Abdirashid Duale, CEO Dahabshiil Group

At a time of cautious optimism for the health of the global economy, figures for foreign direct investment (FDI) in Africa might not seem so encouraging at first sight. According to the most recent UN data, FDI inflows to Africa fell for the third consecutive year in 2011, to $42.7bn. The chief reasons cited are the global recession and the Arab Spring in North Africa, both serious issues that continue to create uncertainty. The broad consensus among investors and commentators, however, is that the underlying trends point to a much brighter future for the African economy.

Africa’s resources are in huge demand. China’s growing need for oil and raw materials is the most commonly cited driver of this expansion, but there are other increasingly hungry importers in both the rich and emerging worlds. Nor is the demand confined to extractive industries like oil, gas and mining. Agriculture remains a pivotal sector across the African continent, which boasts some of the world’s most fertile land.

An extraordinary rate of urbanisation has produced a burgeoning middle-income bracket of ambitious, educated, entrepreneurial young people with a global outlook. Consumer demand is soaring as internet and mobile use becomes more widespread. Demographic trends point to this generation as being the crucial one for Africa’s rise: the continent has the fastest-expanding labour force in the world, expected to grow from 500 million today to 1.1 billion by 2040.

Rapid urbanisation has led to an increasingly urgent infrastructure gap: principally in power, transport, hospitals and schools. Africa’s overall current infrastructure spend is about $45bn per year – approximately half of what is needed. This shortfall represents a great opportunity for investors. Power companies in particular have already made inroads. In West Africa, US-based AES’s huge investment in Cameroon and Siemens AG’s presence in Nigeria are good examples of how overseas players can have a central role in carrying Africa’s infrastructure into the 21st century.

According to the United Nations Conference on Trade and Development (UNCTAD), FDI from emerging economies exceeded those from developed economies for the first time in 2011, with China, India and South Korea all stepping up their activities. The US, however, which is historically the dominant investor in Africa, still accounts for the largest number of new projects by any one country.

There is much discussion about the growing role of China in the African economy. Sceptics worry about a lack of commitment to anything beyond purely economic goals. Advocates applaud China’s strictly commercial approach and its increasingly important role in infrastructure development. Over the last decade China’s share of African exports has risen from one per cent to 15 per cent. A quarter of China’s oil imports originate in sub-Saharan Africa, and state-owned Chinese oil companies are now active throughout the continent.

Outside extractive industry Chinese investment is showing increasing signs of being a genuine catalyst for diversification. More than half of FDI from China goes into manufacturing, finance and construction, while less than a third goes into mining. China has also become a major source of foreign aid to Africa, as well as of official development assistance in the form of low-interest loans – commonly channelled into large-scale infrastructure projects.

Inflows to North Africa halved in the wake of the Arab Spring, while FDI to sub-Saharan Africa rose 25 per cent to $36.9bn in 2011, close to its pre-crisis high of $37.7bn. Commodity-rich countries such as Nigeria, Ghana, Congo, Equatorial Guinea and the Democratic Republic of Congo attracted the most investment in their respective regions. Africa’s most populous country, Nigeria, topped the list of recipients on the continent with $8.92bn – a fifth of all FDI to the continent. Nigeria’s and, increasingly, Ghana’s oil sectors constitute the main driving force behind West Africa’s strongly resource-focused capital inflows.

East Africa has also begun to feel the increasing benefit of investment interest from overseas. FDI there grew from $4bn in 2010 to $6bn in 2011, and the growing number of new projects bodes well for increased growth and diversification over the next few years. Kenya in particular has made significant strides in recent years towards a balanced economy, with increasing investment in real estate, manufacturing, IT and tourism complementing a rising mineral resource profile. The UK’s Financial Times recently ranked Kenya as the third most attractive FDI destination in Africa, after South Africa and Morocco.

Kenya is an example of how advances in infrastructure and human capital can play a crucial role in a push towards foreign investment that is better distributed across sectors and social groups. The growth of strong services industries such as IT and telecoms, coupled with the emergence of highly skilled professionals in areas like law and accountancy, have created the conditions for foreign capital to make a difference right through the economy.

Our company, Dahabshiil, operates in many countries in the East and Horn of Africa, providing a vital service to people living in urban areas as well as remote rural locations. We provide remittance and other services to people in the Somali territories, Ethiopia, Kenya, Uganda, South Sudan, Sudan, Rwanda and elsewhere both inside and outside the continent.

Other countries, including Burundi and Sierra Leone, have been recognised by the World Bank as having made strenuous efforts at reforming their investment policies, making life easier for investors by improving processes such as dealing with construction permits and paying taxes. Momentum is now building for coordinating investment policy reform at regional level. Such integration of policy environments will be more and more relevant as large foreign firms start eyeing bigger markets and more ambitious cross-border projects.

With the exception of remittance finance, which has remained broadly stable over the last decade, averaging 2.4 per cent of Africa’s GDP, much of the inflow of FDI to the continent is of course governed by perceptions. Indications are that these are improving among emerging economies, but still lag some way behind improvements on the ground among rich-world investors. A recent report by Ernst & Young found that companies with an existing presence in Africa regard it as the second most attractive destination after Asia, while those with no experience of doing business there are overwhelmingly negative. There can be no doubt that this discrepancy will hold Africa back for as long as it persists, and that it reaffirms the need to keep telling a different story – one of a wealth of opportunity amid a steadily improving political and regulatory environment.

FDI to Africa has outstripped official development assistance since 2005, as good an indication as any that the continent has come of age as an investment destination. The UN forecasts growth of between $70-$85bn in 2013 and $75-$100bn in 2014. Given this shift it is essential that governments look to harness the growing inflow of overseas capital to spur job creation, technology and knowledge transfer and export diversification. Developing policies that channel investment not just into extractive industries but into manufacturing and services too will be an increasingly important part of that process.

Abdirashid Duale is CEO of Dahabshiil, the largest international payments firm in the Horn of Africa. Abdirashid was recently recognised as one of the 50 most influential Africans by the Africa Report. For further information please visit www.dahabshiil.com