Africa: growth, change and opportunities

Since the beginning of the 21th century, average economic growth across Africa has been stronger than the global growth rate. Africa has a big infrastructure development potential and new projects are crucial for economic growth. Going forward, industrial development with adequate consideration of ESG risks will be critical for the region.

Africa is the home to a huge diversity of culture, history and ethnicity. Regarding the economic development, except for the dominant economies like Nigeria, South Africa, Egypt and Morocco, the continent is made up of countries that have relatively small domestic markets. The African Development Bank reported Africa to be the world’s second-fastest growing economic region in 2017 and estimated the average growth to be 4.3% in 2018.

Africa is the home to a huge diversity of culture, history and ethnicity. Regarding the economic development, except for the dominant economies like Nigeria, South Africa, Egypt and Morocco, the continent is made up of countries that have relatively small domestic markets. The African Development Bank reported Africa to be the world’s second-fastest growing economic region in 2017 and estimated the average growth to be 4.3% in 2018.

Recent positive trends in most African countries can be attributed to their efforts to reform their economies over the last decades and put them on a more sound footing. At the same time, despite these reforms, the rather slow growth rates in those countries which contribute the bulk of African economic output indicates that there are persisting problems that must be addressed.

Many large infrastructure projects are underway across Africa. Most of these projects are related to the production and transportation of electricity, while other projects include highways, railways and airports. International investors like the International Finance Corporation and the World Bank see considerable opportunities in the African markets.

While still heavily relying on conventional energy sources such as oil & gas in Mozambique, Nigeria and Ivory Coast or coal in South Africa, renewable energies have received increasing attention and financial support from investors and governmental bodies fueled by the growing energy demand. Overall, climate change has gained awareness in Africa in recent years.

Rail transportation has been instrumental in promoting industrialization in advanced and emerging African countries alike. However, rail transportation is still underdeveloped in Africa. Weak transport infrastructure in some regions has adverse consequences for the overall regional development and sectors like manufacturing, agriculture and tourism.

Another booming infrastructure subsector is telecommunications, which is a growth market in Africa due to the constantly increasing customers base. Large players are continuing to penetrate the untapped African markets and offer new products.

Africa is endowed with abundant natural resources. Most African countries have recognized the need for capacities to exploit natural resources. Overall aim is to produce goods and services to meet their national needs and boost economies through export. This leads to the formulation and implementation of policies and strategies for sustainable development of natural resource exploration in Africa.

Since 2000, concrete steps have been undertaken by countries like Guinea, Nigeria, Kenya and South Africa to adopt mineral development policies and strategies aimed at attracting investment. These include new mining legislation providing regimes favorable to investors, the reduction of state participation in mining activities as well as new environmental and social requirements for mining operations.

International investors are increasingly adopting an approach aimed at achieving improvements in projects’ sustainability performance. Thus, investors play a key role in promoting and implementing best practices in the areas of Health and Safety and environmental compliance.

The 2017 PWC report describes improvements in the Health & Safety performance at South African mining operations as “one of the biggest success stories for the mining industry over the last 20 years.” Statistics provided by the South African Department of Mineral Resource show a downward trend in fatalities for the industry over the past 10 years, indicating that investments made in Health and Safety measures pay off in practice.

Critical reports covering human rights violations like child labor or slavery-like working conditions at mines in Africa regularly appear in the media. Increasing global demand for specific resources such as cobalt that is widely used in batteries in several products, puts pressure on mining companies to increase their output sometimes under problematic ethical or environmental conditions.

The situation is especially challenging in countries with poor regulation. International companies are therefore increasingly held responsible to take responsibility for ESG standards in their supply chains and are called for practicing ethical sourcing.

Water scarcity is a challenging issue in Africa. United Nations Department of Economic and Social Affairs has reported that more than 40% of the global water-stressed population lives in Sub-Saharan Africa. Scarce water resources are becoming an increasingly important concern for the mining sector in Africa. Mining requires water at almost every stage of the process, while most of the mining assets in Africa are located in water-stressed regions.

The ongoing residential water restrictions in Cape Town were implemented as an emergency measure once the water crisis broke out in January 2018. Media reports, that residential water consumption has dropped from 1,2 billion liters per day in February 2015 to around 520 million liters per day in February 2018. This challenging situation paved a way for the new projects in the area of water supply, like South Africa’s largest seawater desalination plant, Veolia.

Africa’s growth story continues to attract investors and insurers who support a long-term development of the region. Keeping in mind the aforementioned challenges and opportunities, Africa is a key market for AGCS.

Insurers play an important role to support the stable development of the region. AGCS offers consulting services for clients to identify and assess material environmental, social and governance risks. Our consulting team is available at AgcsSustainability@allianz.com

We are dedicated to deliver the best possible solutions to the management, control and reduction of ESG risks.