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Shouldn't You Invest in Bottleneck-Breakers in Africa?

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The legendary "High Financier" Siegmund Warburg used to say "Show me trouble and I'll show you profit." It is a little known fact but, according to a 2010 report from the UN Economic Commission for Africa, only about 30 percent of African roads are paved and, as a consequence, "shipping a car from Japan to Abidjan costs $1,500, while shipping that same vehicle from Addis Ababa to Abidjan would cost $5,000" (UN Economic Commission for Africa, African Union and African Development Bank 2010). Africa's maritime ports have their own problems; the same report estimates that the continent's port productivity is only 30 percent of the international norm. It is likely that part of the reason for this under-performance is the unequal usage of the continent's ports; only six of its 90 total ports (three in Egypt and three in South Africa) handle 50 percent of its trade. A related issue deals with cost; the port in Durban--Sub-Saharan Africa (SSA)'s busiest port--charges more to dock a ship than any other major harbour in the world and double the world's average. Even more absurd is the fact that about 50% of all intra-Africa air routes are monopolies served by a single carrier. Journeys between West and Central African capitals are often quicker if routed back through Europe. While such anecdotes may sound backward and even disastrous, they also serve to highlight serious profit taking opportunities for attentive parties.

The Big Picture

In a poorly serviced continent like Africa, the opportunities with greatest potential are those associated with improving communications networks, trade systems, logistics service providers, consumers' channels of distribution and critical infrastructure-plays between its fast growing nations. Africa includes some of the most attractive countries in the world in terms of GDP growth, tradable asset base, low leverage levels and other key metrics. The efficiencies and returns that can be generated from investing in African intra-trade enablers are simply massive.

However Africa's current internal trade is low--making up only about 10 percent of its total trade according to Brooking Africa Growth Initiative. Most of its exports go to the world's advanced economies, and most of its imports come from those same advanced economies. Comparatively speaking, other regions of the world enjoy significantly higher levels of internal trade. For the developing countries in Asia, intra-regional trade as a share of total trade was roughly 17 percent in 2010; for the member countries of the European Union, the same figure was more than 60 percent. This low base (levels of trade) is bound to increase. The current infrastructure picture is a heritage of colonization; former colonies were traditionally the trade partner of choice, now African nations have a broader set of partners, and this increasingly includes neighbours and other African nations.

Huge infrastructure projects building bridges, ports, airports, roads, as well as power stations will help improve Africa internal trade and propel growth in these markets even further, thus breaking significant 'bottle-necks' in place. The AfDB (African Development Bank) under the leadership of Donald Kaberuka has made and continues to bring innovative solutions. Another African institution, the AFC (Africa Finance Corporation) under the leadership of Andrew Alli has made infrastructure at the center of its preoccupations, and has been also able to successfully tackle these issues hands on.

More institutions in Africa and overseas see the problem and realize that massive demand for improved infrastructure exists, and there is no better example of this than the cellular revolution of the previous decade. The telecom sector is critical in many ways and has numerous ramifications for Africa. Mobile banking and its ability to bring finance to unbanked populations is probably first thing which comes to mind - that is a good reflex. Africa's socio-cultural relation with money stands to undergo deep transformation with the help of technologies shrinking the lines between informal and formal sectors.

There is however much more. Few realize that the improved telecom infrastructure is at the root of India's privileged place in the Outsourcing and Teleservices industry, and Africa stands to become a considerable contender in this space over time if one looks at the strides already made by South Africa, Mauritius, Ghana, Senegal, Kenya, Egypt, Morocco, and Tunisia over the last decade.

The Hurdles To Overcome and To Profit From

However bandwidth and data connectivity remain a paramount challenge to overcome in Africa. We certainly can advise on avenues to capitalize on this vast problem, but we do also see other lower hanging fruits. In fact, we recommend investors, funds and wealth managers allocate priority capital towards critical agents of the sector such as infrastructure service providers, such as telecom towers or data centers plays or any other actor in the supply chain able to deliver scalable cost savings to traditional operators. Cost control and focus on core strengths will remain the main agenda for telecom operators, and sector participants who are able to help them solve such needs and assist them in outsourced strategies.

In an era of declining revenue per subcribers for mobile operators, this avenue allows one to profitably ride the wave of the overall sector continued growth without taking as much risk as each of the mobile operators. Some innovating actors able to provide (a) best solutions for current industry problems and (b) propose solutions for industry next set of problems are a favourite; especially when they allow the existing operators to tap into the revenue lines of both the banking and energy sectors. Mobile phone companies like Safaricomm have pioneered mobile money in Kenya and many African countries over the last few years. Other recently established players like Orun Energy have developed low cost energy-saving solutions for these same African mobile phone companies who spend more diesel and maintenance of generators than their western counterparts. Kwabena Smith, the founder and CEO of Orun Energy claims that energy related costs constitute 65% of the operating costs of a telecom tower. It is a major barrier to setting up towers in rural Africa.

Other groups such as access.mobile are helping their telecommunications partners innovate in an increasingly competitive landscape by defining new areas of value added services in agribusiness beyond text messaging price and other information to farmers. They utilize mobile-to-web frameworks linked to mobile money to capture real-time supply chain data, make payments, and improve operational insight and risk management for high-growth agricultural enterprises. According to Kaakpema Yelpaala, access.mobile's Founder and CEO, "it is important to keep in mind that while providing these technology tools to our clients, we are also capturing data that is otherwise difficult or impossible to access for any other market participants in the global agricultural supply chain."

Also, Asian-based phone manufacturers are designing, for Asians and Africans, phones able to hold two, three or four SIM cards, have enhanced radio and other features relevant to these local markets. As observed by the Economist in its Apr 15th 2010 Edition titled "The world turned upside down", developing countries, long a source of cheap labour, are becoming hotbeds of business innovation in much the same way as Japan did from the 1950s onwards. We believe that actively establishing strategic partnerships between emerging markets based and Africa based innovating and like-minded entrepreneurs will yield potent returns for investors.

Avenues taken to cover larger share of client base differs between local entrepreneurs, but most importantly require mind sets and techniques untested in the western world; BCG notes that a growing number of entrepreneurs in the emerging world like Africa are also replacing scaling up with 'scaling out', which means involving a wider range of people in the process of production and distribution, something that has been made much easier by mobile phones and the internet. The most successful examples of this are clinics on wheels, but there are many others. Nutriset, a French manufacturer of fortified food for malnourished children, has outsourced production to local franchises in Africa. The company maintained quality control and the franchises were close enough to the children to make distribution quick and easy. Kenya's Child and Family Wellness Shops offer shares in the company to the nurses who operate the clinics, which encourage them to serve more children and helps stem the brain drain from rural areas.

The Invisible Hand's Touch is Seriously Needed

Africa's notorious customs environment poses yet another impediment to intra-African trade. The high fees that custom offices charge is part of the problem; according to the Doing Business 2011 report, Sub-Saharan Africa is the world's most expensive region to trade within (World Bank and International Finance Corporation 2011). The costs to businesses in time delays is another issue; the same Doing Business report shows that delays are up to three times as long in Sub-Saharan Africa compared with other regions of the world.

However the January 2012 Report by the Brookings Africa Growth Initiative titled "Accelerating Growth through Improved Intra-African Trade" reminds Governments efforts in improving intra-trade can help their mandate. Accelerating Growth through Improved Intra-African Trade can help industries become more competitive by creating economies of scale and weeding out producers that are less productive in the marketplace. It can establish and strengthen product value chains and facilitate the transfer of technology and knowledge via spill-over effects. And it can incentivize and spur infrastructure development and attract foreign direct investment. For these reasons, expanding intra-African trade is a key to accelerating economic growth on the continent. It is especially important for the continent's many small, landlocked countries that face tremendous challenges trading internationally. Unfortunately, however, most of Africa's current exports go to the world's advanced economies, and imports come from those same advanced economies. But this issue...is also an opportunity Governments can profit from. Countries like Mauritius, South Africa and Rwanda amongst others are making strides in that direction.

Take Away Home

Africa has its unique set of issues, many are infrastructure related legacy issues and some are "bottle-necks" to the explosive growth experimented by this "Last Born of the Global Market"; these issues are investor's greatest opportunities. Thankfully Africa is benefitting from an increasing number of forward-thinking Governments and is populated with an increasing number of savvy, pioneering, experimented and globally exposed entrepreneurs determined to disrupt their market by tackling local problems via tailor-made solutions ; solutions to a clientele growing at phenomenal rate, and at time, characterized by non-homogeneous traits. Africa is, indeed, one of the most fertile grounds when seeking to serve both the people at the Bottom of the Pyramid (BoP) and those at the Top of the Pyramid (ToP). This is what some call "straddling the pyramid", others call it "playing the piano". Success stories like Equity Bank in the Eastern corridor of the continent prove that change-ready businesses which spend time identifying local "bottle-necks" to break and capital into developing coherent regional approaches and robust relevant technical solutions can benefit from immediate and significant opportunities of serving both the premium segment and the low-income segment, respectively called 'Africa One' and 'Africa Three' by Vijay Mahajan in his thought-provoking book titled Africa Rising.

In essence - one can greatly profit from investing in "bottle-necks breakers" in Africa - whether a Foreign based investor or a member of the new breed of Africans Investing in Africa (AIAs). One must always keep one picture in mind - the hour-glass : top and bottom are fat, middle is actually thinner - that's Africa in a nutshell with regards to the best opportunities.

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