business creation and make agriculture more attractive.  

And the Chinese and Indian examples are there to prove that this is possible, two countries where in thirty years (1965-1995) this dividend has represented up to 40% of economic growth. 

Energy, financial services, transport, agriculture, industry, health, telecoms, construction and retail… the leading sectors for investment

Energy (including solar energy), financial services, transport, agriculture, industry, health, telecoms, construction and retail. These are the sectors considered the most promising in Africa.

Energy is the preferred sector for investment intentions because Africa still has some 600 million inhabitants who do not have regular access to electricity, even though the continent has optimal sunshine conditions.

A big problem…

As far as investment funds are concerned, it should be remembered that, until the end of the 1990s, only public and multilateral funds financed economic and social projects on the continent. The latter were therefore unable to finance small and medium-sized enterprises (SMEs), even though Africa’s development depends on them.

Donors are also criticized for having relied on the intermediation of national development banks, which did not have the internal skills necessary for an objective appraisal. 

The same is true of multilateral development banks (ADB, BOAD, BDEAC), which were not equipped to finance and monitor small-scale projects.

Microfinance institutions were slightly better in terms of project financing, “but the size and potential of the targeted projects were more related to the individual survival of a family or a micro-enterprise than to a real economic development strategy”.

For their part, multilateral financial institutions, such as the IFC (part of the World Bank Group), or bilateral institutions (PROPARCO for France, DEG for Germany, CDC for the United Kingdom, FMO for the Netherlands, etc.) have financed private investments with varying degrees of success.

A highly anticipated investment protocol…

But that was before. Today the landscape has changed, following the proliferation of private equity funds active in Africa that raised $2.4 billion in the first six months of 2018. Private equity transactions, counted during this period, amounted to $900 million, 75% of which were in the infrastructure & utilities, financial services and manufacturing sectors. 

In West Africa, for example, the main active funds are Investisseurs & Partenaires, Emerging Capital Partners, AfricInvest, Amethis Finance, Cauris Invest, Phoenix Capital Partners and Adenia Partners. This is not to mention multi-country funds with significant African activity (Partech Africa, PAI Partners, climate investment funds, FISEA, and in Germany the recent “Compact with Africa”), to which we must add pension funds, crowdfunding platforms (Afrikwity and Cofundy).

Unfortunately, the pension fund industry is considered the weakest link in African finance, weighing only $372 billion (compared to a global pool of $41.3 trillion managed by pension funds worldwide), while demographics are exploding and pay-as-you-go pension systems are failing. 

In conclusion, the AfCFTA could not only promote the development of existing investment funds, but also the creation of others, as the areas of investment are vast and numerous. In this regard, the investment protocol, which was developed as part of the AfCFTA implementation process, is eagerly awaited…

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