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Strategy Playbook for Leading in Sub-Saharan Africa Frontier Markets
By Joe Mutizwa
Partridge AfricaCopyright © 2015 Joe Mutizwa
All rights reserved.
Lions Follow Buffalo Herds
In order to distinguish the traditional type of investment opportunities from the newer opportunities emerging as part of the growth and transformation story of sub-Saharan Africa, I refer to large buffalo herds as those large and scalable traditional potential profit pools that tend to coalesce around the following primary sectors:
In sub-Saharan Africa, prides of lions follow buffalo herds — the abundant gifts of nature — as they provide a sustainable source of food. Formidable prides of capitalists are taking after the lions of the savannah, scouring for buffalo herds that remain across sub-Saharan Africa in the form of investment opportunities in the traditional opportunity areas. These investors, as we shall see, are as much from outside Africa as they are from within the continent of Africa itself. Let me look at each of these economic 'buffalo herds' briefly.
It is true that with the end of the commodities super cycle, there has been a cooling effect on investors' appetite for this type of investment opportunity. A few mining majors have, in fact, exited from their investments in parts of sub-Saharan Africa due to collapsing commodity prices among other headwinds. The recent woes experienced by the resources giants — such as Glencore, Anglo American Corporation, and Rio Tinto to name but a few — have had the effect of spooking investors away from emerging markets in general and the resources sector in particular.
While this may be the near- to medium-term outlook for mining opportunities in Africa, the fundamental reality is that sub-Saharan Africa is endowed with a significant proportion of the world's key mineral resources which will be exploited as global economic fundamentals change.
The investment case for sub-Saharan Africa in the resources sector is supported by the following compelling statistics cataloguing sub-Saharan Africa's share of key mineral resources:
The World Bank estimates that Africa has 30 per cent of the world's extractive resources, encompassing more than sixty different minerals.
It has 88 per cent of global platinum reserves, 84 per cent of chromium resources, 60 per cent of diamonds, 49 per cent of cobalt, 40 per cent of gold and bauxite, and 17 per cent of uranium reserves!
Africa's reserves of oil, gas, and minerals have barely been exploited, and with further exploration work, dramatic upward revision of estimates is likely.
Chinese imports from Africa have risen from US$1 billion in 1990 to over US$200 billion today — a 200-fold increase in less than twenty-five years. A large chunk of these are resource-based commodities.
The resources sector in Africa has grown at a compound annual growth rate of 7.1 per cent between 2002 and 2007.
Chinese share of the world trade in fuels and mining jumped by 216 per cent, from 6 per cent in 2005 to 13 per cent in 2013, attaining a value of US$544 billion — ahead of US's US$440 billion.
Always watch out against the resource curse
This is a phenomenon where abundance of natural resources has produced perverse economic consequences. The so-called Dutch disease (which can be traced to the Netherlands's experience after discovery of gas in 1959) arises when an economy experiences sudden and massive increases in foreign currency inflows resulting from exploitation of newly found resources such as oil and gas or special metals such as diamonds, gold and others. As the hard currency inflows surge from exports of the new resource, the local currency appreciates thus making imports cheaper while, at the same time making the country 's non resource exports uncompetitive.
This can result in the decimation of sectors such as agriculture and manufacturing whose contribution to national GDP may decline sharply thereby undermining the economy's diversification and making it increasingly vulnerable to the volatility of globally determined commodity prices. In some sub-Saharan African countries such as oil dependant Nigeria and Angola, receipts from oil exports account for as much as 90% of exports and more than 75% of government revenues resulting in severe fiscal and currency convulsions when commodity prices collapse.
It may not always remain like that. A strong case has been advanced to the effect that in twenty years, close to half of the world's countries could depend on their resource endowments for growth. This is premised on the expectation that the commodity cycle reversals seen in recent years will be reversed as the demand for resources surges, driven by rising affluence in key countries, such as India and China. Dobbs, Manyika, and Woetzel estimate that the global steel production rose 82 per cent between 2000 and 2012, and they expect demand for steel to increase by another 80 per cent in the next twenty years. 7 Even with prospects of technology-driven improved productivity in resource utilization, the inevitable reality is that with an expected addition of 2–3 billion people to the global urban middle class over the next twenty years, the demand for sub-Saharan Africa's natural resources in the mining, oil, and gas sectors will rise sharply, lifting African economies in the process. The expected 'resource revolution' will lift all boats, not just productivity, as the demand for energy- and mineral-based raw materials to power the resultant infrastructure upsurge will skyrocket.
Significant opportunities exist in the resource sector in most sub-Saharan African countries. Tanzania, Mozambique, Angola, and Uganda are poised to be the next hydrocarbon powerhouses in Africa, although further exploration may reveal other potential giants in this sector. Sudan, the Democratic Republic of the Congo, and Zimbabwe hold great promise in the resource sector as well. It is accepted that in the short term, commodity prices may remain depressed as is being experienced now with the wobbliness in the Chinese economy. It is an undisputed fact that most resource commodities are a China play, given the fact that China is the largest driver of resource demand in the world and that China's resource quest has driven resource prices up.
The current collapse in commodity prices that is hammering the currencies of resource-dependent sub-Saharan African countries, such as Zambia, Ghana, Angola, South Africa, and Nigeria, is expected to abate in the medium term as the Chinese economy recovers its balance. The recent problems facing the Chinese economy, while serious for the world economy, must be kept in proper perspective. With a US$13 trillion economy growing at the downward revised rate of around 6 to 7 percent going forward, this growth rate is equivalent to the creation of two South African economies every single year! Now that puts the Chinese economic challenges into sobering perspective for sub-Saharan Africa!
It is clear, however, that the destabilization of commodity-dependent economies should constitute a serious wake-up call to the rest of sub-Saharan African countries to diversify their economies away from dependence on extractive industries, which are subject to the vagaries of global commodity cycles.
The world is going to go seriously short of arable agricultural land as demand for food rises sharply, driven by the dramatic rise in the population of the urban middle classes of the new economic superpowers in Asia. Sub-Saharan Africa stands to benefit enormously from this shortage of arable land as Africa's share of the world's total amount of uncultivated, arable land stands around 60 per cent. 10 This is remarkable, considering that the whole of the African continent has only 20 per cent of the world's land mass. The value of arable land across sub-Saharan Africa is set to skyrocket over the next twenty to thirty years as food prices rise in the wake of increased demand. This could be a once-in-a-generation opportunity for investors as well as for African nations. This is indeed a large buffalo herd of extraordinary size and potential value!
Agriculture represents Africa's largest economic sector, employing an estimated 70 per cent of Africa's workforce, but due to poor productivity, it contributes only 15 per cent to Africa's GDP. It is estimated, for example, that cereal yields in Africa are only about 1,500 kilograms per hectare — the lowest in the world — and only one-third of the rest of the emerging countries. Africa currently imports $30 billion worth of food each year, and the demand for food is set to increase dramatically, as the population explosion in sub-Saharan Africa becomes a reality and as the diets improve with the growth of the middle class across rapidly growing African urban populations, served by an expanding network of retail outlets and efficient food distributors. Just modest improvements in agricultural productivity across key countries in sub-Saharan Africa will bring significant benefits to both investors and African economies.
Countries such as Nigeria, South Sudan, Zimbabwe, the DRC, Zambia, and Tanzania, which have large tracts of arable, uncultivated land and abundant sources of water for irrigation, constitute the most attractive potential investment destinations for investors looking to invest in agriculture in the subregion.
By most measures, including the World Bank estimates, sub-Saharan Africa ranks consistently at the bottom of all developing regions in terms of infrastructure development and performance. This situation has had major adverse impact on the region's growth prospects.
While Africa currently spends US$50 billion per annum on infrastructure, the World Economic Forum estimates that US$100 billion needs to be spent each year if the widening infrastructure gap is to be meaningfully adressed. It has been estimated that the current infrastructure deficit in Africa stands at US$900 billion.
Four major areas that present large opportunities for investment are as follows:
power (electricity, gas, wind, solar)
water and sanitation
information and communication infrastructure
I will look at the first three sectors in this chapter and at the fourth sector in the next chapter.
It has been estimated that sub-Saharan Africa's combined consumption of electricity in 2010 — at 423 terawatt hours per annum — was less than Brazil's 426 terawatt hours. About 45 per cent of sub-Saharan Africa's power-generating capacity is in South Africa alone, and if this was taken out of the equation, the rest of the region's power generation (including the whole of Nigeria) would be less than that of New York City! In 2010 sub-Saharan Africa consumed only 55 per cent of India's energy consumption and only 11 per cent of the USA's consumption. It is further estimated that by 2040 sub-Saharan Africa's demand for power will reach a level equal to the 2010 consumption of India and Latin America combined, or 1,601 terawatt hours per annum — a 378 per cent increase over a period of thirty years. This has been estimated to represent an investment opportunity of US$800 billion. There are, of course, enormous differences across sub-Saharan Africa with regards to the status of power generation and consumption. As former Nigerian Finance minister –Ngozi Okonjo-Iweala points out in her book Reforming The Unreformable: Lessons from Nigeria-Nigeria's per capita consumption of electricity at 121 kilowatt hours(kWh) is below the average of low income countries(which stands at 317 kWh) and only a tiny fraction of the 3,800 kWh per capita consumption in South Africa
This is the size of the opportunity in sub-Saharan Africa's power sector, which must, of necessity, include hydro, coal, gas, solar, wind, nuclear, geothermal, and imported fuels. It is further projected that while in 2010 Africa's power sources were largely coal (51 per cent), nuclear (21 per cent, mainly South Africa), imported fuels (19 per cent), gas (6 per cent) and hydro (3 per cent), by 2040 the three largest sources of power in sub-Saharan Africa will be gas (44 per cent), coal (23 per cent), and nuclear (16 per cent).
Rapid advancement in solar technology, accompanied by dramatic cost improvements, could herald hitherto unimaginable progress in efforts to power sub-Saharan Africa using readily available solar energy. Economist Jeremy Rifkin has estimated, for example, that in 1976 it cost US$76 to create one watt of electricity from solar power, but now it costs only $0.36. 17 Elon Musk, the founder of Tesla, is well on his way to launching his Powerwall solar-based battery that could have revolutionary implications on energy availability across sub-Saharan Africa.
These statistics point to the existence of truly gigantic investment opportunities in the power sector in sub-Saharan Africa. When one takes into account the fact that as of 2010 over 600 million people in sub-Saharan Africa did not have access to electricity (over 60 per cent of the population), then this must represent one of the largest investment opportunities ever for investors, local and foreign.
Africa has the world's largest potential sources of renewable energy, given the expansive Sahara Desert, strong winds along the long African coastline, the savannah, large river systems, and the geothermal reserves along the Rift Valley and at other locations across Africa.
For wind and solar energy, the largest opportunities for investment in renewable energy exist in the following countries across the subregion: South Africa, Namibia, Somalia, Chad, Niger, Mozambique, Kenya, and Ethiopia. The largest opportunity for hydropower generation lies in the Democratic Republic of the Congo.
Forward-looking visionaries have already started scoping the huge opportunities that lie in the renewable energy sector. Zimbabwe's business icon Strive Masiyiwa is convinced, for example, that what was experienced in the mobile sector will be repeated in the energy sector, where new technology breakthroughs will make energy accessible to everyone across sub-Saharan Africa.
Water and Sanitation
Africa has a desperate need for clean potable water and sanitation infrastructure, particularly as urbanization accelerates at unprecedented levels. United Nations statistics show that sub-Saharan Africa has the lowest safe drinking water coverage of any region, with only 61 per cent of the population having access to safe drinking water in 2010 compared to 89 per cent world average and 99 per cent in developed regions of the world.
While an average of 63 per cent of the world population has access to acceptable sanitation standards, only 30 per cent of sub-Saharan Africa's population had adequate sanitation coverage as of 2010. An estimated 25 per cent of the region's population practise open defecation, and with rapid population increase, this number increased by 33 million people between 1990 and 2010.
These statistics suggest that a considerable opportunity exists in the area of provision of safe drinking water and adequate sanitation, and these opportunities are magnified by rapid rural to urban migration and rapid population growth.
Transport and Logistics
A huge gap exists in sub-Saharan Africa's supply and demand for road, rail, air, and water transportation — a gap that creates significant opportunities for investors. It has been estimated that Africa has 204 kilometres of road per 1,000 square kilometres of land area compared to a world average of 944 kilometres of road per 1,000 square kilometers of land area — a deficit of close to 80 per cent.
Given the projection that air passengers will double every decade for the next forty years and that car ownership will multiply more than tenfold during the same period, this means that the demand for roads and adequate airports will escalate over the next forty years.
As the oil and gas industry grows and as intra-African trade expands, the need for expanded logistics hubs, such as gas and oil pipelines, ports and transportation hubs will become imperative and will, as a consequence, create new investment opportunities across the region.
The implications of these infrastructure demands on sectors such as cement and steel manufacturing and the general construction industries are far-reaching.
In its first comprehensive report on opportunities for growth in the tourism sector in sub-Saharan Africa released in October 2013, the Word Bank estimated that tourist arrivals in the region grew 300 per cent between 1990 and 2012, with 33.8 million tourists visiting the region in 2012 (up from 6.7 million in 1990) and with tourism-related receipts amounting to US$36 billion in that year alone. The report makes the following projections regarding in that year alone. 22 The report makes the following projections regarding tourism potential in sub-Saharan Africa:
About 3.8 million jobs could be created by the tourism industry by 2021.
More than 16 million people are expected to be employed directly and indirectly as a result of travel and tourism by 2021. One in twenty jobs in sub-Saharan Africa is in travel and tourism.
By 2021, about 75 per cent of all tourists to Africa will be intraregional African travellers.
In 2011, only twenty-three international hotel corporations were operating in sub-Saharan Africa.
Only 10 per cent of sub-Saharan Africa's 390,000 hotel rooms are estimated to meet international standards, and 50 per cent of these are in South Africa as of 2010.
Airfares in Africa are almost 50 per cent higher than elsewhere, and charter tours are 20–30 per cent more expensive than comparable destinations in other parts of the world.
Despite having 15 per cent of the world population, the continent is served by only 4 per cent of the world's scheduled air service seats.
Excerpted from Savannah Protocols by Joe Mutizwa. Copyright © 2015 Joe Mutizwa. Excerpted by permission of Partridge Africa.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
Part One: The Opportunities, 1,
1. Lions Follow Buffalo Herds, 5,
2. Crocodiles of the Rift Valley Are Always Present at the Migrations, 18,
3. Vultures Know Where the Opportunities Lie, 31,
Part Two: The Business Risks in Sub-Saharan Africa, 37,
4. Laughing Hyenas Are Not Your Friends, 39,
5. When Two Elephants Fight, the Grass Gets Hurt, 46,
6. The Jungle Is Stronger Than the Elephant, 53,
Part Three: The Need for Due Diligence, 57,
7. Beehives Can Be Home to Both the Honeybee and the Snake at the Same Time, 58,
8. The Leopard Does Not Change Its Spots, 63,
Part Four: Risk Mitigation Strategies, 69,
9. A Colony of Mice Has No Granary, 71,
10. The African Fish Eagle Is an Efficient Predator Because Fishing Is Its Core Competence, 73,
11. Pythons Swallow Porcupines at Great Risk, 80,
12. Impalas Are Not Fat for a Reason, 83,
13. It Is Speed and Agility That Give the Cheetah a Deadly Advantage, 88,
14. Shrewd Birds Build Their Nests with the Feathers of Other Birds, 92,
15. When Spiderwebs Unite, They Can Tie Up a Lion, 97,
16. The Camel and the Cockroach Have a Common Trait—Resilience, 102,
17. The Best Time to Fold a Bull's Hide Is When It Is Fresh, 107,
18. When You Are in a Tough Neighbourhood, Learn from the Honey Badger, 113,
19. Go to the Ant, Thou Sluggard, 117,
About the Author, 131,