Monday, 23 January 2012

Africa: the next big investment story


Welcome to Africa, the Dark Continent with a bright future. Just a short decade ago, Africa was the “hopeless continent.”  However, it has turned the corner and is now “the hopeful continent.” And given the state of things, such bold statements about the continent are likely to become common place. It is the next big investment story. Some analaysts call it the " final frontier."

 What has happened? How did Africa turn its fortunes so fast?  Four things happened. No. five namely:  Africa’s isolation; the rise in commodity prices; good house keeping; Economic growth and the entry of China as an investor in the continent. And finally, frequent economic meltdowns in the North.

Africa has a low correlation with the global economy. Consequently, the continent is not significantly affected by economic crises in the north. In the last decade or so Africa has shrugged off three global economic meltdowns that devastated the rest of the world.

In 1997, Africa shrugged off the financial market meltdown that devastated financial markets in Asia, Europe and the USA. Four years later in 2001, the continent again escaped the dotcom meltdown unscathed.

The dotcom meltdown was in fact a blessing in disguise for Africa. Small homebred ICT companies exploited the opportunity to grow into Mega corps. Today, Africa’s largest cellular phone companies were brewed in Africa. According to GSM association, there were 650 million subscribers in Africa by the end of 2011 and the number is expected to grow to 735 million by the end of 2012. This is a 64 per cent penetration rate, perhaps as high as in the North if not higher. 

This huge number is shared among three largest homebred Mobile providers and their smaller relatives. The largest of these is South Africa’s MTN which has grown into a Trans-national Corporation, controlling more than 150 million subscribers in Africa, Middle East and East Asia in just about 15 years. Egypt’s Orascom is second and then in third place is a company that keeps changing hands, now Airtel. Airtel was originally a homebred Company known as Celtel with a foot print in 15 African countries.  Europe’s Vodafone and Orange have some presence in Africa but probably are not among the top five players in the continent.

The second reason: economic growth. Over the past decade six of the world’s ten fastest-growing countries were African, says the Economist. “In eight of the past ten years, Africa has grown faster than East Asia, including Japan. This growth has added another 60 million to Africa’s middle class whose per capita is $3,000. This number is expected to rise to 100 million in 2015, says the Economist. Other analysts say that many countries in the continent will post 7 per cent growth rates into the future.

The commodities boom is partly responsible. In 2000-08 around a quarter of Africa’s growth came from higher revenues from natural resources.  Other factors include the growth of local enterprises which reduced profit repatriation. Africa has witnessed a rapid growth of highly profitable local enterprises, spread across all sectors, which boosted employment, tax revenue collection and domestic investment as they invested in further growth.  

Governments too have put their houses in order thus reducing wastage of public resources. This resulted in huge investments in infrastructure - roads, rails, Hydro-electric dams, name them. Infrastructure has been the Achilles heel in Africa’s progress. So the rapid investment in infrastructure has improved the quality of life for African by; cutting the cost of doing business, opened up some areas for exploitation and created millions of new jobs.  Almost every country in Africa is now engaged in Major infrastructure project be it roads, railways, airports, hydro dams geothermal projects.

In East Africa, the trend is to build roads Airports and Railways lines almost simultaneously. Tanzania, Uganda and Burundi are jointly sourcing for funds to build a railway line connecting Tanzania’s Port of Tanga in the Indian Ocean to Musoma on Lake Victoria, some 880KM, inland. The US$4.7 billion line will serve landlocked Rwanda, Burundi and Uganda.

Next door, Kenya has finalized feasibility study for the construction of Port of Lamu and more than 1000KM Standard Gauge Railway line connecting the Port with Juba in landlocked South Sudan. The entire project will cost an estimated US$8.1 billion. A 1500 KM oil Pipeline from South Sudan to Lamu Port which has been in the drawing board for a long time, now looks feasible.
 Further North, Ethiopia is also going full steam building a 659 KM Railway line Connecting Addis- Ababa with the port of Djibouti on the Red sea. Ethiopia, Jointly with Kenya have just acquired US$360 million funding from African development Bank to Build a 320 KM road linking the two countries.

Joint Application for funds to build infrastructure projects of mutual benefit, is hastening infrastructure development in Africa.  It is also opening up trade links in the continent. Intra-Africa trade, though still a small proportion, compared to trade between Africa and the world is picking up. Trade within the East Africa common market region has already hit US$2.5 billion a year and is growing.

In its drive to develop infrastructure, African governments are becoming focused and impatient with laggards. In fact, the largest financiers of the on-going projects are China and African Development Bank. The north is increasingly being replaced- mainly because of the slow –decision making habits.

Infrastructure development has the greatest investment potential in Africa. Demand for infrastructure is very high, way beyond the governments’ ability to provide leading a paradigm shift to include the private sector in Infrastructure development. So far, only the telecommunications sector is largely in private hands. And their earnings are mouth watering.
 Studies show that other infrastructure sectors are also profitable with IRRs ranging between 16 percent and 25 percent. Capital markets in Africa are vibrant and sufficiently sophisticated to mobilize funds for infrastructure projects. Funds managers out there are you listening?


Monday, 16 January 2012

Inflation in East Africa expected to shrink


Thanks to goods rains. The dams are full, farms are rich with crop and there is plenty of fodder for the livestock and the beast of the wild. Inflation in East Africa is set to decline significantly beginning the end of this month, we can report. So far, prices of food, fuel and electricity are inching down.  And these are the drivers of inflation in the region.

Poor rains in the last season resulted in poor crop yields, parched fields and drying up water reservoirs. Coupled with instability in the foreign market and a rising crude prices, inflation in East Africa went wild, rising from single digit figures to the late teens in Tanzania and Kenya, and up to 30 percent in Uganda in ten months.

 In Kenya inflation is has peaked at 19.72 per cent recorded at the end of November, It peaked at 30 per cent in Uganda and in Tanzania, it is expected to peak at 19.2 per cent posted in November.

By the end of December 2011, deflation picked up pace going down to 18.76 per cent in Kenya and 27 percent in Uganda. It is not clear how inflation behaved in Tanzania since records are not available. However, the Tanzanian shilling has strengthened against all major currencies since November 2011 rising 5.2 per cent against the US dollar and a similar rate against the Euro and the British Pound.

 Unstable currencies were among the causes of rising inflation. This means that their appreciation against world currencies will result in weaker inflationary pressures at home.

Food, energy, and fuel the culprits in the misery that East Africans suffered for the whole of last year are also posting downward trend. This downward crawl in prices is expected to turn into a stampede, reaching, experts say, a single digit by the second half of 2012.
Already electricity and fuel costs are beginning to shed some weight. Staple food prices have also followed suit, bringing some welcome relief to consumers.

Such declines will be boosted by ripening food crops come January and February which, experts say, will see inflation shrink.

Kenya is expected to drive the deflationary war in the region. This is because inflation in Kenya was driven by among other variables, the weakening shilling.  Although the shilling is still roughly 3.5 percent weaker than the US dollar at this time last year, it has recovered from being the worst performing currency in the world, to being the best performing against the dollar.

The shilling has recovered 21 per cent over the last eight weeks to sh87.5 to the dollar from shs107 to the dollar in October. The appreciation of the shilling has resulted in a 9.7 per cent decline in Pump prices in the last two months. This decline, though small, is seen as a signal for better things to come. Other things being equal further reductions are expected.
Kenya, the leading economy in the region, also exports her inflationary pressures to her neighbours who consume 50 per cent of her industrial output. The country depends largely on hydro generated electricity. During droughts, the dam levels decline, leading to a decline in electricity generating capacity.

To bridge the gap, the country results to expensive thermal power the cost of which is passed on to the consumer. The consumers, especially the manufacturing sector respond by raising the prices of their goods.

Now with dams full, thermal power plants must take a break. This will lower the cost of electricity significantly. In fact the cost of fuel exceeds the cost of power in power bills. So removal of fuel prices will mean lower prices and more electricity for the given amount of money- a welcome relief to hard pressed domestic consumers who bear the brunt of inflation.

Lower energy prices cut the cost of production for manufactured goods and hence motivates cut in prices of consumer goods.  From next year, Kenya goods will be cheap in the regional market which will be a relief for consumers in the regional markets. That is how Kenya spreads her problems and gains to the region.

Are we looking at a vibrant economic growth in the 130 million people market? Probably! The region has enjoyed a decade of vibrant economic growth, posting on average 6.1 per cent. However, the drought last year changed all that, and growth is expected to have slowed to around 5.0 per cent this year.

Next year, being the second full-year of the operation of the East Africa Common market is expected to bring in good tidings for region. 

Thursday, 12 January 2012

Whimsical protectionism engenders poverty In Tanzania


President Jakaya mrisho Kikwete of Tanzania:
The Political class is hurting Tanzania's interests

I define whimsical protection as a form of protection that is not based on economic factors. It is impulsive and erratic and does not engender any economic benefits on the protected country or society.

 In worst case scenario it stalls; investment, technology transfer, production and skills acquisition in a country. It is a recipe for deeper poverty and underdevelopment.

Such is the case with Tanzania, a country in East Africa. Although the second largest economy in the 130 million people East Africa Common market bloc, she is the laggard. 

Protectionism initially served a purpose. Her weak manufacturing sector needed some form of protection from the stronger Kenyan manufacturing sector. This resulted in asymmetrical tax system in which Kenyan exports were taxed at 90 per cent discount while Tanzania and Uganda Exports came to Kenya tax free.

This resulted in a 2000 per cent rise Tanzania’s formal exports to Kenya between 1996 and 2010.  Official data shows that Tanzanian exports to Kenya stood US$6.6 million in 1996 -the first full year of the operation of the EA Customs Union to US$135.4 million in 2010. Official Kenyan Data shows that Tanzania‘s exports to Kenya in the first half of 2011, stood at US$112 million, exceeding exports for the whole of 2009. Such growth would not have been possible without some form of protection for the weak Tanzanian manufacturing sector.

But it is also a signal that the sector has come of age and should now be allowed to compete on an equal keel. In fact, the economic reason for protection is no more. But there are capricious reasons for it. And these do more harm to Tanzania than good.

Tanzania’s concerns graduated to “Kenya Phobia.” According to Kenyan officials, “Tanzanians always think the first beneficiary of any progress in the region is Kenya. So they simply reject things out of hand.”  And they are hurting their country’s interests.

The latest step is her refusal to ratify discussion on the proposed political Union in the region due to the issue on Land. The Proposed document wants the citizens of the East African common market to be free to own land anywhere in the bloc. “No says Tanzania. Our land is for Tanzanians only.” A month ago, Tanzanian government officials minced no words accusing some unnamed countries of “greedily eyeing our land. We shall not bulge,” they told the local media.

Kenyan officials familiar with Tanzania’s capricious nature say that in Tanzanian parlance “other countries” means Kenya. Kenyan officials dismiss this as “Kenya phobia and myopic stance.”

Owing to this “phobia” especially among the political class, Tanzania has made bad decisions against its leading market in Africa- Kenya in particular. In 2001, Tanzania pulled out of COMESA trading bloc citing the cost of fees in several blocs, preferring to remain in SADC.

That was strange since SADC was not a significant market for Tanzania. The immediate result, Tanzania lost a significant market in Burundi. The move, unconfirmed reports say, was due to a spat between a Kenya firm and a Tanzanian Cabinet minister.

 In 2002, Kenya’ Airways’ (KQ) bid to buy Air Tanzania Corporation, ATC, was frustrated by politicians who preferred South African Airways(SAA), despite advice by ATC management to sale the airline to KQ. At that time politicians argued Kenya was only interested in Tanzania’s tourism circuit.

ATC was sold to SAA for a whopping $20 million. This was an imprudent decision since SAA itself was in financial doldrums owing to an investment gone awry. Five years down the road, the marriage collapsed and ATC was returned to Tanzania. By then, KQ, which bought a privately owned Tanzanian airline, Precision air, had completely dominated the Tanzanian airspace. ATC could not even find an elbow room in the lucrative domestic routes.  Now, ATC‘s survival is in doubt for it depends on government support to remain air bone.

 Two, years ago, a Tanzanian Cabinet minister was embroiled in a dispute wit a Kenyan firm, Brookside dairies. The firm bought a Tanzanian milk processor, but soon discovered that the farmers there could not deliver enough milk to keep the firm afloat.  It opted to process the 12,000 litres it collected in Tanzania in Kenya since that was a cheaper option.

The minister wanted the factory repossessed although he knew very well that the farmers in Tanzania could not supply the 60,000 litres it needed to operate profitably. The Solution was simple: Mobilise farmers to produce more milk. If necessary, he should have called for importation of skills from Kenya to teach them animal husbandry. That was not popular.

According to a recent report in the Financial Times, Kenyan employees cannot be allowed to work in Tanzania freely. This has forced some investors to look elsewhere in the region.  Consequently, Tanzania is no longer an exciting destination for Kenyan investors. In the mid 1990s and early 200s, Kenyan investors trooped to Tanzania in droves, making Kenya the second largest investor in Tanzania after Britain.

Most are now pulling out. The latest investor to pull out was East African Breweries which sold its 20 per cent stake in Tanzania breweries. There were other smaller investors who have pulled out too. Although Data is not readily available there are indications that Kenyan investors are looking elsewhere and that the flow of Kenyan investment funds has slowed down.

Those that remain are keeping their investment levels low. Kenya’s most aggressive expansionists are in the banking industry. And they appear to be reluctant entrants into the Tanzanian market. Major Kenyan retail outlets have opened a branch each in a country of 40 million people. Nakumatt Limited, has just set up shop in Arusha while uchumi supermarket has a branch in Dar-Es salaam. All complain of delays in getting work permits for Key staff

The financial sector appears to be looking elsewhere. Kenya Commercial bank, the first Kenyan Bank to venture into the Tanzanian market in the 1990s boasts of only 11 branches in Tanzania. At the same time she boasts of 14 branches in Uganda; 19 in South Sudan and 9 in Rwanda. It is noteworthy that KCB entered the latter three markets years after it set up shop in Tanzania.

Equity Bank, the fastest growing bank in the region boasts of 38 branches in Uganda and 4 in South Sudan. It has its eyes trained on Tanzania and Rwanda but Rwanda is higher in the radar than Tanzania.

Tanzania did not read the writing on the wall.The expansion of the East African community to include Rwanda and Burundi and the birth of South Sudan spelt trouble for her, say analysts. Initially Tanzania and Uganda were the favoured destinations for Kenyan investors. However, the entry of the three new countries into the market changed the equation. While Uganda is still attractive, Tanzania is sliding lower in the scales as the new entrants roll out the red carpet for Kenyan investors.  

Tanzania, as a virgin investment destination will therefore have to compete with other virgins in the region for one suitor. Is she ready to be the third or fourth wife? Only time will tell. But as politicians chest thumb and fight ghosts, Tanzanians are definitely losing out!

Thursday, 5 January 2012

Africa’s largest wind Power farm set to start


A wind power farm: LWTP is building a similar project.

Kenya, East Africa’s largest economy is weaning itself from dependence on hydro-generated electric power. She is now turning to other renewable sources of energy such as wind and thermal power.
The country 1173 MW and consumes almost the entire lost leaving no excess capacity. Electricity generation requires excess capacity to deal with any unforeseen occurrences. Kenya’s second wind power farm will come on stream at the third quarter of 2012.  
Of the 1173 MW generated an estimated 400Mw is hydro, some 200 MW is generated from Geothermal and the rest is met by expensive Thermal energy plus some little imports from Tanzania and Uganda.

Consequently, the country sole power generator, KenGen, is running full steam working on clean energy sources. Among these are Geothermal from which it expects to generate some additional 4000 MW in the next four years. It has started a small-scale wind power which is already feeding 13.5 MW into the national grid. The first wind power farm came on stream in 2009

A second wind farm, owned by the private sector, is expected to come on stream later this year. It is by far the largest wind power farm in Africa. Known as Lake Turkana wind power (LWTP) project, it will produce 300MW of electric power a year and effectively retire expensive-diesel powered electric power.

This will catapult Kenya into the Pole Position as the greatest producer of clean power in Africa. The € 600 million wind farm will produce the cheapest power in Kenya at €0.0752 per kilowatt hour.

 Lake Turkana, from which the farm derives its name, is located some 500Km North West of Nairobi, the Capital. The farm has already signed a fixed Power Purchase Agreement with Kenya power and Lighting Company, KPLC, the national power distribution agency. The 20-year agreement stipulates that KPLC will pay this 7.52 Euro cents per KWh for the 55 per cent load factor and Euro cents 3.76 for any quantity above the 55 per cent load factor.

LWTP is upbeat that after years of painstaking preparations it has crossed the final hurdle and will soon come on stream. The hurdle was a demand for a sovereign guarantee against political and other risks in addition to the PPA. That was granted a year ago by the Kenya government opening the way for closing of the financing deal.

That deal, according to company officials, will be closed by March/April this year. The deal will enable LWTP to produce the first 50 megawatts (MW) of electricity in the third quarter rising to full capacity a year later. Lake Turkana Wind Power will build at least 353 wind turbines each with a generating capacity of 850 KW of electricity.

The farm, once on stream will supply of 22 per cent Kenya’s electricity demand. In addition, the country is expected to bring on stream a further 400MW geothermal power in the next four years. It is not clear, how much potential wind power holds as a potential for Kenya as a source of energy. Kenya has an estimated potential to produce 7000MW of geothermal energy, said the Minister for energy, Kiraitu Muriungi.

The Turkana wind farm is a private Company that need government guarantees in order to attract financiers. It is right from its conception in 2004, been financed through a complex financing model which began with raising the seed money to raising funds through private placements to finance each milestone in its development.

The final stage is being financed through a 30 per cent syndicated loan arranged by the African Development Bank (AfDB). Other financiers are the Standard and Ned banks of South Africa, BKF, a Danish development bank and the European Investment Bank who will pump in €42.8 million.

The project is 51 per cent owned by Aldywich International, South Africa’s IDB (25 per cent), Pan Africa Investment Development Fund and Vestas— the leading Danish manufacturer of wind turbines (12.5 per cent) and the six co-founders (6.5 per cent).

Wind power, coupled with geothermal and  hydro-electric power that already accounts for more than 70 per cent of Kenya’s electricity demand, will  make Kenya nearly 100 per cent dependent on environmentally-friendly energy sources and eliminate power  fluctuation in output from hydro sources. Currently, it uses Thermal power to smooth out fluctuations.