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Africa/USA: A cautious look beyond the recessionary gloom

By Witney W. Schneidman ?in Washington, DC
Posted on Monday, 21 September 2009 00:00

The new administration may want US businesses to do more, but

recession-hit companies are still unwilling to invest in the face of

the continent’s risky reputation

The high calibre of the US delegation, led by secretary of state Hillary Clinton, at a US-Africa business forum in Nairobi in August seemed to indicate that President Barack Obama’s administration wants US businesses to invest in the continent. After all, it is not often that the US secretaries of state and agriculture, the US trade representative, and three senior members of US Congress travel to Africa to promote trade and investment.

Some American investors have already discovered Africa’s commercial potential. Washington-based Emerging Capital Partners (ECP) has raised more than $1.6bn and has made more than 50 investments in 40 countries on the continent in the last nine years. ECP’s CEO Tom Gibian says, “Since we began our business in 2000, it was hard to find a quarter where growth and positive reforms didn’t improve from the previous one,” until the collapse of Lehman Brothers in September 2008.

No risk, no gains?

Others are less keen. American business does not have a historic presence on the continent, apart from iconic brands such as Coca Cola, and the large US presence in South Africa – now about 700 companies – and relatively long-term activity in the extractive sectors. Sub-Saharan Africa still accounts for less than 1% of US foreign direct investment.

The beginning of a new trend is discernable in Commerce Department figures, which show that US direct investment in Sub-Saharan Africa increased by 5% between 2006 and 2007 to $13.3bn. The new investments were also in non-oil producing countries, such as South Africa, Mauritius and Liberia.

The interest in Liberia is clear. US businessman Robert L. Johnson built a four-star hotel and created the Liberian Enterprise Development Fund, leading to more than $22m in new investments. Also, the US Overseas Private Investment Corporation has invested with Buchanan Renewables to develop a $61m project to convert non-producing rubber trees into energy-producing woods chips, creating 600 jobs.

While the data is sparse, numerous business and government officials convey an impression of a new willingness in US companies to look at Africa’s commercial opportunities. One official at a Fortune 500 company says: “We are watching Africa carefully and will pick and choose the commercial opportunities as they emerge.” But the president of the Corporate Council on Africa (CCA), Steve Hayes, says American companies “are still overly cautious in their attitudes toward Africa”.

The US business presence is at least visible throughout the continent. IBM, Microsoft, Oracle, Hewlett Packard and, most recently, Apple are competing aggressively for market share in the ICT sector. The aerospace company Lockheed Martin recently signed an agreement with Liberia to upgrade Robertsfield Airport and is providing logistical support in Southern Sudan and DRC.

Delta Airlines now offers service to six markets in Sub-Saharan Africa, and expects to be flying to Cape Verde, Liberia, Kenya, Angola and Equatorial Guinea in the next 12 to 18 months. In South Africa, companies have won tenders related to the 2010 World Cup for stadium construction, transportation and transport planning.

In the extractive sectors, American companies continue to have a pronounced presence across the continent, even with the recent fall in commodity prices. In March, Contour Global signed a $300m deal with Rwanda to develop methane gas in Lake Kivu.

In Burkina Faso, Limited Brands employs 4,000 women to produce ‘fair trade’ organic cotton on behalf of Victoria’s Secret apparel. If there is a common theme echoed by officials from many of these companies it is the ability to train locals to perform key tasks important to their commercial presence. One aerospace executive says: “We would rather train and certify a local worker instead of importing an aeronautical engineer. It’s also more cost-effective.” An IT executive who works for an American company in Ghana says: “In Germany, a customer expects to be served by a German. The same is true in Ghana and elsewhere in Africa, and we can do that.”?

The global recession has contributed to American caution about entering the African market. The retail sector, in particular, has been hit hard and there was a 13% decline in exports of textiles and apparel to the US under the African Growth and Opportunity Act (AGOA) in the first six months of 2009.

Interestingly, competition from Chinese companies does not seem to be a significant concern for many US companies, even though China continues to be the largest individual country exporter to Sub-Saharan Africa with a market share of about 10% (the US market share is 5.5%). For now, there are few sectors in which Chinese and American companies directly compete. While telecommunications and some infrastructure projects may be the exception, there has been no ‘crowding out’ of American companies in sectors such as energy, automotive, chemical, agriculture, construction and engineering, and IT.

While some US officials fret that China is the ‘big elephant in the room’, the immediate concern should be over job creation, skills transfer and contract transparency and not market displacement for American companies. As the global economy improves, American companies are likely to continue to discover Africa. For one thing, nine of the 20 fastest-growing economies in 2009 will be in Africa, according to the IMF. New consumers will be found not only in South Africa but in Kenya, Uganda, Zambia, Ghana, Angola and Senegal.

However, the Obama Administration will have to sustain its commitment to enhancing trade and investment on the continent, as was evident at the recent AGOA Forum in Nairobi, if American companies are going to arrive on the continent in significant numbers.

The administration’s $3.5bn commitment to an African food security initiative could be a stimulus to greater investment in the agricultural sector. Two American companies, Dole and Chiquita Brands, for example, have already begun to explore opportunities in Angola and Mozambique to supply the European markets. But there will also have to be investment in seeds, irrigation and roads for this programme to become successful.

US firms are likely to need more incentives to mitigate the perceived risk of investing in Africa, even though the investment returns are generally higher than in any other region in the world. Greater access to financing is also a priority. China’s Exim Bank guarantees loans for its businesses in Africa at a rate nearly 30 times that of the US Export-Import Bank, according to CCA.

Africa’s investment future is bright, especially in alternative energies, such as wind, sun and biofuels, and in tourism, financial services and housing. American companies may eventually become more eager to contribute to, and benefit from, enhanced prosperity on the continent.

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