Is Sub-Saharan Foreign Direct Investment honeymoon over?

Mistrust, unmet expectations, and violent eruptions over capital inflows could further worsen the eight years investment slump in Sub-Sahara

By Isaac Ntuli

For the past eight years net inflows in Sub-Sahara were in a decline following an investment surge that lasted nearly for two-decades (1 see graph 1), a sign that the investment honeymoon might be over. These incidences take place against the backdrop of dissatisfaction with development aid as a solution for Africa's developmental challenges. Instead, for the past two decades advocacy for private investment to play a bigger role has been the dominant proposition on how to solve development challenges Africa faces.

As early as 2005, the United Nations Economic Commission for Africa (ECA), reported that $350 billion of private investment was required for Africa to achieve its Millennium Development Goals (MDGs) in 2015. From 1996 to 2014 investors heeded the call and the net FDI flow into Sub-Sahara grew significantly. These firms made more profits in the continent than any other region in the world. In 2019 it was estimated that the average rate of return for inward direct investments was 6.5% higher than the 6.2% realized in Latin America and the Caribbean. Given Africa?s abundant natural resources MNEs targeted the continent's extractive industries, particularly in the energy sector such as gas and petroleum. However, these investments have not met the expectations of Africans for a variety of reasons. Firstly, the continent has been unable to diversify its economy away from exporting natural resources.

Furthermore, most of these investments were greenfield despite high risks associated with them. Compared to brownfields, greenfields investments are considered risky due to market entry costs, high capital outlays and government regulation that may impact the investment. Despite these business costs, it appears as though decision makers in the MNEs are willing to forgo less risky investment strategies to enjoy the high level of control that comes with greenfield investment. Such moves give MNEs the power to engage in rent-seeking conduct, which is a sore point in the relationship between MNEs and African countries. In 2015 former President Thabo Mbeki tabled a report which estimated that $50 billion is siphoned from the continent through illicit means. In response to these revelations, countries in the continent are demanding more from international corporates. Two years after the Mbeki's report, the Government of Tanzania (GoT) hit the gold miner, Acacia Gold with a $190 billion bill for unpaid taxes and penalties. The demand followed a government report which found that Acacia was dodging tax and exporting more gold than they had declared. In addition, the former President, John Magufuli, signed into law a bill that allowed the government to take a 16% stake in all mining projects.

Investors believed that Tanzania's actions were unwarranted and are disincentivizing further investment. It was thus expected that these actions were bound to deter further investments in Tanzania. Verisk Maplecroft and Resource Nationalism Index showed that Tanzania tumbled from a 'medium' to 'extreme' risk and became a second-riskiest country in the world for mining companies. Despite these assessments, Tanzania's net inflows edged slightly in 2016 from the slump experienced since 2014 (see graph 2). Incidents of local communities attacking MNEs have also flared up. Recently French oil major, Total, declared a force majeure following an attack on its $20million Liquid Natural Gas in Palma Town of Cabo Delgado, Mozambique. In another incident, the police clashed with Lonmin miners over wages in Marikana, in Rustenburg, South Africa leading to loss of life. Ever since, relations between the employer on the one hand and the community and unions on the other, have soured.

Relations between economic actors and the society at large needs to be repaired in Africa. Historical forces have shaped the way African societies view European and US investors. There is a long-held view in Africa that slavery and colonialism made Europe and the modern world what it is today at their expense. They believe that profits from slave trade fueled the rise of port cities like Bristol, Liverpool, and London while the Atlantic economy created by that slavery helped sustain the Industrial Revolution. This power imbalance that existed then did not end with the end of slavery and colonization. To date some in the continent are convinced that this power imbalance still sustains economic prosperity of European countries.

Hence it will take much more than high returns for the African continent to recover from the current investment slump. Historical forces that are often not engaged will have a major impact on the future of investment in the continent.