WSJ: Investments in Africa

Patrick McGroarty/The Wall Street Journal

An electric-cable factory in Dar es Salaam, Tanzania,

owned by a division of Kenyan-based Transcentury Ltd. African investors are

playing a larger role in projects on the continent.

DAR ES SALAAM, Tanzania—As U.S. and European companies retrench from their

efforts to bankroll projects across Africa, a group of investors is quickly

emerging to pick up the slack—other Africans.

Even as overall foreign investment into Africa has contracted, a cohort of

homegrown companies has mounted an unprecedented expansion drive. Investment

between African countries has almost doubled in the past five years, to 13% of

new projects started on the continent last year, according to a report on

foreign direct investment released Thursday by the United Nations Conference on

Trade and Development.

African companies are heading into the rest of Africa in

an unprecedented investment drive that has cushioned a pullback from the West

and signaled the emergence of homegrown multinationals. WSJ's Patrick McGroarty

reports from Tanzania.

The companies behind those investments are chasing high growth rates in

fast-developing markets, many of them buoyed by resource exports. Oil in Angola

and Nigeria, copper in Zambia and coal in Mozambique have each attracted tens of

billions of dollars over the past decade. Over the period, the continent's

supermarket chains, construction companies and banks have expanded rapidly.

South Africa's Shoprite Group raised $1 billion in bonds and new stock in

March to fuel expansion into markets including Nigeria and the Democratic

Republic of Congo, adding to the 223 stores in 16 countries it already has

outside South Africa. The Nigerian industrial conglomerate Dangote Group spent

$93 million on a majority stake in a South African cement maker in 2010 and $400

million to build a cement factory in Zambia in 2011. Togo-based Ecobank

Transnational Inc. was the second-biggest investor in Africa over the past

decade in terms of new projects; the bank now operates in 32 African

countries.

World Investment Report

See foreign direct investment into Africa and select African countries on the

World Investment Report 2012, released Thursday by

the UN's Conference on Trade and Development.

China has maintained its position as the continent's top investor, pumping

$56.4 billion into sub-Saharan Africa since 2005, the Heritage Foundation

says.

The U.S., Europe and other developed countries have sent less money to Africa

since the global financial crisis began, according to the U.N. report. Overall

investment into Africa fell for a third straight year in 2011, to $42.7 billion,

down from a peak of $57.8 billion in 2008. "The overall fall in FDI to Africa

was due principally to a reduction in flows from developed countries, leaving

developing countries to increase their share in inward FDI to the continent," it

said.

Many of those developing-world investors, the report showed, hailed from

within Africa, a continent of one billion people clamoring toward consumer

lifestyles. Already, 355 million Africans spend from $4 to $20 a day, a tier the

African Development Bank defines as middle class. Consumer spending in Africa is

expected to double from current levels to nearly $1 trillion a year by 2020,

according to research firm Euromonitor International.

Enlarge Image

Africa's growth is hovering above 5%—with rates approaching 10% in Angola and

Ghana—even as the economies of billion-person developing markets in India and

China are slowing. India's economy grew 5.3% in the first quarter, the lowest

rate in almost a decade, while China grew 8.1% in the same three months, the

slowest since the spring of 2009. Last week, Brazil's government ordered $4.1

billion in economic stimulus in an attempt to lift growth above a modest 2.5%

this year.

"Africa's domestic market is very big and very poorly served," says Gachao

Kiuna, chief executive of Transcentury Ltd., a Kenyan power equipment and

transport company whose revenue has grown to $300 million from $3 million in

eight years. "That's going to be the fundamental driver of continued economic

growth—and that is what's making us more resilient to the global economic

shocks."

Many African countries are accelerating growth from a tiny base. Kenya and

Ghana each have economies smaller than Madison, Wis., the Brookings Institution

wrote in a recent report.

But collectively, the gross domestic product of Africa's nations are already

roughly the size of Brazil's. Companies willing to decipher the cultural and

regulatory nuances between 54 markets are positioned to tap decades of growth

potential, according to Louis Deppe, a director for private-equity firm Actis

LLP.

"The demands within African countries are so high and there's so much room

for efficiencies that these markets can be introspective for a long time still,"

Mr. Deppe says.

To be sure, global economic malaise hasn't spared Africa entirely and could

yet crimp the continent's growth. Falling commodity prices are weighing on

Africa's resource exporters. Crude-oil prices fell to an 18-month low in June,

hammering big exporters like Nigeria, Angola and Ghana. The European debt crisis

has hurt Africa's more liquid currencies, like Ghana's cedi and Kenya's

shilling, which depreciated sharply this year as investors fled risky assets.

South Africa, the continent's largest and most open economy, has been the

hardest hit—the rand hit a three-year-low against the U.S. dollar last month,

but has recovered since.

Some exporters are also struggling to find financing as the European banks

that dominate that business have retrenched. "Africa is not divorced from the

rest of the world," says Arnold Ekpe, Togo-based Ecobank's chief executive.

And a perennial challenge remains: the lack of reliable roads, phone lines

and power grids to facilitate trade between countries. Trade between African

countries has been stuck at about one-tenth of the continental total over the

past decade, according to the International Monetary Fund.

But some improved cross-border connections are making it easier to operate

between countries. Stretches of Africa's potholed roadways are getting

face-lifts, often thanks to Chinese and Indian companies that need them to get

minerals to ports. Direct flights now link big commercial hubs, whereas flying

from Dakar, Senegal, to Lagos, Nigeria, used to involve an eight-hour trek that

stopped in three different countries.

Regional trade blocs are also eliminating tariffs between member countries

and harmonizing customs and visa policies, reducing dayslong waits for trucks at

some borders.

In South Africa, service providers are among those tapping into the

continent's new middle class. Johannesburg-based medication and equipment

distributor RTT Group has opened regional hubs in Ghana and Kenya since 2006 and

now delivers to 27 African countries.

Iain Barton, RTT's chief executive, said health-service companies can grow

almost exponentially in Africa, where heart disease and diabetes are becoming

almost as common as HIV and tuberculosis as Africans consumption habits change.

"It wouldn't be ambitious to aim for less than tripling our business in the next

five years," Dr. Barton said.

Transcentury, Mr. Kiuna's Kenya-based infrastructure company, made its first

foreign investment in 2005 in Tanzania's seaside capital of Dar es Salaam,

acquiring a majority stake in an electric cable factory from France's Nexans SA.

"They wanted to exit the market because they saw it as small," Mr. Kiuna

said. "I would argue that was a mistake."

A spokeswoman for Nexans said the factory didn't fit the company's Africa

strategy at the time.

Less than one-tenth of Tanzania's roads are paved and it can take a month for

imports to clear Dar es Salaam's port. That can make for unreliable supplies of

the copper and aluminum Transcentury needs to forge its cables. But Mr. Kiuna

said those tribulations were worth enduring to reach an urbanizing population of

44 million and growth above 6%. Under Transcentury, the factory has doubled its

share of Tanzania's cable market and turned a profit every year except 2010.

Even with Tanzania's robust growth, companies with strong positions here are

looking to expand elsewhere. Since 2009, Bakhresa Group, East Africa's biggest

flour miller and Tanzania's dominant purveyor of fruit juices and ice creams,

has spent $45 million building a grain silo and flour mill in northern

Mozambique. The mill will help Bakhresa ramp up sales in Mozambique, where

growth averages above 7% a year, and make it easier to transport flour overland

to neighboring Malawi. There, Bakhresa has nearly 80% of the market.

"We saw the market potential, and based on that, we expanded," said Ramesh

Kumar, Bakhresa's vice president for corporate planning. "We're catering to

markets with promise."

Write to Patrick McGroarty at patrick.mcgroarty@dowjones.com