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Avoiding the common pitfalls in African expansion

When expanding into Africa, local companies need to understand that simply  transplanting products and services does not necessarily mean they will be successful elsewhere. By Theodore Josias

The rate at which local organisations have ventured into Africa has to date remained slower than that of their European and Chinese counterparts. However, more and more South African companies are realising the importance of expanding into Africa as part of their growth strategy.

While this certainly makes business sense, says Josias, there are a number of common pitfalls both local and global organisations seem to fall prey to when setting up an operation in Africa.

Some South African companies have failed in their African expansion bids or are paying a very high price for entering into territories. In these instances, many have failed to understand that simply transplanting products and services that work well in the South African context does not necessarily mean they will be successful in other territories.

A full on-the-ground investigation is essential to truly understand the culture and preference of the populations in the various territories as opposed to just the population size, income per capita and growth rate. Failure to do this could spell disaster for any company intent on creating an African footprint.

Though a textbook implementation framework is outlined in the diagram, it is of the utmost importance to conduct adequate homework upfront. Organisations often fail to realise that Africa is not a homogenous continent but have different cultures, languages and regimes country to country.

The lessons learnt in one particular country are not necessarily applicable to others. Many African countries are strongly driven by culture and traditions that need to be fully appreciated to properly formulate a country strategy.


Planning and thought need to be given as to whether you will be starting an organisation from scratch or through joint venture partners with the aim of knowledge and technology sharing. If the latter, adequate due diligence will need to be conducted with regards to perspective business partners.

Many African countries are also strongly driven by a need for citizens’ empowerment. It is therefore essential that a business strategy carefully considers how to deal adequately with this requirement that could aid the growth of the business. Given the limited knowledge that some entities have, they tend to focus on partnering with the ‘usual suspects’ in a territory who might not always be the best fit for the company. It is therefore essential to do a full partner review in each territory.

Also, organisations need to ensure they understand not only the macro-environmental barriers to entry, but also the basic micro-environmental factors such as tax regimes, exchange controls, work permits regarding quotas for expatriates, and business licence requirements. Not doing the research often sees organisations making the same common mistakes such as not declaring importation of capital equipment properly and not being able to repatriate funds due to the capital investment or funding of operations not having been made through the right channels.

However, when it comes to doing the homework, this also needs to be conducted at a higher level regarding how the investment and shareholding are structured, whether the operations should be undertaken in a branch or subsidiary or even a representative office, be it a South African or an international investment.

When investing or expanding in Africa, organisations often opt for an intermediary vehicle with a more tax effective structure such as Mauritius, Seychelles, or the British Virgin Islands. Here naturally the organisation will have to consider local withholding taxes and the double tax treaties between countries.

Expanding organisations also need to keep in in mind the type of operation they anticipate as activities under a representative office are often restricted where only business development functionality is permitted as opposed to revenue generating functionality.

And while organisations often have a clear strategy as to how they will go to market, having a pre-planned exit strategy is another aspect that is often overlooked.  When it comes to the exit strategy, organisations should be aware what their end-game is. For instance at what stage when it comes to on-the-ground operations, tax efficiency, double agreements, and exchange controls, is it time to begin exiting and has the entity been structured in such a way as to allow for an efficient exit.

Another aspect organisations expanding into Africa should be aware of is underestimating the time it takes to set up and conduct business on the continent. Though South African companies are generally welcomed in Africa as ‘brothers’ on the continent, a deliberate attempt to understand the local practices is essential in building lasting business relationships. Organisations would do well to heed the cultural nuances inherent in conducting business in each respective African country where it is important to be respectful of business partners and local business practices.

Organisations should also understand that they need to ensure they have the right people or advisors in place to assist with certain logistical and legislative requirements. Back office and operational considerations are additional areas that are often not given much thought when it comes to setting up in a new territory.

Monthly accounting, processing payrolls, payments to employees, and in-country payroll taxes, together with the often myriad of social security contributions, can be an overwhelming challenge, particularly if organisations are operating across more than one country.

Here organisations need to be aware of the various local statutory accounting requirements. For example, in francophone and lusophone countries, companies must adopt the local chart of accounts in local currency, and in in most countries payroll taxes and social security payments have to be conducted in-country as EFTs are not accepted.

It is for this reason that many organisations opt to outsource this function to reliable business referral partners as it may be more efficient and cost effective to do so, at least initially.
While the challenges are numerous, so are the opportunities. A huge advantage across the continent is the fact that developing nations are able to leapfrog over old technology, replacing it with cutting-edge industry best practices.

The continuing incline in the uptake of mobile and increasing Internet penetration provide particularly exciting opportunities for organisations considering African expansion.

AUTHOR | Theodore Josias CA(SA) is Head Africa Expansion at SNG Africa
A virtuous circle

A growing appetite for all kinds of property in the Southern African Development Community is attracting both local and global investor interest. Many institutions have money to spend but quality property assets are hard to find. By Luba Vengeni

Demand for property is growing across the Southern African Development Community (SADC) region, resulting in attractive investment opportunities. Demand far exceeds supply for retail, commercial, industrial and residential properties in some of the faster-growing economies in the SADC region.

Rapid urbanisation, fast-growing economies and a growing middle class with more disposable income across the SADC region are contributing to this growing appetite for property.

Cities in the region often lack shopping centres and quality office space. There is minimal development of industrial property and an increasing need for warehousing and logistics centres as retailers enter these new markets. Poor infrastructure is a common theme and could be a catalyst for further investment.

The supply of commercial property has also been hampered by lack of access to capital, both equity and debt, leading to chronic shortages of investment grade properties.

At the same time institutional investors, both locally and internationally, have substantial capital available to inject into the property market. Investors favour property investments due to their long-term stable nature, as income and capital return keeps pace with inflation while it is a relatively low-risk asset. It also offers excellent diversification from equities. Pension funds are generally highly governed, and require certain checks and balances before they are able to make investments. As SADC countries implement legislation that creates an investment environment in line with global regulatory requirements, they are able to attract more capital.

SADC investors have started to show more trust in the domestic economic environment as they recognise that returns on investment in some African countries can far outweigh those in other areas of the globe. Many institutions in the SADC region have money available that they want to invest in their own countries. They just lack the vehicles and investment opportunities to do so.

The SADC region is appealing for various reasons, with good economic growth a strong drawcard. SADC economies as a whole grew by an average 4,7% annually from 2003 to 2013, according to the Southern African Institute of International Affairs. This is impressive when compared to the European Union’s average of about 2% per year.

Another reason is that five of the Top 10 most attractive retail markets in Sub-Saharan Africa belong to the SADC region, according to A T Kearney’s Global Retail Development Index. They are Namibia, Tanzania, South Africa, Botswana and Mozambique. These are identified as not only the most attractive markets today, but also those that offer the most potential in the future. Retail-specific opportunities often link back to South African retailers such as Shoprite and Pick n Pay, which are making substantial inroads into various African markets.

Zambia is probably the most enticing property market in the region, as its fast-growing economy has averaged between 6,5% and 6,9% annually. In comparison, the economic growth rate for the SADC region has averaged an appreciable 5,14%, while South Africa only managed a sluggish 1,5% in 2014.
The economy of Zambia, which has extensive copper reserves, has been somewhat dampened by the fall in commodity prices, but the growth is still considerable. In 2014, it was the tenth fastest growing economy in the world.

The country has added approximately 100 000 square metres of retail with the biggest regional shopping centres measuring about 44 000 square metres. Shoprite, Pick n Pay, Foschini Group and Mr Price have all set up shop in the country.

Mozambique has also become an interesting market for property investors, especially since the discovery of gas and oil. According to Standard Bank’s Head of Oil, Gas and Renewables, Simon Ashby-Rudd, quoted in the Financial Mail: ‘Mozambique has probably made the biggest gas discovery in the world in the past 10 years. Mozambique will probably be the next Qatar.’

Once new resources are discovered, demand for commercial property follows. These discoveries also lead to more jobs and as employment rises, demand for retail increases.

We are seeing this in Mozambique with its growing appetite for residential housing, office space, retail and hotels. A new international airport opened last year in Nacala, in the north of the country. This, together with the redevelopment of ports and railways, will open up opportunities in northern Mozambique, and property development will naturally follow.

Growth prospects in Botswana, the world’s largest diamond producer, are favourable, offering attractive property investment opportunities. Botswana’s economy grew a healthy 5,2% in 2014 and is expected to grow 4,9%in 2015.

The country actually had an estimated per capita gross domestic product in 2013 of $16 400, which was higher than that of Mexico and Turkey, according to the US Central Intelligence Agency.
It is not all smooth sailing when investing in African property, especially given some of the political and social difficulties. Some of the common issues relate to land tenure and double tax agreements (DTA) between the countries.

SADC countries are battling with unemployment while a lack of infrastructure, including roads, rail and electricity supply, is also a concern. Zambia, as an example, has six-hour power outages in the evenings due to electricity constraints. As a result, retailers cannot operate without a generator.

The political landscape and legislation can also make things difficult, as well as currency volatility and uncertainty over land tenure.

In terms of land tenure, leasehold ownership is generally preferred but there are some exceptions. Foreigners may acquire and own property in Namibia, except agricultural land. Land is typically held in freehold title.

One way in which some of the problems experienced in SADC can be alleviated is by introducing policies that facilitate investment. Property is both an enabler of and a beneficiary of economic development. Economic growth tends to lead to a thriving property sector and property development, in turn, helps to boost economic growth, creating a virtuous circle.

This can lead to growing employment and thriving communities around new nodes of development, making property a responsible, socially uplifting investment choice.

AUTHOR | Luba Vengeni is Head of SADC Property Investments at STANLIB
Unlocking  the backlog

South Africa is spending far too little on infrastructure to make a dent in major backlogs and to unlock economic growth. It is not alone. Across the globe government spending on fixed capital investment is at its lowest levels in decades. By Kevin Lings

Following the 2008 global financial crisis, government debt worldwide soared and is now preventing countries from undertaking significant spending on maintaining infrastructure or funding new projects.
Globally, about $57 trillion is needed for infrastructure investments up to 2030. This is simply to keep up with global economic growth, according to a 2013 McKinsey report Infrastructure productivity: how to save $1 trillion a year. The amount required is a hefty 60% more than the $36 trillion that was spent globally on infrastructure over the past 18 years.

In 2014, the Reserve Bank warned that if South Africa did not rapidly build new infrastructure, particularly increasing power supply and improving transport, it would not be able to achieve sustained growth of more than 3% a year. This is far short of the government’s 5% growth target. The world is largely stuck in this low-growth trap due to muted spending on fixed capital investment.

In effect, South Africa has missed a generation of capital investment in roads, rail, ports, electricity, water, sanitation, public transport and housing. To grow faster and in a more inclusive manner, the country needs a higher level of capital spending. The National Development Plan (NDP) says that South Africa would require a level of investment in fixed capital formation of about 30% of GDP to achieve an average economic growth rate of 5,4% a year to 2030. Public sector investment should account for 10% of GDP to realise a sustained impact on growth. These targets do not appear achievable, given that fixed capital investment was last at these levels in the late 1970s and early 1980s. In the past five years it has hovered between 18% and 20%.

At the beginning of 2015, the government’s net fixed investment in infrastructure spending was a mere 7,4% of GDP. This includes spending by both public corporations (3,9% of GDP) and general government (3,5% of GDP).

Realistically, South Africa is unlikely to meet the NDP targets, but if we could get even halfway there it would make a significant difference to economic growth.

Two things need to be done: government needs to involve the private sector and reprioritise its spending.

In the wake of the 2009 recession, the private sector has been reluctant to invest its healthy levels of retained earnings in productive capacity. At the same time, the public sector has favoured consumption over investment.

Government is unable to borrow more to fund infrastructure spending. Its debt levels are already high at around 44% of GDP up from a low of 26% of GDP in 2009, and the ratings agencies have put it on negative watch, limiting its ability to borrow more.

Instead, government needs to redirect its spending to investment and away from consumption. The South African government has spent a great deal on growing public sector employment and social grants. This all fuels consumptions. South Africa is not alone in this either. The US government, for example, spent vast sums of money on unemployment insurance, rather than investment, which cost it economic growth.
What South Africa really required was spending on critical economic infrastructure, or infrastructure that promotes economic activity such as roads, digital communication and power supply.

A recent policy discussion document released by the African National Congress ahead of its national general council in October shows an understanding that government has to reprioritise spending away from consumption if it is to grow the economy and create more jobs.

According to the document: ‘Given the paucity of resources available in the fiscus – in this current period of low economic growth and a huge budget deficit – it will be necessary to ensure proper prioritisation and sequencing of state interventions. It is also necessary to find creative ways of drawing in the private sector in realising some of the objectives such as urgent infrastructure projects.’
The ANC appears to have had a light bulb moment, realising government has been spending vast amounts of money, but not getting much bang for its buck.

Not only does government need to reprioritise spending on investment, it also needs to align that spending with a revival in business confidence.

This is vitally important, as government has to work hard to unlock the corporate balance sheet. Private sector funding of infrastructure is the missing ingredient in this global financial cycle as corporates sit on piles of cash – although this is not peculiar to South Africa. As long as business lacks confidence in the economy, it is not going to spend money on investment.

As interest rates are at record lows worldwide, we would expect to see corporates taking advantage of low capital costs to borrow for expansion. Instead, we are seeing fixed investment as a percentage of GDP at its lowest levels in decades. There is little incentive for corporates to take on risk. Equity markets have been buoyed by global liquidity, due to the US Federal Reserve’s $3-trillion quantitative easing programme, which has been imitated by Europe as they try to boost economic growth. As a result, corporates have seen their share prices rise without taking any risk, giving them no reason to take on project risk in infrastructure.

Private sector investing in South Africa is actually in recession at the moment. Corporates are not even investing enough to maintain the infrastructure they have, although they are investing to some extent in the rest of Africa. They are also investing in offshore environments, as for example, local investment firm Brait buying a 80% stake in British health club chain Virgin Active.

Both the public and private sectors have important roles to play in building infrastructure, including bulk infrastructure. Government’s shift in the composition of expenditure towards investment is a necessary precondition to breaking the stalemate in infrastructure spending.

We can get this right. The Department of Energy’s Renewable Energy Independent Power Procurement Programme (REIPPP) has been a particularly successful example of a large scale private and public sector procurement programme to develop much-needed infrastructure.

Infrastructure is ideally suited to investors looking for alternative assets with predictable risk return profiles. It offers benefits such as stable returns with low volatility and as it has low correlation to the business cycle it adds diversification to an investment portfolio. It also offers a good inflation hedge as the income streams are usually inflation linked.

The average investor would probably gain access to exposure to infrastructure through their pension funds or other institutional investments, which might invest a portion of the fund in alternative investments. Infrastructure is ideally suited to pension funds with long dated, predictable cash flows being a good fit to a long dated pension liability profile. Take, for example, a railway link. Once built, the fees paid by rail users provide a steady source of income over decades.

If government increases its focus on economic infrastructure, this would entice private sector investment and then increase employment. This, in turn, would increase the tax base, allowing government to increase spending on social infrastructure, such as social grants and education. This virtuous circle could set South Africa on a new, elevated growth path.

AUTHOR | Kevin Lings is Chief Economist at STANLIB
Africa asset management set to rise

Africa is abounding with new opportunities for growth and investment, stimulating investor interest. Although the fund industry in Africa is in most countries still developing, asset managers are likely to become more active as the industry continues to flourish. By Ilse French

New research from PwC projects that traditional assets under management (AuM) in 12 markets across Africa will rise to around $1 098 billion by 2020, from a 2008 total of $293 billion. This represents a compound annual growth rate (CAGR) of nearly 9,6%. Traditional asset management, in particular the mutual fund industry, is expanding aggressively across Africa. This will largely be driven by a number of factors: economic growth and the subsequent rise in wealth will boost the demand for pensions and life insurance products, the demand for retail investment funds will consequently increase, and the widespread adoption of technology will make delivery of new products cheaper, bringing more consumers into the formal financial sector.

Africa Asset Management 2020 is an in-depth study that examines the asset management industry across 12 African countries that have financial markets of varying levels of development.

The countries, which represent a sample from Northern, Eastern, Western and Southern Africa, were assessed by a range of relevant indicators to capture their true investment potential.

The countries were categorised in three groups: advancing markets, promising markets, and nascent markets. Also, the report outlines and analyses the future game changers for investment into Africa as a whole as well as addressing the impacts for these specific markets.

As Africa has entered the 21st century, economic growth has surpassed expectations and stimulated investor interest across a broad range of asset classes. Although the fund industry in Africa is, in most countries, still developing and has much to prove, global and local asset managers are likely to become more active as the industry continues to flourish.

The PwC report also predicts that:

  • The global rise in the volume of investable assets which has taken place over the last two or three decades is set to continue to increase in the future, and investable assets are set to be significantly higher in 2020 than today.
  • Recent research conducted by PwC projects that global AuM will rise to around $101,7 trillion by 2020. Although Africa is a small part of the global industry, it is a region that is experiencing significant growth.

It is interesting to note that retail investors form a small proportion of investors in asset management in Africa. However, the report suggests that the number of retail investors in these markets could be increased by way of education about products, encouragement of a savings and investment culture, and overall economic growth.


Capital market regulation varies widely across Africa as legislation and regulatory structures differ between countries, reflecting both market and varied historical conditions. In some countries, capital market regulations fall under the realm of the central bank, while in others they are under the auspices of the independent regulatory commission.

Although the GDP growth rate in Africa is on the rise, the savings and investment culture has not yet caught up and for the most part, capital markets remain small and illiquid. Regulations to boost the capital markets are under discussion in some countries, such as encouraging pension funds to invest in locally listed companies.


All parts of the financial services sectors are expected to continue to expand to 2020 and beyond, but bank assets will wane in the coming years as competition is fuelled by new entrants and regulatory reforms.

Some banks have set up their own asset management subsidiaries in a bid to push their proprietary products. Some of these banks are also seeking cooperation with foreign asset managers to promote their African investment strategies in other parts of the world in exchange for promotion of other asset managers’ investment strategies in Africa. Banks have the best distribution network, and they will likely remain the main distributors in the future.

The pension fund sector in the 12 countries in this study has grown steadily from 2006 to 2014 and is expected to continue to grow considerably. As these economies mature, pensions are becoming more significant as a part of the financial services sector, although many countries still have no private pension schemes.

However, change is under way with Mauritius and Ghana, and they serve as examples of countries that have created three pillar pension schemes encompassing a third tier of voluntary schemes for middle-class workers.

The insurance industry is also growing but Africa has a low average penetration rate of about 3,5% of GDP, except South Africa, which is over 15%. As with pension funds, insurance companies outsource part of their asset management to third parties.


Currently, private equity (PE) investment is the most interesting form of investment for foreign investors as a result of illiquidity in the capital markets. But the lack of availability of exit options remains a concern for potential private equity investors in Africa.

Infrastructure is also considered to be a major opportunity for investment. The World Bank has estimated that an annual spending of $93 billion would be required to achieve national development targets in Africa and close the infrastructure gap. Many African countries have taken longer to catch up on infrastructure, and the recent economic uncertainty further underscores the need for a massive need to overhaul Africa’s infrastructure.


Significant global and continent megatrends, referred to as the ‘game changers’, will also help drive the market and create future opportunities.

Africa’s demographic dividend, its growing middle class, its increased use of technology, and its rapid urbanisation will all have a part to play in the development of the asset management industry in Africa.

Demographic dividend

Africa currently represents 15% of the world’s population and 3% of the world’s GDP and less than 1% of the world’s stock market. But that is changing. There will be diverse opportunities, and these will be different to those in the developed world. Africa’s population growth and the resulting demographic dividend could boost economic growth. Investment is necessary in some industries to create labour productivity and economic diversification and reduce poverty rates.

If policies are implemented to create enough employment for the enlarged workforce, the falling dependency rates should increase both savings and investment and create a substantial demand for savings products.

Growing middle class

Africa’s middle class has increased substantially over the past decade. Standard Bank’s report on the middle class in Africa indicates that Nigeria will add 7,6 million middle-class households by 2030 while Ghana will add 1,6 million. The middle classes are associated with a great emphasis on education and saving. This will increase demand for sophisticated financial services and investment products such as retail investment funds, thereby significantly boosting the asset management industry.

Increased use of technology

Technology is increasingly changing the face of Africa. Mobile financial services have taken off as larger portions of the population access the web by way of mobile devices compared to fixed line internet. Mobile technology is also enhancing financial services across Africa by way of a non-banked model and a banking model. However, data security may become a key concern in the future requiring closer collaboration between telecoms and financial regulators.

Urbanisation and infrastructure

Poor infrastructure in Africa is an impediment to economic growth and improvements in this area are required. PwC research suggests that infrastructure spending in sub-Saharan Africa will exceed $180 billion by 2025. The shortfall in government funding creates opportunities for private investors to get involved, either through direct investment or public-private partnerships.

Currently, Africa’s urban population is increasing by 1,1% annually and is expected to have a major impact on real estate and infrastructure by 2020. Also, PE is growing across Africa. Although the majority of deals are small in size, it seems likely that deal size will grow to be more in line with other emerging markets as their economies and regulatory frameworks develop.


The 12 countries in this study vary from those with extensive legislative frameworks, such as South Africa, to those in much earlier stages in the development of their regulatory frameworks, such as Angola.

Regulatory reform is likely to boost economic growth and stimulate investor appetite. Changes to regulations to pension funds, in particular, could have an effect on the asset management industry as public pensions are usually the largest institutional investors in many African countries. These changes include allowing pension funds to invest in a wide range of assets or the establishment of a three-tier pension system.

In addition, sovereign wealth funds (SWFs) can fill existing funding gaps until the legal frameworks of African countries develop sufficiently to make them appealing to other investors. As large institutional investors, SWFs could provide a considerable boost to the asset management industry in Africa, particularly because they are long-term investors who seek stable returns. The fact that most of the funds use a proportion of their assets to make impact investments domestically or regionally suggests that they will become big players in local markets.

As asset managers look for new investment channels and competition becomes increasingly intense, understanding the characteristics of the local markets will be crucial to grasp the potential of this final frontier.

AUTHOR | Ilse French CA(SA)is PwC Africa Asset Management Leader