Foresight Africa viewpoint: Potential potholes to investment to watch for in 2017

Editor's note:

Below is a viewpoint from Chapter 1 of the Foresight Africa 2017 report, which explores six overarching themes that provide opportunities for Africa to overcome its obstacles and spur inclusive growth. Read the full chapter on mobilizing financial resources here.

Few could have predicted the confluence of factors that have shifted African markets in recent years. We’ve seen countries making earnest efforts to improve investment climates that have helped drive economic growth. We’ve seen large reductions in absolute poverty and growth in an African middle class with disposable income. We’ve seen the scale up of new technologies and the leapfrogging of legacy systems in areas such as banking, telecommunications, and utilities. At the same time, we’ve seen the devastation that a crash in commodity prices can bring to national budgets and some businesses. And, of course, little progress has been made on intractable corruption in many countries.

On balance, I remain more optimistic about the investment opportunities in Africa than I have been in the 30 years that I have been working with the continent, but I see three interrelated challenges that I believe will increasingly become gating issues that drive or inhibit investment flows over the next 12 months, depending on how they are addressed. These are: trust and trustworthiness, political will, and uncertainty.

First, I am concerned about persistent deep-seated public skepticism of the private sector that lies just below the surface of the welcome mat. It manifests itself in myriad overt and subtle forms in African politics and policy. Yet with aid budgets around the world flat and FDI growing, historically aid-reliant countries must adapt in order to secure the capital needed to feed, educate, and power a healthy and growing citizenry. Serious investors must be sincerely embraced and considered valued clients and partners that create jobs and generate economic growth, rather than piggy banks useful for tax revenues only.

Many social challenges that were once exclusively the domain of government budgets and aid groups can today be tackled with help from business.

To be sure, some of this skepticism of business is warranted. The legacy of some businesses that may have prioritized short-term profits over the health, well-being, and long-term relations with local communities has left scars. But we must not lose sight of the fact that many social challenges that were once exclusively the domain of government budgets and aid groups can today be tackled with help from business. This is because innovative models have been developed that enable these services to be delivered in a financially viable, self-sustaining manner. From electricity generation to privately operated public transportation, to private medical schools that can cost as little as $6 per month, many critical development needs can be met with long-term private business models.

Second, distrust of the private sector can make ministers and civil servants reluctant to make difficult choices and decisions. When governments make bold decisions to eliminate energy subsidies or establish a cost-reflective tariff to attract investment in critical power upgrades, it’s tempting to blame any accompanying energy cost increase on a predatory private sector. But that acts like a bucket of cold water on future investment. Trust and trustworthiness between investors and governments are needed to unlock critical capital flows for development.

The experience of investors already in a country is the best advertisement for future investors.

My final concern is around uncertainty. It is investors’ worst enemy. From energy tariffs to taxation to tendering processes to land and regulatory policies, predictability is what investors crave. Yet, we are seeing many instances of governments re-negotiating the agreements struck with early pioneering investors when their countries become more popular and less risky as an investment destination. Worse, we’re seeing a retreat in short-term FDI in some markets because of the chilling effect of punitive policy changes. Nothing stymies prospective investors more than seeing existing investors having to deal with retroactive taxes, renegotiated concessions, or other painful and unforeseen policy changes. The experience of investors already in a country is the best advertisement for future investors—and it can be either a positive one or a very negative one.

In many cases, a suboptimal but stable policy is preferable to a more attractive policy that might change. By sticking with a proven system with which investors and governments have practice, investors have a reliable foundation for business plans, project development timeframes shrink, and investment will flow.

Africa needs foreign investment to create jobs and opportunities, boost economic growth, drive innovation and build stable markets. It is my fervent hope, as president of the U.S. government’s development finance institution, that governments and investors will grow to understand each other’s needs and perspectives and see each other as partners in Africa’s growth. When both can trust and be trusted to carry out their roles with fairness, pragmatism, and a sense of urgency, we will see progress in meeting the enormous needs and capitalizing on the historic opportunities that Africa richly merits.