From Riches to Returns: Can Africa remedy underwhelming foreign investment?

From Riches to Returns is the name of Dentons’ latest report on foreign direct investment in Africa; why it has not met the continent’s needs; and how this can be remedied, write David Syed and Yun Ma, co-heads of Dentons’ Sovereign Advisory practice, and Noor Kapdi, chair of Dentons’ Africa Region.

The title of our report may be snappy, but it faithfully reflects Africa’s quandary. For all the talents of its people and abundant natural resources, impressive economic returns have not materialised.

Dentons continues to guide African sovereigns towards more attractive national investment environments. In turn, we support private investors to find common ground with sovereigns, and to chart a profitable course through what can be complex, sometimes heavily bureaucratic, legal systems.

In terms of solutions, there is no one-size-fits-all fix for a continent as diverse as Africa. Nonetheless, we suggest that it is the steady process of legal and good governance reforms – leading to a clearer landing zone for state and private interests – that will serve as the ballast for sustainable economic development.

Africa’s infrastructure gap is perhaps its most pressing challenge. As much as USD $170 billion per year is needed to close it. Particularly pronounced are infrastructure gaps in energy and transport. Put simply, private enterprise cannot flourish with inconsistent power supply and poor roads.

This will require foreign investment, which counterproductively fell by 3.3% to USD $53 billion in 2023. The cost of capital remains high globally, so public-private partnerships and innovative financing models (including blended finance) will be essential.

Carbon markets would likewise be an excellent fundraiser, but Africa is not tapping them, using just 2% of its carbon credit potential at present. In our view, this reflects incomplete legal frameworks across many African states, the fixing of which could unlock as much as USD $100 billion per year.

Africa also continues to struggle to capture more value from its natural resources. The infrastructure and financing deficits outlined above preclude widespread domestic processing, making states reliant on the export of raw, unfinished goods.

The African economy is often slurred as corrupt and inefficient. In reality, the continent faces a set of interlocking challenges that will only be overcome by diligent leadership and technical expertise in equal measure. European leaders would admit they face a not dissimilar challenge.

Africa, however, is not short of willing partners. Superpowers like the US, China and India continue to invest heavily, and increasingly influential economies like the UAE see huge potential in renewable energy generation.

Sustained Emirati investment in solar energy, for example, has yielded new roads and ports (not least Sudan’s new $6 billion Red Sea terminal). This constitutes a virtuous circle of industrial productivity feeding infrastructure development.

And while Egypt remains the top destination for FDI, a plurality of partners and new investment paradigms are helping smaller nations win more than their expected share.

This includes Mauritania, with its population of less than 5 million, which nevertheless secured USD $75 billion in investment in the five years to 2023.

Mauritania boasts huge potential in hydrogen and ammonia production. In 2023, its government announced a partnership with Conjuncta, a German firm, and the UAE’s Masdar and Egypt’s Infinity Power, to develop a best-in-class green hydrogen facility worth some USD $34 billion.

This project is a good example of how Africa can generate economic gains at low environmental cost (in fact, green hydrogen is a major net environmental benefit). We think this balanced equation must be the continent’s lodestar, and foreign investors will need to sign up too.

Meeting this worthy objective will depend in great part on legal systems and investment regimes that uphold environmental obligations on the part of states and investors alike.

Without this foundation, the potential of African renewable energy to support drastic global emissions reductions will remain unexploited. Without this foundation, returns to capital will be constrained, with investors less able to diversify and explore new sectors and markets.

The 21^st century was meant to belong to Asia but surplus capital there and in the Gulf means that no continent should be left behind. In fact, current trends show that the rise and rise of non-Western economies, like China and India, will fuel Africa’s economic development.

The rules of the road, which Dentons will continue to help shape, will then determine the pace, sustainability, and equity of African growth.

These are the variables, but economic and environmental pressures mean the time for implementation is now. Africa’s leaders and foreign stakeholders must embrace this spirit of urgency.

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