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Jun 25, 2007:
Kara Michaels investigates what it's like to do business in Africa, and hears what Kelly Clinton, general manager of ABSA Specialised Property Equity, and Dale Ramsden, Development director for Actis Africa Real Estate Fund, have to say on the matter.
"Africa's profitability is one of the best kept secrets in today's world economy." Kofi Annan
Clinton commences by explaining that the founding principle of his viewpoint is that South Africa is part of Africa. "What we do here influences up there," he says.
He explains that to do business in Africa requires courage, integrity and passion, with the extra characteristics needed being patience and perseverance.
According to him, the following companies are already in Africa: Steers (70), Nandos, Woolworths, Truworths, Shoprite (60), Hungry Lion, Spar, PEP, Game, Nampak, Datatec, Ellerines, Carnival, Smart, Italtile, Absa, Edgars, Jet, CAN, Naspers, Imperial, Red Square, Boardmans, Legit, Temptations, Jetmart, Prato, Sasol, MTN, Steinhoff, Barloworld, and SBSA. "Many companies are up there making a lot of money," he says.
According to Ramsden, it's impossible to ignore what's going on beyond our borders. "It's time to look at new markets," he says. "And South African companies in South Africa have a competitive advantage.
"There are no snipers waiting as you cross the Limpopo and corruption is not a necessity."
He does however point out that there is not a huge market and that the experience is frustrating.
"It's about patience. The developed world has watches, Africa has time!" he says."
Clinton advises that in addition to a normal property due diligence, it is necessary to undertake a social search before doing business in Africa. "This is because that which you are about to buy may have already been sold five times," he says. "This entails doing research via a local company and then taking its information to a local lawyer to see if it all adds up. After that, some personal research work is a good idea.
"I also recommend walking on the land and finding out how many other land claims are in existence."
Only 2% of land in West Africa is property registered.
"The third dimension in Africa is FOREX in that all deals involve some element of FOREX. There is a demand for foreign exchange that could involve equity in local currency, senior debt in pounds, mezzanine debt in euros and tenants paying rent in US dollars as an example," says Clinton.
"Different countries are also involved. For example Eden Island in the Seychelles had its client in Cape Town, its credit approval in London, its capturing office in Johannesburg, its booking office in Mauritius, its country debt in the Seychelles and its fees in New York.
"A property valuation is done in the local currency and then converted to dollars, euros, pounds and rands. There is no yield curve, derivatives or gilts; only the Treasury Bill rate and prime bank rate. Therefore it is necessary to be aware of what's happening with FOREX exchange in a country.
"The interest rate can be TB + 1 000 basis points and the country's FOREX reserves impact the capitalisation rate."
Clinton explains that when it comes to corruption in Africa, which forms part of the experience, it is not called corruption, 'the Greek handshake', 'Walk like an Egyptian' or 'What's in it for me' but 'silent money situation or phantom fees'.
Ramsden disagrees with Clinton in this regard in that his experience in Africa shows that corruption and bribery can be avoided. "It takes two people to create corruption, usually through wanting to expedite matters. In fact, a bribe only extends the transaction in that one enters a vortex of frustration from a compromised position," he says.
"Business can be done legitimately, but if you don't have the stomach or patience, don't go there."
Ramsden explains that it's all about relationships. "To be successful you have to be able to relate to people and they have to be satisfied with your personality to be able to do business with you and to build a relationship with mutual trust," he says.
"Don't say this is how we do it in South Africa or spend too much time on legal documents as opposed to on relationships.
"It's also about capital. Capital is essential, because if promises are not supported by ready capital, failure is on the cards."
Ramsden was responsible for heading up ACCRA mall in Ghana as a result of the Actis Africa Real Estate Fund having a mandate to provide equity finance in Sub-Saharan Africa due to a dearth of capital and a demand for quality real estate. "It has an existing fund of US$150 million and is prepared to take development risks, acquire existing assets and assets with turnaround potential," he says. "Its mandate is to build on existing experience in Africa and to grow from bases in East and West Africa.
"In November 2002 Actis Africa Real Estate Fund secured the land for Accra Mall in Ghana, with the initial design taking place on a limited piece of land. Additional ground was never needed," he says. "Later a long term lease of land took place with the Ghanaian authorities.
"In December 2005 earthworks began. Then on the 31 January 2006 an injunction was issued against the development. Actis opposed the injunction and development of the mall was kept to a minimum during that time.
"In May 2006 the court ruled in Actis' favour.
"Development continued. All the finishing items for the mall had to be imported, so the air conditioning came from Malaysia and the sprinklers from Germany as examples.
"Why were more items not procured from South Africa? Because the suppliers were not interested in business north of the border!"
Ramsden explains that during the development of the mall he had to contend with a rainy season that makes South Africa's highveld thunder seem like a light drizzle. "When the project commenced the weather was characterised by tropical showers and extreme heat and humidity," he says. "Power outages for 75% of the time also meant that we could not rely on municipal services. This entailed a need for full back up power and sewerage and water treatment facilities.
"Despite all this frustration Accra Mall has been successful."
The question that now comes to the fore is which agencies are there to assist when doing business in Africa. Clinton enumerates the following: The International Finance Corporation, the Multilateral Investment Guarantee Agency, Africa Export Import Bank, Africa Trade Insurance Agency, Export Credit Insurance Corporation South Africa and Absa/Barclays.
Of interest is that South Africa has invested R20 billion in Kenya since 1999, it has accounted for 43% of Africa's $1,3 billion FDI in 2005 and trade between South Africa and Africa increased from R24 billion in 1998 to R52 billion in 2004.
Clinton concludes by advising that a lot of care be taken. "If you're prepared to really sweat, work hard, go back to basics and enjoy joy baked beans, you can make money in Africa," he says.
Ramsden concludes by saying that there needs to be a paradigm shift in the approach to projects in Africa, ie if it can go wrong, it will. "Africa is not about rocket science. It's about patience, relationships and capital," he says. – Kara Michaels
