The India-Africa Corridor: A Busy Passageway
The combined markets of India and Africa comprise gross domestic product (GDP) in excess of US$3 trillion and a total population of 2.2 billion citizens. For most of the past decade the Indian economy has grown at between 6% and 9% per annum. Nations on the African continent have also broken ranks and averaged an annual GDP growth rate close to 5%.
There are many similarities between the two regions, including a growing middle class, multiethnic and multicultural societies, large rural populations, an inadequate core and soft infrastructure, corruption and the lack of a well-developed financial ecosystem. Indian companies are accustomed to the trying conditions of their home market back home and find this environment favourable in comparison to others vying for business in Africa.
India’s bilateral trade with sub-Saharan Africa is nearly US$50bn per annum, with the balance favouring Africa given that much of the underlying trade is the export of oil, minerals, metals and agricultural products to India. It is estimated that this segment makes up 85% of all African exports to India. In the financial year 2010-11 India’s top three African export destinations were: South Africa (US$3.98bn), Kenya (US$2.28bn) and Nigeria (US$2.25bn). Its top three import partners in the same year were Nigeria (US$10.78bn), South Africa (US$7.14bn) and Angola (US$5.11bn).
Indian investments into Africa have reached a total of US$30bn, mostly because of the surplus cash positions of a number of Indian firms. The most recent, and perhaps largest, transaction to date is Bharti Airtel’s acquisition of Zain Telecom (formerly Celtel), which has made it one of the largest pan-African operators. Others include Essar Energy’s stake in Kenyan Petroleum Refinery and Karuturi Global’s investment into Ethiopia for commercial farming.
Tata Group’s African presence is a testimony to Indian companies’ global ambitions and the Indian Oil and Natural Gas Commission (ONGC) is a major investor in the hydrocarbons segment across Africa. But apart from a handful of such major transactions, most Indian investments are small to medium in nature and span sectors such as manufacturing, food processing, pharmaceuticals, agriculture, retail, technology and the service industries. To make major inroads, Indian corporates need to participate in development of the core African economy, which will require taking a hard look at their style of doing business in Africa.
Comparison with China: The Geo-politics of Africa
China has made massive investments into the African continent. Its trade and investment figures with Africa are four times those of the Indian economic engagement with Africa. China has a very clear motive for investment, which is to acquire minerals and raw materials. India, on the other hand, takes note of its feeble balance sheet and prefers to increase its presence in Africa by means of development aid tools. It has established a pan African e-network that will connect all of the continent’s 53 countries with over 200 Indian universities via fibre-optic cable. The objective of this network is to offer e-health, e-education and e-governance services to Africa.
India has also increased its soft lending, from a mere US$25m per year to US$5bn in recent times. This lending is channelled through a few dozen African banking institutions and, on the Indian end, through EXIM Bank of India and others. The loans facilitate development of infrastructure and industrial projects. Other initiatives include the setting up of an India-Africa virtual university, support for healthcare and other capacity-building measures.
The strategy is clearly directed at winning African support in India’s global geo-political campaigns such as climate change or the bid for a permanent seat on the UN Security Council. The jury is still out on whether India will be able to woo African support for these causes, but these softer touch initiatives will do little for Indian firms in securing business wins as India’s government wants its private sector companies to achieve these through their own efforts.
The Growth Sectors
Whether the Indian government provides support to industry in increasing collaborative ties or not, its corporates can certainly take their own measures towards boosting bilateral trade and investment flows. To do so the industry must take a more holistic approach and focus on creating and strengthening African capacity that will yield the desired improvement in the investment climate and result in greater opportunities.
Africa’s share of world exports has been steadily declining and the continent has been unable to increase its non-oil exports to other markets, due principally to its poor infrastructure. Infrastructure investment will therefore take a prime position in the India-Africa corridor, as indeed it should for corporates in any other region vying for greater business in Africa.
With growing industrialisation and urbanisation, the demand for development of infrastructure in African nations will only move in one direction. To date most of the infrastructure has been developed either through public funding or development finance funding. The private sector has not aggressively pushed public-private partnership (PPP) models, where it supposedly takes the majority investment risk. There are, undoubtedly, issues with political instability, lack of legal frameworks and shortage of project finance. But Indian firms are already well used to these risks at home. They need to export not just technology and operations, but also know-how in developing large PPP contracts. This will also bring greater efficiency, in addition to the necessary capital, into the African market.
India, which has had a good run with PPPs in roads, power, ports and airports, is now embarking on ambitious projects to develop social infrastructure such as healthcare, schools, water utilities and other urban infrastructure using PPP models. Africa offers more than $1trn of infrastructure opportunities and a significant share of that could go to Indian companies.
Energy and low carbon markets are other major growth segments within the broader infrastructure category. Lack of power is by far one of the biggest impediments to higher African GDP growth. There are no issues on the demand side in Africa, but serious supply side constraints. Although rich in hydrocarbon wealth, Africa has one of the highest power tariffs in the world. Energy deregulation is essential, whereby independent power producers can produce electricity in part of the country and sell it to an off-taker in the other part of the country. India’s power sector got a massive shot in the arm when it established such a framework, and Africa must also look at creating such markets.
A further need is the creation of low carbon markets to increase the throughput of solar, wind, biomass, waste, small-hydro and geo-thermal based power. Africa has abundance of such resources that should be utilised prudently. The recent creation of the Renewable Energy Certificate (REC) and Energy Efficiency Certificate (EEC) trading markets in India has unlocked greater potential of renewable energy development. India is also embarking on development of a water effluent trading market, which will bring about a paradigm shift in the water sector. Indian companies can make a major contribution to the development of such frameworks and underlying projects in Africa.
Three out of four trade finance transactions between India and Africa fail to secure trade finance. The key reason is that banks in both regions soon exhaust the country and/or commodity limits. Given the large volume of deals taken up by petroleum and mineral imports, the banks run out of trade finance limits very quickly. Indian banks are keen to increase their exposure to Africa but do not get support from their African counterparts, which must look to secure further credit support from top-rated international banks.
The opportunity is for an entity, or a group of them, to take the lead in establishing a pooled credit/risk facility for African banks. Such a pool could provide much-needed liquidity to African banks, which would support an increase in India-Africa transactions. A number of central banks are also keen to back such a facility, as it would mean providing development finance to African nations for trade growth rather than aid. It is estimated that the current demand for such a facility is at US$500bn annually, and could lift trading volumes to that same level.
India is known as the country of entrepreneurs. Despite a challenging business environment, its enterprises have generally flourished with little government support or none at all. Although other social disparity issues remain, the prevailing enterprise culture across all walks of life is something that gives hope to hundreds of millions of people to fulfil their dreams and lift many of them out of poverty. This is the culture that Africa needs to adopt en masse and India can certainly be a valuable partner in helping it along the way.
India’s micro-enterprise segment has contributed to economic growth, by bringing many people into the mainstream economy through mobile connectivity, microfinance, microinsurance and other up-skilling efforts. Social enterprises are now flourishing across India and attracting institutional investors in addition to development agencies. This is increasing the rate of investments to develop marketing and distribution networks, greater use of technology and the development of a skilled workforce targeted at the rural and urban poor. These Indian social enterprises could use their expertise to open up an equally massive African market.
London at the traffic crossroads
It is hard to believe that a large number of India-Africa transactions are being banked, due-diligenced and/or offered legal advice by London, but it is true. The City of London as representative of the UK’s financial services prowess is the primary reason for this, but both India and Africa’s historical Commonwealth connections also play an important role. When world economic growth peaked in 2007-08, nearly seven out of every 10 major India-Africa transactions were being financially closed in London. This trend is only likely to grow, with new formal and informal networks being formed in London to accelerate the economic activity in this corridor.
There are numerous sectors such as healthcare, agriculture, and education, where Africa offers tremendous opportunities to Indian companies. But India should play to its strengths. These are sectors where India also has serious issues of its own.
The growing sunshine sectors among small businesses and PPPs are those where Indian industry has a tremendous opportunity to develop a strong footprint in Africa. It must take the lead in developing these sectors and bring the Indian government in to support it in crucial junctures. This strategy will be a win-win for all parties and open up a third dimension of Indian co-operation with Africa; one driven by public and private collaboration. Developing such market-based enterprise models will also create an advantageous position for Indian entities compared to their Chinese or other competitors, who may rely on government-backed financing to penetrate Africa.