EYe on Africa
Volume 3 | March 2011

Features
Investment opportunities in Kenya
Review of the Islamic finance industry
Wor...
Inside
4. Editor's note
5. Our African footprint
6. Regional highlights
-Ernst & Young at the Mining Indaba
-2010 World En...
Editor's Note
The Africa Business Center™
You have come to the right place
Africa remains at the centre of the global inve...
African footprint - at a glance

5
Regional Highlights

This year's Mining Indaba, described as the
"world's largest gathering of investors,
financiers and m...
Regional Highlights

World Entrepreneur Award Programme
spreads into Africa

Emerging entrepreneur category:

As Africa en...
Regional Highlights

This year’s Lifetime Achievement award went to:
Dr. Bertie Lubner – MaAfrika TIkkun
Bertie Lubner gre...
Regional Highlights

Ernst & Young East Africa Tax Team trains
Kenya Commercial Bank Regional Finance Team
November 24th a...
Africa is still golden

When it was suggested a year ago that Africa’s economic
recovery was on track, many thought this p...
Consumer products in Africa:
Hunting big game

With over a billion people, 53 countries and some of the best
Gross Domesti...
Consumer products in Africa:
Hunting big game

With its black and yellow elephant branding, and the slogan
‘My country, my...
Why invest in
Kenya?

Kenya is an attractive destination because of its growing
infrastructure: roads and rail, airlines h...
Sector investment
opportunities in Kenya

Sector and description

Potential projects/opportunities

Agriculture and Agro p...
Hidden
opportunities

Recent political unrest in Egypt and Tunisia has caused investors to look very carefully at their Af...
Hidden
opportunities

Rolling 3 year Alpha
40.00%
South Africa quant model
Africa quant model

30.00%

0.00%

May - 05
Aug...
A review of the
Islamic Finance Industry

Despite being at the height of the global financial crisis, when
most of the bas...
A review of the
Islamic Finance Industry

Africa, with its Muslim population of approximately 500 million
people, represen...
EYe on Africa profile: Q&A with Sugan Palanee,
Regional Senior Partner, Advisory Services

Q. Are Indian multinational com...
Contacts in Africa
You have come to the right place

Country

Name

Email

Angola

Val Davies

val.davies@za.ey.com

Botsw...
Ernst & Young
Assurance | Tax | Transactions | Advisory

About Ernst & Young
Ernst & Young is a global leader in assurance...
Upcoming SlideShare
Loading in …5
×

EYe on Africa volume-3-march-2011

518 views

Published on

Published in: Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
518
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
6
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

EYe on Africa volume-3-march-2011

  1. 1. EYe on Africa Volume 3 | March 2011 Features Investment opportunities in Kenya Review of the Islamic finance industry World Entrepreneur Awards 2010 Winners and Lifetime Achiever Africa is still golden in the Mining & Metals sector !@#
  2. 2. Inside 4. Editor's note 5. Our African footprint 6. Regional highlights -Ernst & Young at the Mining Indaba -2010 World Entrepreneur Award winners -Ernst & Young East Africa Tax team provides successful training to Kenya Commercial Bank 10. Africa is still golden 11. Consumer products in Africa: Hunting big game 13. Why invest in Kenya? 15. Hidden opportunities 17. A review of the Islamic Finance Industry 18. Eye on Africa profile: Q&A with Sugan Palanee
  3. 3. Editor's Note The Africa Business Center™ You have come to the right place Africa remains at the centre of the global investment stage. 2011 got off to a flying start, with the world literally converging on the Cape Town International Convention Centre for the Mining Indaba. Mining economies, including Zimbabwe, Niger and Tanzania, showcased their potential to the rest of the world. We feature highlights from the Indaba and give more perspective in “Africa is still golden”. As we did in our previous issue, we compare the performance of some of Africa’s stock markets with those in the developed economies for the past ten years. For this, see Jonathan Kruger’s piece “Hidden opportunities” on page 15 and the graph below. 9 Year market performance to 31 January 2011 Kruger’s research emphasises the importance of looking beyond the recent uprisings in Egypt and Tunisia in order to identify Africa’s true economic potential; especially in 2011 – during which more than ten countries on the continent will conduct elections. Uganda concluded theirs in February, but everyone is keen to see what will happen in Nigeria and Zimbabwe. Following our past interview with the CEO of consumer products giant Tiger Brands, Derek Engelbrecht, Ernst & Young’s Retail and Consumer Products Africa Leader, shares his insights on the opportunities and challenges of selling to Africa’s billion consumers. We also shed some more light on banking in Africa with our focus on Islamic banking; a fitting tribute to the recognition of Nigeria’s Central Bank Governor, Sanusi Lamido Sanusi, who received the honour of being named the World’s Central Banker of the Year by The Banker (a publication of UK-based Financial Times). The award affirmed our decision to feature the Nigerian banking sector in EYe on Africa previously. Add to all these a Q&A with Sugan Palanee on the role of India in the future of the continent’s economic growth and our regular “Doing Business in...”, this time the focus is on Kenya, and you have a true African feast. Enjoy EYe on Africa, Volume 3. Contact us for more on how you can grow your business in Africa – the new and last economic frontier. Victor Kgomoeswana Associate Director, Africa Business Center Tel: +27 11 772 5249 E-mail: victor.kgomoeswana@za.ey.com Web: africabusiness@za.ey.com 4
  4. 4. African footprint - at a glance 5
  5. 5. Regional Highlights This year's Mining Indaba, described as the "world's largest gathering of investors, financiers and mining professions in African mining", saw the largest number of delegates attending in the history of this event. Adrian Macartney, Sector Leader for Mining in Africa commented that the mood was very buoyant and that “there is certainly a buzz in the air, which we haven't experienced in the industry over the past 18 months. Africa remains a huge focus area for many investors across the globe, and we are expecting the amount of M&A activity to significantly increase in the next 12 months.” A few of the key issues discussed at the conference included resource nationalism, mining investments in Africa, resources in Africa and the role of China and other BRIC countries in terms of investing in Africa. Victor Kgomoeswana, Adrian Macartney and James Thomas 6
  6. 6. Regional Highlights World Entrepreneur Award Programme spreads into Africa Emerging entrepreneur category: As Africa enters a new decade, and joins China and India in crossing the billion-person mark; business and government leaders have more reason than ever to be optimistic about future growth prospects. With plentiful natural resources, sustained improvements in infrastructure and a desire to be part of the global economy, it is no surprise that Africa is seen by many overseas investors as the land of opportunity. “The enormous potential of the African market is further enhanced when you consider the natural entrepreneurial spirit that exists within African people and business leaders. As we have seen within the BRIC economies, building a stable business environment where entrepreneurs can thrive will be a key ingredient of sustained economic success, we are pleased to announce another dimension to the competition. Entrepreneurs across Southern, Western and Eastern Africa have, for the first time, been given a global stage from which to compete and be recognised," announced Zanele Xaba, Director for the World Entrepreneur Awards Programme. Seeking alternatives for meat products that provide similar levels of protein, and that have the same taste as their meat counterparts, Fry’s Vegetarian was started in 1991 by Wally and Debbie Fry in their own kitchen and a small office that they owned from a previous business. What was a hobby pursued more for personal satisfaction than for business ideals – the Fry’s began experimenting with food types in 1989 looking for vegetarian alternatives that were tasty, nutritious and easy to make. In September 2010, Fry’s launched the Meat Free Mondays campaign in South Africa as a global initiative to invite South Africans to pledge their support and declare Mondays a meat free day in their households. Meat Free Mondays has begun as an environmental initiative aimed at raising awareness of the environmental impact of meat farming and production, and the impact a reduction in consumption could have on the environment as a whole. Wally and Debbie Fry - Fry Group Foods Social entrepreneur category: Olivia van Rooyen - The Kuyasa Fund The 2010 winners included: Master Category: Marcel Golding and John Copelyn - HCI Marcel Golding and John Copelyn became business partners in 1995. Prior to that, both held leadership positions in the trade unions, Marcel was involved in the National Union of Mineworkers in various senior capacities and John was the General Secretary of the SA Clothing and Textile Union. They were both founding members of the Central Executive Committee of COSATU and were among the twenty union leaders delegated to form part of the ANC National Parliament list contesting the 1994 parliamentary elections. In 1997, having sought and received permission to leave parliament, they reversed their business interests into the JSE-listed shell: Hosken Consolidated Investments Ltd (HCI). The vision of the company was to bring the vast majority of the wealth to the working population of the country. In order to ensure that they were personally invested, Marcel and John structured their investment into HCI through their own investment companies by putting their own capital into the businesses in which HCI invested. Marcel became the Executive Chairperson and John the Chief Executive Officer of HCI from January 1997. HCI was the third company on the Johannesburg Stock Exchange to be regarded as black empowered and the first to have a significant portion of its shares owned by broad based black economic empowerment. Over the last 14 years, Marcel and John have built HCI into a prominent JSE-listed company with majority shareholdings in a number of industries including buses, casinos and hotels, television, clothing and textiles, mining, renewable gas, property and motor component manufacturing. 7 The Kuyasa Fund (Kuyasa)is a non-profit social development organisation that provides microfinance as a tool to improve the housing conditions of South Africa’s poorer communities. Olivia van Rooyen started Kuyasa to support community groups to save towards housing, and grant loans to individuals who qualify for the state housing subsidy-within their belief that the poorer of the poor are still credit worthy and that through mobilising savings they are able to build financial and social capital – specifically housing. To meet their vision of enabling these marginalised communities the ability to own and finance their dwellings, Kuyasa provides microfinance services to those with secure occupational rights but who are traditionally excluded by the South African banking fraternity. The underlying belief behind the business of Kuyasa is that by improving the quality of housing of these people – the moral and social fibre of the community is enhanced by pride felt in being a home owner, and the stabilization it gives to families.
  7. 7. Regional Highlights This year’s Lifetime Achievement award went to: Dr. Bertie Lubner – MaAfrika TIkkun Bertie Lubner grew up in an entrepreneurial family – his father, Morrie Lubner, was one of the founders of the Plate Glass Group. After school, he completed a B Comm at the University of Witwatersrand and then joined the Plate Glass Group in 1951 as a trainee. In 1953 he moved to Rhodesia (now Zimbabwe) to develop the company’s interests in what was then the Central African Federation After 41 years with the Plate Glass Group, Bertie changed his focus to allow him to undertake a number of new initiatives, such as getting involved in major business organisations, government bodies and his family’s philanthropic initiatives. After 14 years, having developed the Group’s interest in seven different countries of the region, he returned to South Africa at the end of 1967. On his return, he assumed responsibility for expanding the Group’s interests in the wood industry and successfully launched this area of the business both nationally and internationally. By the early 1990s the Group was operating in 19 countries, employing 23,000 people, with a turnover of over US $1 billion. Bertie and his brother Ronnie were joint Chief Executives of the Group, and in 1982 Bertie was appointed as Chairman, a role he held for the next eight years. In 1992 the Lubner family sold control to SA Breweries; however the family bought back, together with Management, all its glass interests in South Africa, and continued with its investment in the international glass arena. • MaAfrika Tikkun – a Jewish-led community organisation to assist previously disadvantaged children, ex-President Mandela is the Patron-in-Chief of this organisation. • The Field Band Foundation – an organisation which, over the last few years, has developed 31 college style bands, bringing not only musical skills, but lifestyle skills to over 4000 children from the most deprived areas; • Trustee for the Worcester Home for the deaf and blind; • Patron of the Lubner “Kibbutz” – a farming project in South Africa, incorporating people with Downs Syndrome. This led him to initiate and become the founder of a significant number of outreach programmes, such as: Nicole Sykes, Bertie Lubner and Lauren Patlansky Zanele Xaba Lead Director: World Entrepreneur Awards - Africa Tel: +27 11 502 0261 E-mail: zanele.xaba@za.ey.com 8
  8. 8. Regional Highlights Ernst & Young East Africa Tax Team trains Kenya Commercial Bank Regional Finance Team November 24th and 25th saw the Ernst & Young East regional tax team come together at the beautiful Karen Leadership Centre in Nairobi to train the regional finance team of Kenja Commercial Bank, including representatives from the finance departments in Kenya, Uganda, Tanzania, Rwanda and Southern Sudan - all countries where the bank has a presence. Facilitators for the session were carefully selected from our Kenya, Uganda, Tanzania and Rwanda offices. The bank has had a long relationship with Ernst & Young which was taken to a higher level when minds were brought together to discuss tax issues affecting the bank in all jurisdictions of operation. Discussions were very interactive and focused more on the tax exposures the bank has had in earlier years and whether the recommendations given have been implemented, transfer pricing and the need for the bank to have it in place, customs and trade and how the bank can plan on a tax efficient supply chain, tax exposures in each of the jurisdictions, as well as a review of tax litigation cases related to the banking sector around the region. 9 The Business Development team from our Johannesburg office, Zanele Xaba and Victor Kgomoeswana, also offered their support by enlightening the client about our Africa Interactive tool as well as the upcoming Entrepreneur of the Year awards. From the client’s side the Kenyan Finance Manager Mr Yusuf Idarus confessed, that when they heard the training was to take place they thought it would simply be about the usual general tax matters that they have always heard of. "Little did we know," he said, "that the training was more focused on what practically goes on in the business including live issues like exposures we have earlier had and how we can mitigate them." They were specifically blown away by the “extras” they received like case law about banking sector, Africa Interactive tool and Customs & Trade, which they thought was not much of a concern to the banking sector.
  9. 9. Africa is still golden When it was suggested a year ago that Africa’s economic recovery was on track, many thought this premature. However, a quick look at current figures shows that there can be little doubt that the continent is definitely ‘open for business’. In early January 2011, the International Monetary Fund (IMF) forecast that Africa will take seven of the top ten places for the World's ten fastest-growing economies over the next five years. And with Africa once again presenting good value to investors, its mining economies are once more in the spotlight. As far as mining goes, Africa's share of global deal-flow tripled from 5% in 2009 to 15% in 2010. The bulk of these deals was inbound and showed a significant growth in volume, signifying the increased interest of the rest of the world in Africa. “In one major deal, Rio Tinto offered US$3.9b to buy Mozambican coal miner Riversdale, while Xstrata is paying US$513m for Sphere Minerals, with the goal of gaining three iron ore projects in Mauritania. When one takes into account the increasing interest in Africa’s mining sector from companies in China, India, Brazil and Russia, it is easy to see why the future looks rosy,” says Adrian Macartney, Mining Sector Leader: Africa. “Taking South Africa as an example, some 31 mining and metals transactions were completed during 2010, either in South Africa or by South African-based firms abroad, with the total value of these transactions amounting to US$2.9b. Of course, the local industry was negatively affected by the ongoing nationalisation debate, as well as concerns over licensing and the availability of energy.” However, says Macartney, by early 2011, a note of positive sentiment has been underlined by the news of increased mining output for 2010, coupled to expected announcements on licensing, as well as the commitment of organised labour, corporations and government to ensure that the country capitalises on the current high demand for minerals. “Zambia has long been viewed as a low risk investment destination, and its copper-based mining sector has thus attracted high levels of foreign investment in recent years. With copper demand set to outstrip supply from next year until at least 2013, things are looking up for the country. Further good news is that the Zambian government has confirmed that it will not reintroduce its proposed 25% mining windfall tax, provided for in the 2008 Mining Act,” he says. “Perhaps the biggest clue to how well Africa’s mining industry is doing is the fact that even Zimbabwe’s economy is stabilising. Official figures indicate that after a contraction of 17.1% in 2008 in its mining industry - the largest decline in five successive years of negative figures - the sector grew by 8.5% in 2009. Furthermore, it was expected to grow by an additional 31% in 2010. The government has also issued more licenses for diamond mining and has completely liberalised its gold market.” “Of course, it is still facing a number of issues, notably the need to overcome the gulf between electricity demand and supply. Another major cause for concern among investors is the government’s drive towards Indigenisation.” However, this is just part of a more widespread continental sentiment. It is not only indigenisation in Zimbabwe or Black Economic Empowerment in South Africa, states Macartney, Africa as a whole is moving toward providing more benefits for the local people. Moving forward, mining companies will have to have local partners or will have to undertake various forms of local participation. In addition, he points out that environmental sustainability is increasingly gaining importance and will surely affect the cost structure of mines in the future. “Ultimately, the abundance of mineral resources on the continent, coupled with the lack of local capital and capacity, opens the door to mutually beneficial opportunities for local and foreign firms to work together in identifying and realising the enormous mineral potential of Africa,” concludes Macartney. Tanzania continues to be a rising star in East Africa, with geophysical surveys finding more gold and coal reserves in areas where these were not expected. In addition to these reserves, Tanzania’s ability to attract investments in mining equipment manufacturing has been highlighted by the signing of a large deal. Adrian Macartney Lead Director: Transaction Advisory Services and Mining & Metals Sector Tel: +27 11 772 3052 E-mail: adrian.macartney@za.ey.com 10
  10. 10. Consumer products in Africa: Hunting big game With over a billion people, 53 countries and some of the best Gross Domestic Product growth rates in the world, Africa presents a tantalising prospect as a significant growth market for consumer products companies. However, tapping that market is not without its challenges; far from homogenous, beset with issues relating to geography and climate, political and social unrest, African markets present that most prosaic of investment equations: weighing increased risk against the promise of great reward. As companies develop their presence, the challenges they face will tend to fall into four categories: 1. Resource prioritisation – where and how to prioritise for greatest return and lower risk 2. Brand and product portfolio – how to determine what is right for each market 3. Organisation – how to structure for success 4. Sustainability – how to protect growth and performance 1. Resource prioritisation: Where and how to prioritise Africa’s vital statistics are becoming progressively more compelling. Gross national income is already greater than that of China or India in 14 of the continent’s countries. GDP is comparable to that of Brazil and is rising at around 6% per annum. With consumer spending rising at 16% compound per annum, Africa is, and looks set to remain, one of the fastest growing economies in the world. At a more granular level, GDP per household across the continent has more than doubled in the last 15 years. Further impetus is added in the fact that foreign direct investment nearly quadrupled from 1998-2008; today, around 85 million African households earn at least US$5,000 a year. This development comes off a low base and with many millions more households aspiring to own, acquire and use consumer products, the stage is set for continued substantial growth. Consumer products companies are taking note of these changes and making bold moves to get established, or to accelerate expansion in what is a collection of the world’s preeminent emerging markets. Weighing the challenges But while the opportunities may be without parallel, so too are the challenges. Africa is seen by many companies as the final frontier for a reason. Over 1,000 different languages are spoken by multiple ethnic and religious groups. And Africa suffers more wars, civil commotion, corruption and economic and political instability than any other continental, though the situation is improving. While Africa is making great strides to combat poverty, up to half the population is at or below the poverty line. Cash flow is irregular, there is little access to credit and many live in informal settlements on the edge of cities or in remote villages. Economic growth and business prospects are markedly different from country to country and region to region, making many traditional routes to market ineffective – particularly for consumer products companies keen to target the working and emergent middle class. This means global businesses have constantly to recalibrate the balance between risk and reward, in order to ensure that Africa makes a positive contribution to business growth and ultimately, the bottom line. The million-mile view: A blueprint While the investment case and approach for each organisation will differ, there are some commonalities which should inform the macro-view of entering or accelerating participation in the African consumer products market. 11 Considering potential markets for entry or expansion in Africa is a complex exercise which requires a kaleidoscope analysis. This should enable companies to assess the strengths and weaknesses of each potential market through a variety of lenses, depending on their strategic priorities. Simply put, analysis of multiple indicators is essential to develop a more sophisticated view of how different markets might perform for their business. Conventional macro-economic indicators are where most start their market analysis. On this basis, South Africa, Tunisia, Egypt and Morocco are all reasonably mature, diverse and open economies, with relatively positive growth prospects. Some of the less developed economies that stand out as having good prospects in an exercise of this nature also include Angola, Ghana, Kenya, Tanzania and Mozambique – populations are rising, growth is strong and political stability is improving in all these markets so ease of doing business is starting to improve. Other, less geographically-based analyses can also shed some light. Cultural analysis reveals that Africa is home to one third of the world’s Muslim population, living not just in North Africa as many suppose, but also in sub-Saharan countries like Nigeria, and in East Africa. This insight enables a more meaningful perspective of African consumers that stands apart from historic, colonial boundaries. 2. Brand and product portfolio There are a number of very strong messages coming out of Africa in terms of brand preferences and the drivers of consumer purchasing behavior. Companies which can understand what is different about African consumers are able to target priority consumer segments with a tailored brand and price proposition; if they can do this and overcome the difficulties of poor local infrastructure and lack of modern trade, they are most likely to perform well. African consumers are a complex and varied group, but there are a number of common themes, irrespective of earning power. In general, African consumers are pro-Africa and have a strong sense of national identity. When SABMiller tried to enter Kenya with its Castle (traditionally South African) brand, it was blocked by East African Breweries’ (Diageo) Tusker beer.
  11. 11. Consumer products in Africa: Hunting big game With its black and yellow elephant branding, and the slogan ‘My country, my beer’, Tusker appealed to the fierce nationalism in Kenya. Africans demonstrate status through wealth. Trading up is a common trend, so the concept of the ‘third party’ observing choices is very important in the purchase and use of products. Many consumers are also strongly influenced by religious practices (particularly in countries with a strong Muslim or variable ethnic contingent) — affecting everything from clothing, through personal grooming, to eating and drinking practices. Clothing requirements are also behind some key sales trends. For example, the volume of shampoo sold in Egypt (population 70 million) is the same as in Lebanon (4 million) due to the fact that 87% of women in Egypt wear headscarves. Because wearing veils can lead to rashes, odour and hair loss, the perceived need for particular beauty products is increasing. Price also remains a key issue; single use or low-cost products are also seeing increasingly solid demand. 3. Organisation: Structuring for success Companies that can execute consistently across all markets to deliver reliably to customers and consumers, drive down costs and reduce risks are more likely to achieve long term operating success. Efficiency is pivotal to allow consumer products to reach mass markets at low cost. The paradox, however, is that the heterogeneity and massive complexity of African markets dictate that there is no one-size-fits-all solution. While many companies want to leverage their size and scale and establish some consistency with their global operating model, it is not always possible in Africa. The principles on which companies have built a US or Europe operating model very often simply do not apply. The informal economy is a key feature of life in Africa — estimated to account for around 42% of GDP in 2000 with the highest figures in Zimbabwe (59.4%), Tanzania (58.3%) and Nigeria (57.9%). South Africa is the least informal market – only 28.4% of GDP. Distribution is a central issue across Africa; when local markets are too small for a multinational to offer just the core range, it is commonplace to extend distribution facilities to other businesses to bulk out ranges and cooperate with others to reduce transportation costs. Poor infrastructure, remote areas and a highly fragmented retail base make distribution one of the major challenges for consumer products companies — which are tackling the issue in a variety of inventive ways. 4. Sustainability: Building for the future Laying strong foundations for long-term profitable growth is perhaps one of the toughest African challenges, given the diversity of market conditions, the speed of consumer change and the unpredictability of legislation and regulation. Deciding where and how management should focus to protect growth and drive performance is critical for ongoing success. Four key areas warrant attention to safeguard the future of African operations in: • Implementing an effective controls and compliance environment • Retaining local talent • Fostering strong relationships with local regulators; and • Ensuring that the principles of corporate social responsibility are properly embedded. To engender sustained adherence to good control standards and build an environment with greater focus on continuous improvement, it is particularly important that global consumer products businesses operating in Africa focus on winning the hearts and minds of local staff to demonstrate why internal control performance drives better business performance. A complex challenge with potentially enormous reward While early entrants have had the opportunity to influence consumer preferences, build brand loyalty, shape industry structure and establish long term relationships, new entrants are actively assessing the marketplace and looking for opportunities to leapfrog the competition. In such a complex, competitive and fast-changing environment, critical factors for success will always include consumer insight, execution excellence and strategic improvisation. The ability to translate learning from other sectors and even geographies into game-changing market approaches are likely to be the key qualities that will set winning companies apart. Businesses that possess these qualities will be able to navigate the challenges of poor infrastructure and low penetration of formal retailing. They will prioritise their resources to effectively target the burgeoning middle and top of the African consumer pyramid and organise themselves in an efficient and flexible manner. And more than that, companies seeking to do business on the continent have to decide whether they are African companies, or merely companies headquartered elsewhere which are doing business in Africa. It is those which show the greater commitment which are likely to prosper. Derek Engelbrecht Lead Director: Retail and Consumer Products Tel: +27 11 772 3567 E-mail: derek.engelbrecht@za.ey.com 12
  12. 12. Why invest in Kenya? Kenya is an attractive destination because of its growing infrastructure: roads and rail, airlines hub for major regional and international routes. The Port of Mombasa is a major gateway to all surrounding countries and a major tea and coffee auction market. Nairobi is the headquarters for UNEP, UNESCO, WFP, USAID, World Bank and IMF regional offices. The country is an agricultural bread basket for the region. Kenya’s Vision 2030 The government’s blueprint for the year 2008 to 2030 aims to transform Kenya into a newly industrializing “middleincome country providing a high quality of life to all citizens by the year 2030”. The plan also aspires to achieve the country’s MDG by 2015. Anchored on economic, social and political governance, it seeks to achieve and sustain annual economic growth rate of 10 percent until 2030. Growth is widely distributed, covering all economic and social sectors, resulting in the reduction of poverty from 56% in 2002 to 46% in 2006. The plan identifies six key sectors under the economic pillar: tourism; agriculture; manufacturing; wholesale and retail trade; financial services and business process outsourcing. What is the key to successful investment in Kenya? Firstly, lessons learnt over the years show that potential investors and traders must have a country engagement strategy and invest in gaining insight about Kenya’s business landscape. Success in investment and trading goes beyond text books, qualifications, out-of-country corporate skill-sets, and an injection of resources. A successful investment strategy will require a matrix of country-insight, innovation, product/service adoption and fit-for-use that is normally a result of relevant research, trial-runs, investment in proof-of-concept projects, local partnerships and alliances. Even more vitally important is an understanding of the need to support a sustainable beneficiation of the entire value-chain in the selected sector. 13
  13. 13. Sector investment opportunities in Kenya Sector and description Potential projects/opportunities Agriculture and Agro processing Horticulture • Livestock industry • Food processing • Agro- processing • Aquaculture, marine & freshwater Investments by – Steers, Debonair’s, KFC, Nando’s, Starbucks, Java cafés, Spur Restaurants, Holiday Inn, Engagement of foreign and local partnerships that facilitate optimal productivity and value-chain growth and sustainability Joint venture opportunities for short and medium-term objectives Manufacturing • Consumer products • Building and infrastructure materials • Pharmaceutical and cosmetic products • Packaging products • Agricultural inputs and equipment • Wood based products • Animal and leather-based products Investment by – Tiger Brands, Nampak, Metro Cash & Carry Enhancing productivity in all sectors through technology, innovation, beneficiation and partnerships Leveraging cost-effective domestic labour for delivery of local value and regional trade Innovative adoption of product and services for selected markets and countries, recognizing differing levels of maturity, acceptance and adoption with consumers Financial services in the telecommunications and banking sectors • Mobile money transfer • Mobile Banking • Inbound remittances • Micro-finance Industry and cross-industry integration, shared-services, data and communication • Consultancy and professional services Investments by – Stanbic Africa, Old Mutual, Alexander Forbes, AON, Didata Telecommunication companies – Safaricom, Bharti Airtel, Yu, Orange Professional services by – KPMG, Deloitte, Ernst & Young, PricewaterhouseCoopers Export trade opportunities to EAC, DRC and COMESA countries Investors can leverage Kenya as a hub for the export of goods and services to the DRC, and to countries in the East African Community (EAC) and the Common Market for Eastern & Southern Africa regions(COMESA). As the largest economy in the region, Kenya’s economic development, superior infrastructure, export processing zones, status as a central hub, gateway to Uganda’s new oil discovery in Lake Albert area and to the newly forming resource-rich South Sudan, position the country as the springboard to the rest of Africa. There is much room for improvement in establishing and growing intra-regional trade in all forms of product, services, enabling platforms and infrastructures. The domestic partnership route is now an ideal strategy for any continental investor or trader. EGN South Africa provides a local and international platform that facilitates interactions and sparring between senior executive leadership, exchange of ideas, perspectives, opinions, challenges, common issues, etc., across all sectors of business, government and professional services, through electronic and physical networks in functional groups such as CEO’s, CFOs, CIOs, CSROs, CHROs and special focus groups such as Business Development in Africa, Water and Energy, Professional Services, etc. John Ndinguri | Business Development Manager Executives’ Global Network (South Africa) Tel: +27 (0)11 791 4229 Mobile: +27 (0)82 511 0173 Website: www.za.egnnet.com 14
  14. 14. Hidden opportunities Recent political unrest in Egypt and Tunisia has caused investors to look very carefully at their African investments. Fear gripped the Egyptian market causing investors to flee and drive the market down over 20%. However if an African investor had been holding a diversified portfolio across various African stock markets, the numbers tell a different story. It would be myopic to paint all African markets with the same brush. Although Egypt and Tunisia have had negative returns, the other African markets have produced exceptionally good returns over the past year. Kenya and Nigeria performed particularly well. In fact a diversified equally weighted African portfolio* would have produced a 9,57% return over the last year. The important thing to remember is you reduce the risk of a portfolio by diversifying across countries and stocks. Even political risk can be diversified because political risk is often localised as each country has different political dynamics. A sharp downturn in a particular market, possibly from irrational panic selling, may also provide an opportunity to enter the market at lower prices. *Equally weighted portfolio invested in Morocco, Tunisia, Egypt, Kenya, Nigeria and Mauritius. Source Bloomberg If we look at the long term performance of African markets we can see they have outperformed developed, emerging and the South African markets. The MSCI Africa excluding South Africa index, covering investible African markets, produced the highest return of 15.32% over the past nine years. Figure 1: African Market Performance. Source Bloomberg The graph(right) shows index performance. However investment managers are always trying to beat the index through active management. In the South African context the index could be the All Share Index and in the African context, the MSCI Africa excluding South Africa Index. Performance above the index is called alpha. When markets become more efficient the alpha opportunities decrease i.e. shares trade closer to their true value making it hard to outperform the index. A few reasons causing markets to become more efficient are electronic trading, improved financial reporting and wider research. 15 Figure 2: Market Performance. Source Bloomberg
  15. 15. Hidden opportunities Rolling 3 year Alpha 40.00% South Africa quant model Africa quant model 30.00% 0.00% May - 05 Aug - 05 Nov - 05 Feb - 06 May - 06 Aug - 06 Nov - 06 Feb - 07 May - 07 Aug - 07 Nov - 07 Feb - 08 May - 08 Aug - 08 Nov - 08 Feb - 09 May - 09 Aug - 09 Nov - 09 Feb - 10 May - 10 Aug - 10 Nov - 10 10.00% The graph (left) illustrates how alpha in the South African market and African markets have diminished over time. However alpha in the African markets is still substantially higher. The alpha difference is illustrated on the chart below. Africa markets are less efficient allowing professional asset managers to exploit these opportunities and generate higher returns for their clients. African quant model performance to 31 January 2011 100% The graph (left) shows how a quantitative process can systematically generate excess returns above the African benchmark. 1 year -2.1% -1.3% 0.1% -13.8% 3 year -10.3% -20% MSCI Africa ex ZA Index 2.6% 3.0% 20% 7.6% 21.3% 60% 30.8% African quant model -60% Full period 5 year 6 ymonth Prescient Investment Management uses a quantitative, systematic and objective method to consistently generate excess returns above an index. After many years of research Prescient launched their African Equity Fund building on the company’s previous successes. Jonathan Kruger | Portfolio Manager, Africa Prescient Investment Management 16
  16. 16. A review of the Islamic Finance Industry Despite being at the height of the global financial crisis, when most of the bastions of the conventional banking world faltered and collapsed under the strain of weak and undercapitalised balance sheets, growth in the global Islamic Banking sector continued well in 2009 and in 2010 albeit at a slower rate. A survey conducted by “The Banker” of financial institutions practising Islamic finance indicates that “Shari’ah-compliant assets rose by 8.85% from US$822b in 2009 to US$895b in 2010. It further indicates that Islamic finance has held a compound annual growth rate (CAGR) of 23.46% from 2006 to 2010” compared with more modest growth rates of their conventional counterparts in the same period. So what makes Islamic Banks different to conventional banks? The ability of Islamic banks to remain fairly incubated from the contagion caused by the global financial crisis, is for the most part attributed to the principles of Shari’ah (Islamic Law) upon which Islamic finance is founded. Islamic finance embodies the following key Shari’ah principles: • The law of contract: Under Shari’ah, contracts constitute a fundamental component of financial transactions and contracts are considered to be invalid and unenforceable unless the terms of the contract are clear, unambiguous and all parties to the contract agree on all terms eg. The asset, its price and the delivery date etc. • The prohibition of interest: Parties to financial transactions and contracts are not allowed to charge or receive interest or pay interest in terms of these transactions. • Prohibition of impermissable activities: Islamic law prohibits participation in gambling, activities of a speculative nature, alcohol related activity among others. Investment in or the financing of prohibited activities is considered impermissible. • Asset backing principle: Under Shari’ah, money is not a commodity in itself and the generation of wealth should be from entrepreneurship through trade and investment. Accordingly, every financial transaction should be supported by an underlying tangible asset or enterprise that requires financing. Although the function of Islamic banks is similar to that of conventional banks viz. to serve as financial intermediaries between borrowers of funds and lenders of funds and to provide investment expertise to clients, the implications of the above mentioned prohibitions on Islamic banking means that the Islamic banks have to fulfil their roles by providing alternative forms of financing compared to those offered by conventional banks. Key to the continued growth of the Shari’ah industry will be its ability to develop financial products that provide Shari’ah compliant substitute product solutions that match conventional financial products and financial instruments. Conventional banks generate returns from “maturity transformation” ie. the difference between short term interest rates paid to depositors and long term interest rates earned from loans and receivables. In comparison, Islamic banks generate their returns through profit sharing related products whereby depositors share in the risk of the banks’ lending. Depositors earn a return instead of interest and borrowers repay loans based on profits generated from the projects on which the loan is lent.
  17. 17. A review of the Islamic Finance Industry Africa, with its Muslim population of approximately 500 million people, represents a huge untapped market for global banks and insurance companies to grow their markets. South Africa with its sophisticated economy and sound regulatory and legislative framework is seen as a portal to the rest of Africa and a perfect platform for global banks to launch Shari’ah banking to the rest of the continent. Currently, in South Africa the number of fully Shari’ah compliant banks is limited. Conventional banks that recognise the potential within the market are operating through Shari’ah windows offering specific tailored financial products. The National Treasury recognises the need to place the burgeoning Islamic banking industry on an equal footing with the conventional banking industry in this country, and has engaged with relevant stakeholders on this matter. Consequently, certain amendments have been proposed to the current income tax and VAT legislation. When effective these amendments will provide equal tax treatment between certain Shari’ah transactions and those of western banks benefiting the Shari’ah investor (who has up to now not enjoyed the same exemptions as his/her counterpart in the conventional banks). So what are the future prospects for the Islamic Banking Industry? The increasing levels of awareness and the growing popularity of Shari’ah finance in Africa and globally together with the acknowledgment by regulators and legislators of the need to accommodate the requirements of Shari’ah finance within the regulatory and legislative frameworks both bode well for continued growth of this sector. The Ernst and Young South African practice has established a specialist Islamic Finance Centre of Excellence which works in conjunction with The Ernst and Young Islamic Financial Services Group (IFSG group) in the Middle East. The aim of the Centre of Excellence is to cater to the specific needs of both Islamic and conventional financial institutions requiring Islamic financial assurance and advisory services in South Africa and the rest of the African Continent. These solutions include strategy development, operational framework and product development, policies & procedures, structured finance advisory, market and feasibility studies. The Centre of Excellence has been involved in providing assurance and advisory services to conventional and Islamic Banks in South Africa and in the African Continent. Emilio Pera Lead Director: Banking & Capital Markets Tel: +27 11 772 3491 E-mail: emilio.pera@za.ey.com 18
  18. 18. EYe on Africa profile: Q&A with Sugan Palanee, Regional Senior Partner, Advisory Services Q. Are Indian multinational companies with long term growth ambitions factoring Africa into their strategies? A. India multi-nationals are following China into the African continent. As both economies grow at pace, they need to sustain through resources. Africa offers this. In fact, the continent provides for 25% of China’s oil and 15% of India’s. The African continent offers land mass, resource reserve and close to a billion consumers. It is virtually untouched in comparison to Europe and other continents. The common theme at DAVOS recently was the focus on emerging economies. Q. How many of these businesses are looking at acquisitions as a means to strategic growth vs survival? How does this compare to deals to Africa from other markets? A. Africa has been the preserved jewel across continents with growth rates in energy economies significantly higher than established economies, India, China, Brazil and Russia would lead the investment into Africa followed by more strategies and measured investments by the US and rest of Europe. Q. To what extent are they looking at acquiring established African brands? A. India multi-nationals will aggressively target brands that have potential e.g. Godrej Group’s recent acquisition of the Kinky brand. Further into the continent, Bharti’s acquisition of Zain in the telecoms space. Q. Which sectors is deal activity to Africa from India being seen the most? A. The sectors of interest appear to be oil and gas, mining and metals, infrastructure and telecoms - specifically around data. Sugan Palanee Regional Senior Partner - Advisory Services Tel: 031 576 8077 E-mail: sugan.palanee@za.ey.com 19
  19. 19. Contacts in Africa You have come to the right place Country Name Email Angola Val Davies val.davies@za.ey.com Botswana Bakani Ndwapi bakani.ndwapi@za.ey.com Congo and DRC Ludovic Ngatse ludovic.ngatse@cg.ey.com Cote d’Ivoire Jean-François Albrecht jean-francois.albrecht@ci.ey.com Gabon and Equatorial Guinea Erik Watremez erik.watremez@ga.ey.com Ethiopia Zemedeneh Negatu zemedeneh.negatu@et.ey.com Ghana Ferdinand Gunn ferdinand.gunn@gh.ey.com Guinea René-Marie Kadouno rene-marie.kadouno@gn.ey.com Kenya Gitahi Gachahi gitahi.gachahi@ke.ey.com Malawi Shiraz Yusuf shiraz.yusuf@mw.ey.com Madagascar, Mauritius and Seychelles Gerald Lincoln gerald.lincoln@mu.ey.com Mozambique Ismael Faquir ismael.faquir @mz.ey.com Namibia Gerhard Fourie gerhard.fourie@za.ey.com Nigeria Henry Egbiki henry.egbiki@ng.ey.com Rwanda Geoffrey Byamugisha geoffrey.byamugisha@rw.ey.com Senegal Makha Sy makha.sy@sn.ey.com South Africa Ajen Sita, CEO, Africa ajen.sita@za.ey.com Tanzania Joseph Sheffu joseph.sheffu@tz.ey.com Uganda John Muhaise-Bikalemesa john.muhaise-bikalemesa@ug.ey.com Zambia, Zimbabwe Joe Cosma joe.cosma@zw.ey.com General enquiries africabusiness@za.ey.com Africa Interactive Ernst & Young offers you a one-stop shop if growing your business in Africa is your priority. The Africa Business Center connects your business to our team across the continent to help you navigate the opportunities and challenges of doing business in what has been called the next frontier of business growth. Now, let the Africa Business Center broaden your business perspective of Africa and deepen your insights with our new software, Africa Interactive. Featuring country information, some sector-specific data and trends to help you better understand Africa as an investment destination, a 15-minute demonstration of our Africa Interactive software will make sure you never look at Africa the same way again. TM TM Contact Kim du Plessis on +27 11 502 0788 for further information. 20
  20. 20. Ernst & Young Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com/za Ernst & Young refers to the global organisation of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. © Ernst & Young South Africa 2011. All rights reserved. Studio ref. 110228. Artwork by Kweyama.

×