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The race to become Africa’s preferred gateway is heating up

Gateway status depends on the type of business a company is looking to engage in and over what term horizon. It is important for each country to understand their relative strength and limitations and to “box clever.”

Nairobi is making an attractive play as the preferred launchpad for pan-African investors.

An intriguing contest is underway to emerge as the “gateway” to doing business in Africa.

South Africa, the continent’s largest economy by GDP, is currently in pole position by virtue of the size, sophistication and connectivity of its economy to the rest of Africa and the globe. But in the past decade, a series of policy missteps, periodic bouts of xenophobia, a clumsy foreign policy as well as a marked deterioration in its business environment has seen the country lose significant ground to other nations. By contrast, Mauritius, Morocco, Kenya and even Dubai have intensified their efforts to be the preferred launchpads for businesses with a pan-African focus.

As the race now hots up, who will emerge as the favourite for this prestigious title?

We examine the strengths and weaknesses of each contender.

South Africa

Despite its geographic location, South Africa’s advantages are well-documented. From its roads and ports, to well-developed financial, commercial and legal sectors, it is more advanced than any country on the continent. Indeed, it consistently tops the Ernst and Young Africa attractiveness index.

Yet for investors, frequent policy goals have seen South Africa’s status slip dramatically. Three finance ministers in a weekend in 2015, an unresolved mining charter, rigid migration and labour laws, deteriorating creditworthiness, and a cumbersome regulatory environment are just some of the factors that have sullied the investment climate. Companies such as General Motors have announced withdrawal from the country after 90 years, whilst the domestic corporate sector remains sceptical and unwilling to invest. Current uncertainty over land reform and the complementary issue of private property rights is creating further anxiety.

As a small open economy in global terms, South Africa is subject to significant currency volatility which complicates financial planning. Such uncertainty acts as a deterrent to ‘bricks and mortar’ type investment. Add to the mix difficulties in obtaining work permits, high data costs, exchange controls and personal safety considerations and investors are increasingly ambivalent towards South Africa. Indeed, foreign direct investment has suffered dramatically over the past decade FDI net inflow declined from almost USD 10 billion in 2008 to USD 2.2 billion in 2016 according to Bloomberg data. All the while the economy has continued to remain stagnant.

As a small open economy in global terms, South Africa is subject to significant currency volatility which complicates financial planning. Such uncertainty acts as a deterrent to ‘bricks and mortar’ type investment.

However, under the new Ramaphosa administration, there are early signs of an attempt to use foreign policy as an economic stimulus – as seen in the relatively outward looking USD 100 billion investment drive and President Ramaphosa’s engagement in global and regional politico-economic matters. But regaining lost gravitas will not happen immediately and will require active effort to improve the costs and ease of doing business. Importantly, the country must address perceptions that it is patronizing, both from a diplomatic and corporate perspective. South Africa also urgently needs to become more competitive, enhance digital infrastructure, and improve skills levels to take advantage of the fourth industrial revolution.

Mauritius

Mauritius has been the biggest beneficiary of South Africa’s mistakes. The island nation, renowned for nimble and creative policymaking, has made huge strides in attracting new investment to the country, and capturing flows which have traditionally been routed through South Africa.

This has been most evident in in the financial sector, where private equity firms and multinationals have used Mauritius as a launchpad into the rest of the continent. Due to preferential tax structures, an investment grade credit rating, no exchange control, political stability, a predictable regulatory environment, as well as a skilled and multilingual workforce, the country has emerged as the preferred jurisdiction for businesses with African interests.

These efforts have seen several treasury functions or corporates and banks being moved to Mauritius. This success has also been reflected in the numbers. In 2016 alone, the country saw a 46% surge in FDI according to the Bank of Mauritius. According to privately-owned investment group Credentia, 2016 also saw 70.8% of FDI channeled into developing economies – particularly those in Africa. Meanwhile, the Financial Services Commission, it in annual 2016/2017 report, noted a 9% rise in investments from Mauritius into the rest of Africa.

The country has also signed a number of Double Taxation Avoidance agreements with African countries which have boosted intra-continental trade, while its relationship with India and China make it a logical choice for multiple jurisdictions which have an Asian focus. Meanwhile, at 25th worldwide, it now boasts the best ease of doing business ranking in Africa (significantly higher than SA at 82) in the World Bank’s 2018 report.

The reality, however, is that Mauritius is a niche player and lacks the scale and connectivity to really be anything more than a financial hub. In this sense, the country should be seen as a financial gateway, rather than a real economy gateway. It is therefore a complementary offering rather than a substitute for any Africa strategy that requires physical operations and scalability.

The reality, however, is that Mauritius is a niche player and lacks the scale and connectivity to really be anything more than a financial hub. In this sense, the country should be seen as a financial gateway, rather than a real economy gateway.

Furthermore, the country is still battling misguided perceptions that it is a “dodgy tax haven” and is merely a tropical holiday destination that is more apt for sipping pina coladas and soaking under palm trees.

Given historical ties with Asia and huge dependence on Europe, its engagement with African countries takes it into a new and unchartered territory. Although intentions in this regard are positive, with a more “Afro-centric” policy orientation, an improved level of cultural intelligence, empathy and sensitivity will be necessary across diplomatic and business spheres to make this pivot successful.

Morocco

Since 2013, under the leadership of King Mohamed VI, Africa rather than Europe and has become the focal point for Morocco’s foreign policy. The Kingdom recently rejoined the African Union in January 2017 after an absence of 30 years, a huge move aimed at cementing closer ties with the rest of the continent.

This rapprochement has seen a significant uptick in investment, particularly in countries in francophone Africa. Cote D’ivoire in particular has seen the fruits of this strategy, with banks such as Attijariwafa having established a sizeable foothold in this market. Insurer SAHAM, which is active in 26 African countries with over 60 subsidiaries, has also followed the trail of Moroccan banks in moving to sub-Saharan Africa.

For Morocco, the advantage is clear – become the gateway between the Arab world, Europe and Africa.

This month Morocco announced plans for a 5,700 Km regional gas pipeline with Nigeria spanning across 5 countries – a clear statement of intent in its quest to expand into the rest of the continent. Meanwhile, Royal Air Maroc (RAM), recently announced plans to launch flights to five other African cities including Harare and Maputo. Significantly, Morocco is the second leading country on the continent for FDI in sub-Saharan Africa – trailing only South Africa. In 2016, the country was praised by African Development Bank President Akinwumi Adesina for driving 85% of its foreign investment into the continent. Moreover, from 2008 to 2016, Morocco’s trade with sub-Saharan Africa increased at an average annual rate of 9.1% – a sign of its growing influence and strategic intent.

Morocco is the second leading country on the continent for FDI in sub-Saharan Africa – trailing only South Africa.

At the same time, through numerous big ticket conferences, the country has attempted to display its business-friendly nature, whilst the King has exercised soft power and built strategic ties through various state visits. With comparative advantages in Islamic finance, agriculture, renewable energy and digital infrastructure, the country is now betting on increased activity South of its borders as an economic catalyst.

For Morocco, the advantage is clear – become the gateway between the Arab world, Europe and Africa. However, it faces a number of challenges in becoming a true hub.

The first obstacle to overcome is the mistrust that exists between itself and fellow African nations. In short, there is significant historical baggage to overcome. Diplomatic ties have been strained on account of the “arrogance and superiority complex” that many nations believe Morocco has often displayed. In 1963, Morocco infamously withheld support for efforts towards decolonization of South Africa, Mozambique and Angola. In 1987, Morocco quit the African Union and applied to join the European Union – a bid that was rejected. More recently, in 2014, Morocco refused to host the 2015 AFCON over Ebola fears, while it hosted the Club World Cup that year.

These missteps have not been forgotten if voting patterns at various diplomatic forums are anything to go by. At the recent voting round for the FIFA 2026 World Cup, it was telling that 11 African countries did not vote in support of the North African country’s bid.

Repairing this damaged relationship will therefore require more than a charm offensive. Critics take umbrage with Morocco’s “un-African” behaviour and believe the pivot to Sub-Saharan Africa is “opportunistic”. Then there is the well-document Western Sahara issue, which puts it on a collision course with many African countries who believe that its continued occupation of the Sahrawi state is a demonstration of its colonial and un-African inclinations.

Add to that a lack of familiarity and a cultural nuance in dealing with black Africans, and it is clear that becoming “Africa’s gateway” is an uphill task. The fact that Moroccans feel a greater affinity to Arab and European identities rather than African is a definite source of friction, and how such complicated identity politics is navigated will be a key determinant of the country’s success or failure in achieving a gateway status.

Dubai

This is a peculiar one. Dubai is a wildcard, but for many it is the logical place to run an Africa portfolio. According to Ahmed Salim, a Dubai based Africa analyst at Teneo Intelligence, the Emirate’s developed infrastructure, ease of doing business and interconnectivity between Asia and Africa constitute a considerable advantage for businesses with a pan African focus. “These factors provide a level of competitiveness that hubs like Nairobi and Johannesburg do not have. There is also the added layer of the UAE’s foreign policy and strategic decisions that have had a knock-on effect in promoting UAE-Africa trade and investment links,” he adds.

Dubai is a wildcard, but for many it is the logical place to run an Africa portfolio.

But the most compelling drawcard, according to Salim, is connectivity – “a majority of African cities are only between 3 to 8 hours away from Dubai; so it is already a key gateway to Africa; and until it is cheaper to fly from Nairobi or Dar-es-Salaam to Johannesburg than it is from Dubai to Johannesburg or Dubai to Dar, this will remain a key advantage for Dubai.”

Dubai, Africa portfolio, internet penetration, limitations, Ronak Gopaldas

However, the simple problem is this – Dubai is not in Africa. For African focused entities, there is no substitute for on ground operations. To be taken seriously, companies need to have a physical presence on the continent – not only for local knowledge but for relationships as well. The “suitcase banking approach” of parachuting in and out may have worked in the past but in today’s context it is not a viable or sustainable option, given the complexities and nuances associated with doing business in Africa. So, despite its attractiveness, Dubai is not a substitute regional head office in Africa – it is a ‘nice to have’ rather than a ‘must have’.

Kenya

Nairobi is fast emerging as a technological hub for Africa. The country which gave birth to M-pesa has now ramped up efforts to grow its nascent fin-tech sector, famously known as Silicon Savannah.

With the highest internet penetration rate in Africa, and rapidly improving digital infrastructure, Nairobi has earned the titled of Africa’s most “intelligent city” according to the Intelligent Community Forum. It is also perceived to have a more supportive legislative and policy environment for tech-startups, particularly in the telecoms and banking sector, according to Erik Hersman, the founder of I-hub. And with an oil and gas boom in east Africa, strong and growing geopolitical interest from both the East and West, not to mention its status as the regional economic dynamo, Kenya, and more specifically its capital, Nairobi, is making an attractive play as the preferred launchpad for pan-African investors. Throw in its educated population (especially in terms of STEM graduates), banking sophistication, and infrastructure drive, the outlook is a positive one.

With the highest internet penetration rate in Africa, and rapidly improving digital infrastructure, Nairobi has earned the titled of Africa’s most “intelligent city” according to the Intelligent Community Forum.

Yet, corruption, security fears and political and policy uncertainty remain key issues for investors. Low levels of development and considerable red tape and bureaucracy in the business environment are also major deterrents – as evidenced by the debacle over the country’s interest rate cap. Ultimately, as a single B rated country, Kenya does not offer the level of institutional maturity and investor protection that some of its competitors do; nor does it have the balance sheet to fund big ticket continental investments. Like Mauritius, it lacks the scale to seriously compete with Johannesburg on a standalone basis – but it retains a number of distinct advantages, notably its regional access and technological knowhow which can be leveraged.

So, who should investors pick as Africa’s gateway?

In short, there is no simple answer to this question.

Gateway status depends on the type of business a company is looking to engage in and over what term horizon. For example, building a factory in a country is very different proposition to investing in a fintech startup or establishing a bank for that matter. Geographic considerations, cultural and linguistic symmetry, as well as historical relationships also have a huge bearing on a company’s preferred choice. French money, for example, gravitates to Morocco, whilst Gulf countries naturally prefer to operate out of Dubai. Similarly, Western money finds a natural fit in anglophone places like Nairobi and Johannesburg.

Overall, South Africa remains the preferred option for most from a scale and practicality perspective, while Mauritius has forged a distinct financial sector niche. Nairobi’s growing tech scene and access to the east African market make it an attractive option, while, Morocco although late to the party, has ambitious designs and is worth watching. Meanwhile Dubai appeals to investors whose Africa operations fall within their MENA regional offerings.

Ultimately, each of these destinations have unique selling points and can each carve their own niche. What is important, however, is for each country to understand their relative strength and limitations and to “box clever.” It is possible to create complementary, rather than competitive, hubs for investors and offer holistic and practical solutions which cater to specific needs.

If done properly, these positive externalities can enhance growth prospects, not only for the countries in question, but the continent as a whole.

Source: Observer Research Foundation