From half a dozen cars to a $300 million enterprise Keeping the lights on in East Africa Can Africa’s boom be sustained? Controlled Distribution UK & RSA Issue 06 \ December 2012
Business | Entrepreneurship | Innovation | Investment | Lifestyle
4 \ Contents \ December 2012
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CONTENTS 16
Regulars
Features
6 News & analysis
14 The Missing Middle
Recent developments from Sub-Saharan Africa.
Soula Proxenos of International Housing Solutions sees a gap in the market when it comes to building the suburbs for Africa’s new middle class.
30 Destination: Malawi Find out more about this month’s destination, Malawi - The warm heart of Africa.
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20
Fracking the Karoo
Anton Bredell, Minister of Environment for Western Cape looks at shale gas extraction in the Karoo. He discusses the opportunities, risks and potential windfall for South Africa and the regions.
“Agribusiness is an area I’m particularly looking into at the moment. In terms of productivity, I don’t think agriculture in Africa is that inefficient.” - Takuma Kinjo
16 From half a dozen cars to a $300m business Yuko Takeo interviews Takuma Kinjo, the man who has built up a significant African business from humble beginnings in less than a decade.
Interview
From half a dozen cars to a $300 million enterprise
Keeping the lights on in East Africa Mark Kapchanga examines the latest major infrastructure projects and the challenges in supplying the power needed by the region to sustain rapid economic development.
14
The Missing Middle “[IHS] must be certain that a country’s institutions will be able to protect the capital invested...And institutions must have the wherewithal to actually pull the whole deal together.”- Soula Proxenos
22 Power hungry African countries turn East
Business
Washington Gikunju looks at the latest developments in dam building and considers whether nuclear is the answer for Kenya.
12 Building Africa’s malls Derrick Roper of Novare Equity Partners looks at the challenges and potential of new malls in Sub-Saharan Africa to service the booming new middle class.
24
Designing Africa’s new hotels
Paul Gardiner of Mantis Hotels discusses the massive potential of Nigeria’s luxury hotel market and his company’s new strategy.
20
Keeping the lights on “We cannot keep talking about making Kenya a middle-class income nation by 2030 if we cannot create a [more] conducive business environment.” - Betty Maina
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GatewayToAfrica.com is a multi-platform title for businesses looking to take part in expansion opportunities in Sub-Saharan Africa Editor: Jeremy Kuper Publisher: Gordon Glyn-Jones Art Director: Jackie Lampard Sub-Editor: Paul Christopher Daniels Contributors: Washington Gikunju, Mark Kapchanga, Milton Lindsay, Yukuo Takeo and Jessica Tasman-Jones Illustrator: Jackie Lampard Directors: P Atherton, J Durrant, N Durrant and R Phillips
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Bull Market: Is Africa’s boom sustainable? Leading economist Ann Pettifor gives her views on whether Africa’s growth is more than just a fad.
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6 \ News \ December 2012
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NEWS AND ANALYSIS:
NEWS IN BRIEF Recent developments from Sub-Saharan Africa
Systematic failures push Transnet’s SA pipeline over budget Last month, Public Enterprises Minister Malusi Gigaba stated there were “systematic failings” by all key players in Transnet’s new multi-product pipeline, leading to the project going R14bn (US$1.58bn) over budget and running three years behind schedule. The 705 km pipeline is being built to transport refined products from Durban to Johannesburg. The review of the situation was completed in December 2011, but it has taken a year for the first comments to be made public. It found that, “the project management setup within Transnet Capital Projects lacked sufficient capacity and depth of experience for the client overview of a megaproject of this complexity.” Such bad project management led to “an overreliance on the Engineering, Procurement and Construction Management (EPCM) contractor.”
Pipelines cause delays (Image by Shutterstock)
Trafigura under the microscope Breaching US Federal bribery laws in Africa can have long-term repurcussions. In the not too distant African past, unscrupulous operators like Tiny Rowland – who the British Prime Minister Edward Heath called “the unacceptable face of capitalism” – once bought power, influence and the odd mineral concession through ties to corrupt leaders. Today’s Africa is changing, largely due to US and EU antibribery legislation. From a legal perspective, individual executives working for multinational companies operating in America or Europe can be prosecuted for bribery committed elsewhere in the world. The Guardian’s latest report that commodities trading company Trafigura is being investigated over its role in a $500m diesel and petrol supply deal in Zambia should serve as a warning to companies operating in Africa.
US Chamber of Commerce (Image by Picasa 2.7)
New Council paves way for US businesses in South Africa The US Chamber of Commerce’s African Business Initiative launched the US – South Africa Business Council in order to jumpstart increased bilateral trade and outperform other countries investing in the growing South African economy by offering superior goods and services. The Business Council will highlight America’s commercial interest in the continent by expanding the commercial relationship between the two countries along with an increased trade. This will involve creating advancing policies in Washington that will support trade with Africa. A sustainable dialogue between the US and Southern African countries on trade and investment. Pushing for clarity and increased consistency on the scoring of equity equivalency requirement of black economic empowerment. Protecting intellectual property rights as a foundation for investment; and working to ease labour laws to allow American companies to hire temporary workers for projects that support growth in South Africa.
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Sudan oil pipeline could re-open in weeks The oil pipeline between South Sudan and Sudan could re-open by the end of the year after constructive talks between the two governments ended in an apparent agreement at the end of November. South Sudan’s chief negotiator Pagan Amum said: “By the end of this year it is possible to load the first ship of oil, especially after the agreement in the meetings today and yesterday.” “We have been able to overcome all obstacles, more so than I was expecting personally,” he added. Under the peace agreement, the Juba government in the South is entitled to three-quarters of all revenues from Sudanese oil. But the shutting of the pipeline has hampered both economies as the Khartoum government in the North relies on revenue derived from leasing the pipeline to the South Sudan government.
Students at Makerere University win Microsoft grant Ugandan students create app for Microsoft. A team of three students from the college of computing and information sciences at Makerere University in Uganda have won a Microsoft grant. They received the award of $50,000 for their the ‘Winsenga’ app. Aaron Tushabe, Joshua Okello and Josiah Kavuma created an application designed to perform ultrasounds on pregnant women that can detect problems such as ectopic pregnancies or abnormal heart beats. The team, named Cipher256 were given the award at the social innovation summit on 4 December in Silicon Valley, California, USA. The grant is called the ‘Imagine Cup’ award and is part of Microsoft’s YouthSpark programme which is the company’s commitment to reach 300 million youths in the next three years through technology and training. As well as a cash prize they will receive software, cloud computing services, solution provider support and access to Microsoft Innovation centres. The money is provided so that the groups who win can run their projects as their own social enterprise or not-for-profit projects that address specific social issues. Maria Muzaaki, the communication officer for the college said: “We are grateful to Microsoft for giving these youths an opportunity to innovate and help the mothers around the world.”
Nigerian fuel subsidy in trouble (Image by crashdburnd)
Net 1 UEPS Technologies under investigation by US Government
Nigeria seeks Swiss help in fuel subsidy fraud
South Africa’s Net 1 UEPS Technologies faces a US Justice Department probe, the company revealed in December. The news that the JSE and Nasdaq-listed company was being investigated sent the value of their shares down more than 55 per cent. Net 1 won a multi-billion rand contract earlier in 2012 to set up a system for paying social grants in South Africa. The US Justice Department probe involves looking at this transaction to see if any corrupt payments were made to South African government officials. A statement from Net 1 UEPS Technologies to shareholders revealed that the company had received a letter from the Department of Justice (DoJ) saying that both the DoJ and the FBI were looking into whether Net 1, or any of its subsidiaries, officers, directors or employees were in violation of the US Foreign Corrupt Practices Act, or any other US Federal laws.
Nigerian fuel subsidy scheme, licence to embezzle? Nigerian investigators have asked Swiss authorities for assistance to unravel a huge potential fraud estimated to be in the region of US$6.8bn, equivalent to a quarter of the national budget. The Nigerian government called in Swiss government help after some Swiss oil trading housing refused to cooperate with the investigation. The Nigerian probe into the fraud began in January. Ibrahim Lamorde, chairman of Nigeria’s Economic and Financial Crimes Commission told the press that a request was made after some of the trading houses refused to provide certain documents.
US Justice Dept (Image by Coolcaesar)
Africa in numbers
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Democratic countries in Sub-Saharan Africa in 2012, compared with just 1 in 1992.
US$24 trillion
Untapped deposits of raw mineral ores in the ground in DRC.
475 million
Mobile connections in Africa (0.46 per person), compared to 12.3 million fixed lines. Highest proportion of mobiles vs. fixed lines in the world.
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NEWS & ANALYSIS:
Deloitte report highlights obstacles for mobile expansion African economic growth hampered by lack of mobile infrastructure by Jessica Tasman-Jones African governments are failing to capitalise on potential economic growth and job creation through a lack of investment in mobile internet technology, a Deloitte report released in November warns. Africa has experienced exponential growth in mobile technology with figures revealing 475 million mobile connections across the continent compared to just 12.3m fixed lines, the highest proportion of mobile versus fixed lines worldwide. The Deloitte report, commissioned by industry body GSMA, touts Sub-Saharan Africa as the fastest growing mobile market and states the mobile industry accounted for 4.5 per cent of Sub-Saharan GDP in 2011 and contributed £20bn to economies there, including £7.5bn in taxes. Mobile internet traffic is a particularly strong area of growth accounting for more than half of all web connectivity in African countries and is set to grow up to 46 per cent annually over the next four years. But mobile operators and development agencies alike warn high taxes on handsets and poor spectrum allocation threaten to curb this area of potential economic growth. Vice President for Sustainable Development at the World Bank, Rachel Kyte, says mobile web access can provide access to basic health information, ease the process of making cash payments and stimulate citizen involvement in democratic processes. In Zimbabwe and Nigeria, mobile already
accounts for 58.1 per cent and 57.9 per cent of web traffic respectively, compared to a 10 per cent global average. Norwegian mobile browser provider Opera attributes these types of figures to a lack of fixed-line infrastructure. The Norwegian company signed a deal with telecommunications provider Airtel in June to see its Mini Opera service, which compresses data up to 90 per cent, rolled out in 17 African countries. In Cote d’Ivoire, where it already has a presence, the number of Opera Mini users grew 600 per cent in one year, page views grew 744 per cent and data use grew 760 per cent. The amount of spectrum allocated to mobile services in Sub-Saharan Africa is currently amongst the lowest worldwide, with more developed markets allocating as much as six times the spectrum as some of the countries in the region. Deloitte telecommunications partner Chris Williams says in many Sub-Saharan African countries, mobile broadband is the only way to deliver internet to consumers, but unless spectrum allocation increases, costs of provision will rise, investment decisions will be impacted and network congestion increased. The GSMA report states complex and uncoordinated approval processes for tower and fibre deployment are the biggest obstacles to investment in the Sub-Saharan mobile community. It predicts if the top six markets released more spectrums the mobile industry could
Image by Vadim Lavrusik
fuel the growth of 14.9 million new jobs and create £21.2bn in sub-Saharan Africa between 2015 and 2020. According to Tom Phillips, Chief Government and Regulatory Affairs Officer at GSMA, mobile technology has “revolutionised” African society. Phillips says governments need to work with mobile operators to provide affordable options to connect citizens. In an effort to tap into economic development opportunities in the mobile web market infoDev, a grant programme managed by the World Bank, has collaborated with Nokia to establish mobile innovation hubs in Kenya and South Africa to train developers and incubate start-ups. Rachel Kyte of the World Bank says the challenge is to get local people, businesses and governments taking advantage of these opportunities and creating content relevant to their communities.
10 \ Views \ December 2012
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INTERVIEW: Minister Anton Bredell
Fracking the Karoo Anton Bredell Minister of Environment for the Western Cape speaks to Gateway to Africa
GTA: What is the timetable for the shale gas exploration in the Karoo and when is the initial probe due to start? Ja, well you must remember that’s the national government’s call, when they want to start. They’ve lifted the moratorium as you know. From the Western Cape’s side, we’re concerned, because[of] a huge portion of this exploration within the Karoo [is] within our jurisdiction. We’re trying to get our house in order and trying to get the conditions under which exploration must happen. I don’t think they will be ready within the next 12 months.
GTA: Can you tell us what your projections are for the amount of jobs that will be created? And where will these jobs be created as a result of the programme? Well that’s also a worrying factor, we can’t just base our decision on a possibility of jobs, and there’s huge rumours on jobs – anything from 300,000 to 850,000 jobs. Now obviously for our department and for the Western Cape Government jobs [are] very important, and to create jobs, is the only way we can get people out of poverty. But that can’t be the main factor. And I’m worried when people talk about jobs and we haven’t determined which jobs, what kind of intellect we need and so forth. And there’s different phases, as you know, within the exploration phase, there won’t be a lot of jobs. Only a few jobs will be created, and [the number of jobs
created is] going to [be] determined on the amount of gas they will find. Currently they talk about technically recoverable gas, 485 TCF (trillion cubic feet), but economically recoverable will be around 20 to 50 TCF. Now that’s a huge deposit, but it’s [dependent] on the gas that they’re going to find. Then there’s indirect jobs, there’s direct jobs coupled to this: The indirect jobs, the accommodation and so forth and the direct skills that we need. But if we look at the US experience, you will also see that when they’ve done the exploration there’s around about 11 jobs per site and when they find gas, then it can escalate. So it’s very premature to talk about jobs, except that jobs [are] very important and that’s the only way we can get people out of poverty.
GTA: What kinds of jobs will there be…will they be just very short term jobs? There’s all sorts of jobs. There’s [jobs] for engineering, for inspectors, for hardcore labour and so forth. It will be very short term. Also after they’ve found gas and they clear the site of all the drilling equipment and they begin extracting the gas there’s a maximum of 11 people involved per site. So, I think it’s very important that we now, [as] part of the way forward, first of all determine baselines for the Karoo. And determine the kind of jobs [needed], so that we can also train people, currently from the Karoo, to take up those kinds of jobs. Otherwise there will just be immigration, or an influx of people
coming from outside doing the jobs, and the whole argument of creating jobs and trying to lift the Karoo out of poverty will be lost.
GTA: But how can you assure the public that the aquifers won’t be damaged and the water supply won’t be polluted? Actually, I don’t think anybody can assure the public that. You’re quite right from your summary, it’s a water scarce area. The amount of water [and] the quality of water [are] very important. To protect the aquifer and long-term sustainability for the Karoo is crucial, and that’s why we’re saying the argument is not so much about the water that you can bring back, or [that will] come out. And [with that] kind of water, the technologies are there to recycle the water and so forth. My problem is that our studies must first of all prove it to us, that the water with the chemicals, with the sand that they pump down in the borehole. What about the water and the chemical stain [left] behind? That’s the big question and those kinds of pollution, that will end up polluting the aquifers and so forth if you can’t treat that. If you can’t get the factual situation right on what kind of mix of chemicals they put down, because they’re very secretive on those kind of issues. So from the Western Cape Government side, we’re very serious on protecting the underground water sources of the Karoo and that’s why, first of all, when you allow exploring, it must go hand in hand with a very strict research programme to
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determine precisely where the aquifers are [and] what’s going on underneath the surfaces of the Karoo, because we don’t have those studies, and those are being collected currently.
GTA: Can you trust Shell to ensure there won’t be any environmental damage? You can’t trust any private sector company to do only research, that’s why you’ve got the anti-fracking groups. You’ve got government. My side is from government and I said government needs to be responsible and we need to make sure we’ve got the intellect. We must make, first of all, use of our intellect and come up with the research to prove that there’s enough gas to explore; second of all that you can do it without destroying the Karoo and that is going to be government function.
[per cent] from nuclear, 9 per cent from renewables and one per cent from gas. And from the Western Cape side, we say that you need to up renewables and gas and bring down the dependence on coal. That is more or less our viewpoint. And if you go in with a zero-sum game with national government, it can end up in a lose-lose situation for everybody.
“We must make, first of all, use of our intellect and come up with the research to prove that there’s enough gas to explore; second of all that you can do it without destroying the Karoo and that is going to be government function.” - Anton Bredell, Minister of Environment Western Cape Government
GTA: Is there a chance that national government might decide to go ahead with fracking when you’re not entirely convinced? No, national government will determine whether they will allow the fracking or not, and they’ve put the moratorium on, and that was first of all a big problem, because within those 12 months there was no research done, no communication. But there’s a very strong anti-fracking group and they’ve got the right within our constitution and there’s a very complex legal system that you must go through. We’ve got land use planning. Where the local authorities, the district authorities as well as provincial authorities will have a say in. And there’s an appeal[s] process. It can be a very lengthy and legal process. National government is trying to come up also with legislation to try and trump some of these processes, so ja, it’s very early days, we will see how this plays out.
GTA: But you’ve already said that there’s no guarantee that there’ll be any jobs as a result of the fracking programmes, so why not embark on a renewable programme which could see far faster results and a far faster return on people being employed? Ja, quite right. Renewables is very high up on our agenda. Currently our energy mix is about 65 per cent from coal, 20
Listen to our podcast on fracking in the Karoo gatewaytoafrica.com/frackingpodcast
12 \ Business Life \ December 2012
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BUSINESS LIFE:
Building Africa’s malls Derrick Roper of Novare Equity Partners speaks to GTA about the challenges and rewards of building malls in Africa By Jeremy Kuper Novare Equity Partners are a South African company that build shopping centres and commercial developments outside of South Africa. “We are the main capital investors in these projects, and we then put everything together from the concept, the design, the whole development process,” says Derrick Roper the company’s CEO. Novare typically looks for pieces of land to buy or develop in partnership with locals. This involves working with some of the largest retailers in Africa, like Shoprite or Pick ’n Pay or Wallmart, who become anchor tenants for their new developments. “We would then basically do everything until the final product is there, leasing and then in the end – hopefully within 5 to 7 years exit these developments and sell them onto other institutional investors. Like pension funds or life assurance companies or any institution that’s interested in buying these finished products,” explains Roper. “So that’s what we do on a day-to-day basis – travel throughout Africa looking for
properties, developing properties.” Building malls in Lagos is “a lot more challenging,” than in Ladysmith. Aside from locating a suitable plot of land, the biggest obstacle is finding the owners of that land. It is easier to build malls in countries with a history of democracy that are more developed. Therefore, Novare generally concentrate their efforts on those countries with well-established systems of land registration, such as the former British colonies of Ghana and Nigeria. In other countries, “it’s a bit more problematic… you’d need to do thorough due diligence on the ownership of the land.” And this takes time and money Roper confides. “You don’t always need [local] partners,” but having good partners on the ground to work with “can be to your benefit because they’re always in a position to move some obstacles for you.”
City planning Another strategy involves acquiring the land directly from government, or local government as part of their urban planning. “We know that the government
“In June we opened our first shopping centre in Abuja in Nigeria, which is the capital of Nigeria. It was the first shopping centre in Abuja. That’s been a major success for us.” - Derrick Roper, Novare Equity Partners
has already dealt with land claims or anything like that, and it’s part of their overall development, so that also makes it a lot easier,” says Roper.
African electoral cycles When it comes to doing business in Africa, “politics are always a risk and an uncertainty Roper admits. “I think it’s getting a lot more stable than what it was, say twenty years ago. If you focus on stronger countries, the more developed ones, that becomes less of an issue…the politics.”
Current focus Current efforts are focused on West Africa, Nigeria and Ghana. “Those are economically well developed with oil being their major export and source of revenue so there’s massive growth in those countries,” says Roper. “In June we opened our first shopping centre in Abuja
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The local builders “In most of the African countries there are fairly good local construction companies, a lot of them would have their partners either from Italy or from Germany or wherever, but it’s typically local construction people.” On the professional side, Novare always works with two teams of architects, quantity surveyors and engineers. One from South Africa, one from the country where they are working. “The South Africans bring the experience of having done many shopping centres, whereas the Nigerians bring the local knowledge. But also they haven’t done shopping centres, so there’s a transfer of skills.”
A lot more expensive
in Nigeria, which is the capital of Nigeria. It was the first shopping centre in Abuja. That’s been a major success for us.” Novare are currently looking to build a 16,000 square metre shopping centre in Kumasi, Ghana’s second city in a joint venture with Standard Bank and Group 5 the biggest construction company in Africa. Roper says that Novare are also thinking about Angola, which has some of the highest real estate prices in the world. However, “Angola is a bit more difficult because of the language barrier”, unlike Ghana and Nigeria for example where English is used and where there is a similar legal system to the UK. “And in Nigeria we’re looking at a number of developments that we actually bought the land for. In Lagos we’re looking at [a] 12,000 square metre [development] to start off with and expanding that to 25,000 square metres.” Other projects include malls in Benin City and Abuja, which are “gaining
“Most of our returns will be in dollars, because our rents are based in dollars, so we’ve got a good hedge against any depreciation of the different currencies” momentum, and there’s a lot more opportunities. We believe that over the next three to five years, hopefully we can finish another 10 similar developments throughout Africa.” Africa presents certain challenges when it comes to getting things within budget and on time, “we managed to do the developments within our timeframe that we planned and within budget.”
High returns “When we make our decisions and do our feasibilities, our return targets are anything between 25 and 30 per cent per annum in dollar terms. “Most of our returns will be in dollars, because our rents are based in dollars, so we’ve got a good hedge against any depreciation of the different currencies – 25 per cent in dollar terms over a five year period, we believe, is a fairly good return. And that is backed up by very solid anchor tenants, that we believe are going to be around for 20 to 25 years,” he explains.
Building malls outside of South Africa is “a lot more expensive. The reason for that is people are just more expensive in Africa because there’s a shortage of skills. Secondly your materials are just a lot more expensive because a lot of it gets imported.” “For instance in Nigeria I would say roughly fifty per cent of everything gets imported. Like generators, your air conditioning, a lot of the steel gets imported. So, import and the transport [costs] makes it a lot more expensive.” “It also becomes necessary to build a lot more infrastructure. In South Africa and the developed world you just tap into the electricity grid, the water supply, or sewerage supply. Whereas in Africa you typically have to build all of that on site. We have to build water treatment plants, we have to put in huge massive generators, back-up generators,” says Roper. A shopping mall in Nigeria will need multiple sources of electricity. Reliability from the grid is probably thirty to forty per cent a day. “This means that one generator and another back-up generator are needed on top of that. As Roper points out, the expense of putting this additional infrastructure in place, “is massive” and “increases your costs significantly.”
Top tips For anyone planning to enter the African marketplace, Roper recommends finding a good local partner that knows the environment. “And also as far as possible, try and align yourself with other international players who know the market. So if you’re a professional person try and align yourself with a development company or a construction company to get work, but also to assist with some of the pitfalls.”
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FEATURE:
The Missing Middle Building the suburbs for Africa’s middle classes by Milton Lindsay In South Africa and the rest of the Sub-Saharan region, the housing industry is comprised of a two-tier pyramid. Developers, eager to capture the massive amounts of wealth concentrated at the top of society, build sprawling compounds and vast mansions for those who have reaped the wealth of Africa’s resource sector, while the remainder of the developments consists of low-income housing.
“[IHS] must be certain that a country’s institutions will be able to protect the capital invested... And institutions must have the wherewithal to actually pull the whole deal together.” - Soula Proxenos, IHS
“Everyone thinks that the money sits with the rich,” says Soula Proxenos, managing partner at International Housing Solutions (IHS). “But, in fact, the truth is that there is a huge amount of money to be made in the lower ends of the market, because nobody thinks there’s any opportunity there.” Since 2007, International Housing Solutions (IHS), a private equity firm based in Johannesburg, South Africa, has worked to capitalise on what Proxenos calls the “missing middle” in South Africa’s housing market – the shortage of housing available for the country’s expanding middle class. According to Proxenos, IHS provides equity to developers for “large or medium-sized housing projects for middle-class families, because in South Africa what is needed is equity to kick start these type [of projects]. Often the equity is early money and this equity makes the difference between what the developer can afford and the loan-to-value ratio that banks are comfortable with.” IHS will provide equity for a developer at various points in a particular project, Proxenos says, and IHS will “encourage developers to move down the pyramid of income,” and cater projects toward a broader portion of the population. In the past five years IHS, which manages a 10-year private equity fund worth R1.9bn ($214m), has completed 32 development deals – providing affordable housing for 26,000 families in South Africa. IHS partners with medium-sized and large-scale developers, and projects range anywhere from 133 units to 8,000-unit developments. Although IHS will work with developers on various types of projects, Proxenos says her firm will only finalise a deal when both the prospective market, as well as the potential developing partner, are deemed to be suitable. Proxenos says, “before making a final decision on a project IHS will ask questions like: Is the developer sound; what does the
actual development look like, and does it make sense based on [IHS’] own market studies on the location?” While IHS has yet to venture outside of South Africa, Proxenos says that similar stratified market dynamics exists “in every emerging market,” where “you’ve got a growing population, urbanisation. And in many of these markets, a growing middle class.” Proxenos says this includes many countries within Sub-Saharan Africa, and IHS has been actively searching for potential deals outside South Africa, including: Namibia, Botswana, Zambia, Mauritius and Ghana for the past few years. Ghana, in Proxenos’ eyes, is one SubSaharan economy that looks especially attractive. “The country is showing many signs of positive development,” Proxenos says. “It has a sophisticated mortgage market, meaning mortgages are readily available. They’ve found oil, but it hasn’t gone to their head – which is often the problem – and the private companies in Ghana really do seem to be making significant progress.” “It’s definitely showing a lot of potential.” However, “a country must have so many different factors lining up” before IHS will deem it ready for investment, Proxenos says. The main question in Sub-Saharan Africa is: “Is a country institution ready?” “IHS is putting institutional capital into an economy that has been starved of this type of capital,” Proxenos says. “So it will make sure there is the institutional reporting, management and control over this absent class to make sure the institutional capital get [the] supporting that it needs, the reporting that it needs and that the money is very judiciously invested.” Proxenos says weak institutions are why IHS is somewhat unlikely to enter countries like Zimbabwe or Nigeria in the near future, despite each having extreme potential and a burgeoning middle class. “[IHS] must be certain that a country’s institutions will be able to protect the capital invested,” Proxenos says. “And institutions must have the wherewithal to actually pull the whole deal together.” Another problem encountered by IHS, when it has looked into expanding outside of South Africa, is that developers and financial institutions are drawn to the wealth generated by the resource sector – particularly in Angola and Mozambique where “mineral industry drives most investors to focus on building villas and luxury hotels.” However, Proxenos says “huge potential remains” throughout Sub-Saharan Africa. “It’s just a matter of waiting for the critical mass to build up in a particular country before [IHS] moves into the market.”
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FEATURE:
From half a dozen cars to a $300 million enterprise Takuma Kinjo tells GTA how he created his Pan-African business in less than 10 years By Yuko Takeo Takuma Kinjo started his business from humble beginnings while he was a student, cobbling together US$10,000 to export six South Korean second-hand cars to Angola. Now, this enterprising 31-year oldheads up a trading company operating in eight African countries, which brought in revenues in excess of $300m last year.
Driving on the left Explaining how his business had expanded since its establishment in Dar es Salaam, Tanzania in 2007, Kinjo said, “After graduating from university, I’d started
a business selling used Japanese cars to African buyers. In the beginning, I had thought to myself that ok, Japan is a righthand drive country [that drives on the left like much of Africa], and so I decided to base myself in East Africa, Tanzania.”
Understanding the local culture “Selling second-hand cars in Tanzania, there’d always be dead [unsold] stock. Selling that dead stock at a cheaper price was always frustrating for me, so I decided to set-up a taxi company,” explains Kinjo. “The dead stock would be used as taxi
vehicles for this new company, but once I set up the taxi company, I realised that my competitors were not other taxi companies, but ‘Boda-boda’ riders. They’re 125cc bikes essentially, and they take one passenger and people use them as taxis. “In order to retain our customers, we decided to buy 10-15 Bodaboda bikes and began a new branch within the taxi business [I had set up]. The initial investment is extremely low on these cheap bikes, and it’s possible to buy and insure them, register the license plates, etc for ￥80,000-90,000 ($640-720) a piece. So the number of bikes we owned kept on increasing and at present we have approximately 150”.
Becoming part of the political landscape of local villages
Takuma Kinjo
“Once you reach that kind of number…in smaller villages outside the city, you get some villages where about half the young men are our employees. “In about two or three villages that was the case. When that happened, during the elections for village chief, the men who were standing as candidates began to seek me and my company’s support.” The relationship
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18 \ Feature \ December 2012
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“Smile at people and talk to them before they start talking to you…Become part of the neighbourhood that you engage [with] in business, and get to know your area and the locals, rather than staying in an area where there is a cluster of foreign businesses.” between Kinjo and the village chiefs strengthened with time, leading to requests for assistance in constructing small roads adjacent to the villages.
Entering the construction business Initially, Kinjo sought help from other locally-based construction companies. However, “after being snubbed by several…I thought, why not create our own construction company? So we did. After taking on the job, I realised that the profit margins from these small-scale construction projects weren’t as good as I’d thought. “That’s probably why we were turned down by the other construction companies in the first place.” But he also realised the reason that the profits were so low, was because of the large profit margins made by the suppliers of the construction material. “So I started a separate construction materials company, reducing overall costs. That’s the general flow of how things developed from the initial second-hand car business,” Kinjo reflects. “Nowadays, we’re involved in building ports and civil roads. As a construction company we are currently dealing in projects like these, and the construction material company has grown to the extent that it is now providing materials to other construction companies as well,” he says.
Future expansion Takuma Kinjo is still actively pursuing other opportunities. “Agribusiness is an area I’m particularly looking into at
Shinryo TradingTanzania Office
the moment. In terms of productivity, I don’t think agriculture in Africa is that inefficient. The problem lies in postproduction, and the lack of processing technology. I’m looking at how to reduce the huge amount of waste which occurs during manufacturing”. “Another area is finance – not microfinance, but looking at larger businesses that would need around ￥1m ($8000) in loans. Right now there is a shortage of financial service providers that will lend at that particular level… hopefully we can start this business by March next year”.
Issues surrounding culture Discussing difficulties that arise out of cultural differences, Kinjo emphasised contrasting attitudes towards labour and motivation. In Japan, as in much of the developed world, increasing salaries is an effective way to motivate staff. However, according to Takuma Kinjo, “money does not necessarily raise morale in East Africa.” “In the case of our company, we
“Agribusiness is an area I’m particularly looking into at the moment. In terms of productivity, I don’t think agriculture in Africa is that inefficient. The problem lies in post-production, and the lack of processing technology.” - Takuma Kinjo, Shinryo Trading
sometimes pay for our employees’ children’s school fees, or provide housing. The reason we pay attention to employee benefits and welfare, is not just to improve employee morale.” Another important aspect of this is that Kinjo believes it significantly reduces the rate of internal crime, when you can see your employees’ family. Another strangely effective method of building trust, “is to smile at people and talk to them before they start talking to you…Become part of the neighbourhood that you engage [with] in business and get to know your area and the locals, rather than staying in an area where there is a cluster of foreign businesses.”
Trust “I do believe that Africa is a place that has a lot of business opportunities, with markets that are yet to be developed. However, when we expand into these markets as foreigners, the cooperation of the locals is paramount. Assistance from locals enables a business to expand in a particular area. However, leaping into a business opportunity [without local assistance] just because the market opportunity exists – this is very dangerous.” “From experience…having someone you can trust on the ground is crucial,” says Kinjo. Takuma Kinjo is founder and CEO of Shinryo Trading Co., Ltd., a trading company dealing in a range of businesses across eight countries in East and West Africa, and centred in Tanzania and Benin.
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FEATURE:
Keeping the lights on East African countries need to ensure reliable power in order to maintain economic growth by Mark Kapchanga The financier of Africa’s largest hydroelectric power plant in Ethiopia has pulled out of the project, citing overwhelming pressure from environmentalists. The African Development Bank (AfDB) says it is no longer feasible to continue focusing on the controversial Gibe III dam construction due to the risks associated with it. The withdrawal from the $1.7bn project, which is 40 per cent complete, is a blow to investors, who had banked on the plant for affordable power supply. In the last three years, Africa has been a hotspot for foreign investors, with China, Japan, Brazil, Europe and the US scrambling for opportunities. China in particular has made huge investments in resource-heavy sectors such as construction and manufacturing sectors. By July, Beijing had injected close to $20bn in the continent. But economic growth in Africa has not been in tandem with the pace at which these investments are streaming in. Today, economic growth in Africa is scarcely 10 per cent due to the rising cost of doing business.
A conspicuous challenge has been the unreliable and expensive power supplies. In Tanzania, blackouts have become a norm with production hours cut from the average of eight to five hours a day. The case is similar to Kenya. Manufacturers have bitterly complained about the rising cost of business, which has hampered the industry’s growth. “We cannot keep talking about making Kenya a middle class income nation by 2030 if we cannot create a [more] conducive business environment. The country needs to focus more on exploiting alternative energy sources such as wind, geothermal and gas,” said Betty Maina, the Chief Executive Officer of Kenya Association of Manufacturers. Currently, Africa growth engines hugely rely on drought-prone hydropower. More than 13 countries use it for 60 per cent of their energy. Often compared to China’s Three Gorges, the Gibe III Dam, if completed, would be the world’s fourth largest. It will generate over 1,800 megawatts (MW) of power. The Ethiopian government expects to earn
“We cannot keep talking about making Kenya a middle class income nation by 2030 if we cannot create a [more] conducive business environment.” - Betty Maina, CEO of Kenya Assoc of Manufacturers
December 2012 \ Feature \ 21
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$407m annually from power exports. Kenya is expected to import more than 500 MW to check on the recurring power outages that have had biting effects on the manufacturing sector. According to the Ethiopian Electric Power Corporation, more than 200 MW will be exported to both Djibouti and Sudan. Additionally, a feasibility study is underway to consider exporting 50 MW to Yemen via Djibouti, Somalia, Eritrea and Egypt. Opponents of the project say the dam would have detrimental effects on the environment. “The reservoir will cause the lake’s water level to drop
by as much as 23 to 33 feet within the first five years,” said Ikal Ang’elei, the founder of the Friends of Lake Turkana, and winner of the 2012 Goldman Environment Prize for Africa. In 2009, the European Investment Bank pulled back its funding, saying the dam would massively affect the ecosystems. A year later, the World Bank also withdrew from financing the project. The World Bank, however, has promised to give a $684m loan to build a 1,000-kilometre electricity transmission line from Gibe III into Kenya. The former World Bank vice-president for Africa, Obiageli Ezekwesili raised
Africa’s major dam projects since 2009 Merowe dam
Sudan Located in Northern part of Sudan
Gibe dam I
Ethiopia
Gibe dam II
Ethiopia
Gibe dam III
Ethiopia
Tekeze dam
Ethiopia
Located in River Omo
Located in River Omo
Located in River Omo
Located in Tekeze River
1,250 MW Power output
184 MW
Power output
420 MW Power output
1,870 MW Power output
300 MW
Power output
a redflag over the way in which the Ethiopian government was managing the shaky project. In particular, she queried the environmental impact assessment report, saying it was not “conclusive”. She also questioned the manner in which the Ethiopian authorities awarded the contract to an Italian firm, without competitive bidding. Whereas many would-be financiers of the dam have withdrawn their funding for the project, the Industrial and Commercial Bank of China says it will put $500m into it. While the social and environmental impacts of these projects are huge, there are those with the school of thought that the region is thirsty for reliable power supplies. “Ethiopia’s electricity generation capacity will go up; power cuts will be reduced and electricity will be extended to at least some of the more than 70 per cent of the population without access,” said Seleshi Bekele, a senior researcher with the Addis Ababa-based International Water Management Institute.
1.8 billion
China Import Export Bank helped fund this project
Completed in
2009
374 million
Completed in
373 million
Completed in
500 million
Estimated completion
The Ethiopian Government funded this project
European Investment Bank helped fund this project
2010 2010
The Industrial and Commercial Bank of China funded this project
2013
224 million
Completed in
Gezhouba Water and Power Group helped fund this project
2009
22 \ Feature \ December 2012
www.GatewayToAfrica.com
FEATURE:
Power hungry African countries turn East Washington Gikunju, our man in Nairobi examines the strategies being considered to maintain power for growth in East Africa’s booming economies. by Washington Gikunju in Nairobi Power hungry African countries are turning to the East for funding and technology to drive their expanding economies, challenging western multinationals’ past dominance in the region. The shifting power balance has seen Chinese, South Korean and Japanese multinationals bag lucrative contracts to build hydro, geothermal, gas, nuclear and coal-fired power plants on the continent. Most big power projects in Africa have in the past been financed by the World Bank and other multilateral lenders such as the European Investment Bank – whose stringent procurement rules have tended to favour western corporations. East Africa’s biggest economy, Kenya, has been a rich hunting ground for Eastern hemisphere nations and corporations that are turning to emerging and frontier economies to boost their growth. In recent months, multinationals such as Mitsui, Daewoo, Hyundai, Toyota and Tshusho have won big contracts for a wide range of power sector projects. The most recent, and the biggest one, is Daewoo International’s signing of a $1.3bn deal last month to build a coalfired plant at the Kenyan coast. The state-owned power generator KenGen’s chief executive, Eddy Njoroge, and the Kenyan Prime Minister, Raila
Odinga, flew to Seoul, South Korea, for signing of the 300 megawatts (MW) plant on 18 November. Chinese company, Synopec International, is currently undertaking a $140m geothermal power field study in Kenya’s Rift Valley basin. Other Eastern companies involved in multi-million dollar projects in Kenya, which are at various stages of completion, include a consortium of Hyundai of Korea and Tshusho of Japan, which are building a geothermal plant and KEC of India, which is constructing transmission lines and power stations. Last month the Kenyan government also signed a nuclear education and technology transfer deal with Slovakia. Sub-Saharan Africa’s second biggest economy Nigeria, is also turning to the east. Nigeria has one of the biggest power deficits on the continent, producing only
Merowe Dam, Sudan
4,000 MW of power for its 160 million people, compared to South Africa’s capacity of 40,000 MW for a population that is just above 50m. Nigeria has spent more than US$40bn on reforming the power sector over the past two decades, yet the country needs to invest many times this amount to guarantee a stable supply of electricity to its population. In a September sale of five power firms by the Nigerian government, one Western
“East Africa’s biggest economy, Kenya, has been a rich hunting ground for Eastern hemisphere nations and corporations that are turning to emerging and frontier economies to boost their growth.” - Washington Gikunju
December 2012 \ Feature \ 23
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company (British) emerged among the bid winners alongside two Eastern firms, a Chinese and Russian corporation. Ethiopia, the continent’s second most populous country, is also counting on the largesse of Eastern governments and corporations to power its economy. The Industrial and Commercial Bank of China has pledged $500m to finance sub-Saharan Africa’s biggest hydro power project, the Gibe III dam in Ethiopia, providing a crucial lifeline after other financiers pulled out citing concerns about its projected negative impact on the environment. A former senior official in Kenya’s Ministry of Energy, Mwendia Nyaga, said in a recent interview there is a range of reasons behind Africa’s dalliance with the East. Mr Nyaga, who now runs an independent consultancy, Oil and Energy Services Ltd, emphasised that the presence of the East in Africa is not an entirely new phenomenon, but reckoned that geo-political and economic power shifts are behind their rising prominence on the continent. With the exception of Japan which is already an advanced economy, most Eastern hemisphere nations have recorded rapid growth in the past three decades, and are at the stage where their home-grown companies are searching for growth abroad. On the other hand, Africa is on a steep economic growth curve that has exposed the deficiency of its power sector. It is projected that Sub-Saharan Africa will record the second highest regional growth rate of 5.5 per cent in 2012, trailing only Asia. The emerging energy shortages have seen African governments loosen their traditional stranglehold on the power sector, opening themselves up for foreign investment. Eastern countries still enjoy much lower costs of production than the developed West, making their corporations a natural choice for the resource-rich but cashshort African continent. The Eastern countries policy of noninterference in internal affairs of countries in which they seek business has been an added bonus for African governments that viewed the West’s insistence on democracy and human rights as being intrusive. “I see the rising presence of the East as more of a diversification for African countries than anything,” said Mr Nyaga who rose to the position of acting managing director of the state-owned National Oil Corporation of Kenya
(NOCK) before quitting in 2010 for private practice. “Politicians want to feel they are not tied to one option, dealing with the East makes them feel safer,” said Mr Nyaga. Besides involvement in the power sector, trade between Africa and the East has soared in recent years, also favoured by the changing geo-political realities. China’s trade with Africa, for example, reached $166.3bn in 2011, which included African exports to China worth $93.2bn, consisting mainly of minerals and raw materials. In July the Chinese government offered African countries $20bn in loans over the next three years. Most of which will be used to finance trade between the continent and Chinese corporations. Critics have previously questioned the quality of projects undertaken by companies from the East, which do not have as much global experience
Image by Intamin10
or as many experts as their Western counterparts. The agreement between the Kenyan government and Slovakia to train scientists for its planned nuclear power plant particularly raised eyebrows in the country, especially coming in the wake of the Japanese Fukushima nuclear disaster. The Eastern companies have been accused of cutting corners to enable them to put in lower bids than their Western competitors. Mr Nyaga, however, says the fears could be founded more on perception than reality. He says the rapid development of Eastern economies is a testament to the fact that some of their corporations can stand head-to-head with Western firms. “There is a lot of innovation going on in the West but in some cases the Eastern countries are just as good as the West,” said Mr Nyaga.
24 \ Feature \ December 2012
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FEATURE:
Designing Africa’s new hotels The Mantis Collection – Bringing boutique hotels to Abuja and Lagos by Jeremy Kuper From his office in London’s Sloane Square, Paul Gardiner director of marketing and heir apparent to the Mantis Hotels group tells me about their latest venture; two boutique hotels in Nigeria.
The George in Lagos
“We moved into Nigeria approximately a year ago and we have a joint venture with a gentleman called Nze Chidi Duru. He approached us to take the Mantis brand into West Africa and flew down with a
small delegation,” recalls Gardiner. “They inspected some of our hotels in South Africa, so as to get an idea of what we were and what we stood for. He’d always had good expectations, just from what he had picked up from the website… heard about from his friends. And we basically shook his hand 24 hours later, and the deal was struck.” The initial deal involved a joint venture for the Grand Towers Hotel in Lagos, due to open in the next 3-4 months. “Thereafter, we together in our joint venture will go and attempt to find other prospective investors and hotel developers. And get them to join Mantis,” Gardiner explains. “Mantis has an all-encompassing management team that come in and we will manage the hotel and the hotel will be badged Mantis. And providing the structure meets all of our criteria, we’ll run it as a 5-star hospitality unit.” “Generally all we take is boutique, we’re not into anything more than 100 rooms. So we’re fulfilling a little niche in the Nigerian market in terms of taking on boutique hotels. Nobody has done it, there’s no other reason than that. So we are pioneering the boutique model with our JV partner,” he says. The joint venture has already sourced another hotel, the George in Abuja, with another local partner, Mr Tein George, and will open within a similar time-frame
December 2012 \ Feature \ 25
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(3-4 months time). Local partners shift obstacles and know the terrain, something Gardiner acknowledges as being crucial to the success of any foray into new markets. “You want to go in there and do your due diligence and make sure that firstly you have the right partner and then a partner that can open those doors for you.” And this local expertise gives Mantis the confidence to move into the Nigerian marketplace. “Many people that we talk to, whether it be in SA or abroad, say you’re nuts doing business with Nigeria – there’s that perception. And we feel very comfortable about doing business there,” says Gardiner. “We’ve gone out there, we scouted the area, and we’ve got a really good relationship with our partner. I don’t think we would have gone in there alone, and I don’t think you can. Firstly you want to partner with somebody that understands the culture, the challenges to entry, barriers to entry, cultural differences.” Nigeria is just the beginning. With much of the world economy mired in recession, Mantis is rightly looking for new opportunities. “We want to expand, not just into Nigeria, but into West Africa.” “Again you want to have a partner there who’s got connections and a network, we have zero network there as Mantis. We will build it over time, but certainly on arrival, we don’t know a soul. So he [the partner] is connected, he knows potential investors and potential buyers… procurement companies, he’s got all of those contacts.” The advantage of the Nigerian operation is that all their rates will be in dollars and this acts as a good hedge against the fluctuations of currencies. But challenges remain in the form of the import duties and transport costs for the building materials, all of which need to be shipped in from overseas. “Import duties are huge in Nigeria, so those have all been challenges for us, we’re not used to those sort of fees landing on our laps. We’ve had to take all of that into
Inside a Mantis boutique
Nigerian Culture
consideration,” Gardiner confides. In some cases Mantis looks for JVs, in others they franchise their brand to local owners, sometimes they own everything outright. But in any of these scenarios, the Mantis team is very hands-on. A defining aspect of the Mantis model is cultural sensitivity. “If we’re going to develop in a particular area…we adapt to the culture of that area. For instance in the Eastern Cape where we did our first big major development 20 years ago, Shamwari Game Reserve – at Shamwari we embraced the Xhosa culture.” As a result Mantis has for example built up one of the largest private collections of Xhosa beadwork. Adrian Gardiner the CEO and founder of the dynasty is a keen collector of art and is central in developing the look and feel of his hotels. In South Africa, Mantis has built up a significant collection of contemporary South African art, including works by the likes of William Kentridge. Art and design is central to the sophisticated image of the group…this is not a Four Seasons Hotel chain. In keeping with
this philosophy, Mantis will be acquiring contemporary works by Nigerian artists for their hotels there. “It’s important that we don’t ignore the local culture. If you look at Nigeria, probably at least 50 per cent of the occupancy there is going to be locals, the rest are going to be expats. So they’ll also want to see their local stuff here.” It is not always easy to make boutique hotels work, but the bottom line in any company is always central. Art and property appreciate and this is key to the Mantis business model. Gardiner gives the example of their No5 Boutique Art Hotel, an art deco gem in Port Elizabeth. His father’s own private hotel – part business, part labour of love. “It’s his pride and joy and he over-capitalised completely, but he wanted to make it the very best, the most iconic hotel in PE.
If we’re going to develop in a particular area…we adapt to the culture of that area. For instance in the Eastern Cape where we did our first big major development 20 years ago, Shamwari Game Reserve – at Shamwari we embraced the Xhosa culture.” - Paul Gardiner of Mantis
26 \ Feature \ December 2012
I think he’s achieved it. It’s a charming little place, it’s only 10 rooms. But he knows he over-capitalised on it.” “A lot of people say you can never make these little boutique hotels work, and we don’t disagree with them, a boutique hotel is a tough one to make money out of, because they’re small, you don’t have
Zuma Rock, Abuja, Nigeria
Hi-spec hotel design
www.GatewayToAfrica.com
the volume of people going through in the hotel.” It is a lot harder for a small boutique hotel to make money on the restaurant. “If you’ve got a 200-room hotel everybody’s going to eat in your restaurant. If you’ve got 35 rooms, or 10 rooms, and you’re running a restaurant with an expensive chef you’ve got to get outsiders to come and eat in your restaurant to back you up. You don’t have that captive audience and that becomes a problem,” explains Gardiner. “Boutique hotels are bloody tricky, but where you make money is more out of the capital value, so you make sure if you’re going to go the boutique route, you build in the right place.” The secret behind the projected future success of the Nigerian boutique hotels is the level of the average room rates. Gardiner points out that most of the major South African chains, like Protea, Southern Sun, Sun International, and Legacy Hotels are operating in Nigeria already, “which is quite amazing.” “And they’re doing exceptionally well. They’re achieving average room rates that we’d be quite excited to see there at our boutique hotel in London. That’s how unbelievably high the rates they’re achieving there [are]. Even at the 3-star level, they’re achieving massive average room rates. So that just tells you there’s an
undersupply of bed nights there.” “In the boutiques you can charge a bit more, because you’re paying for the comfort. You’re paying for the home away from home. Everyone knows your name when you walk in the door in Mantis hotels. I think that you can charge a premium for that and that’s why we feel that these will do pretty well. And the numbers and the analysis that we’ve done in that market tell us that.” Central to the Mantis brand is the ethical dimension. Something that becomes clear when I speak to Gardiner. “I think that Africa is the last continent that hasn’t really been exploited in terms of its natural resources. The world, countries like China and India, are hungry for those resources.” “And that wealth has got to be spread, otherwise it’s just going to end up in a devastating situation where those people at the top sell everything, every resource gets stripped out of every country and Africa will be destroyed.” “I’m talking from a conservation perspective too, because our family is very close to conservation. And the continent has got to be very careful of that happening. They don’t speak from one voice, you’re looking at all the different states in Africa. So they’ve all got to look after their own assets very carefully.”
SunInternational_A5_flyer_aw2.indd 1
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28 \ Final Word \ December 2012
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FINAL WORD:
Bull Market Is Africa’s boom sustainable? - Ann Pettifor GTA: Is Sub-Saharan Africa’s growth sustainable? To be honest, I think the resurgence in Africa at the moment is down to the availability of mineral resources and China’s desperate need for those resources…for those assets basically. And I think that’s having the impact now on Africa.
GTA: Can you tell me about Jubilee 2000 and what’s happened since? Jubilee 2000, a world-wide civil society campaign that I helped lead, resulted in the cancellation of about $100bn of debt in nominal terms – less in net present value terms - of 35 of the poorest countries. Most of these sovereign debtors were African. This debt was written off, first, by the Paris Club of creditors, and then by the World Bank and IMF. Countries like Mozambique, Tanzania, Uganda, Ghana, Ethiopia all got substantial debt relief as a result of the efforts of millions of Jubilee 2000 campaigners. And what that really meant was that the debts they were due to repay in hard currency to foreign creditors,
for say, the next thirty years, stayed at home. We know that some of the money saved was invested well - in e.g. health and education in countries like Uganda and Tanzania. But the problem was that as soon as they were given the debt relief and were made more sustainable, both the big multilateral institutions, the IMF and in particular the World Bank, followed up with new loans. And then China piled in with new loans. Now there’s a difference between China’s lending and most loans made by official creditors from the West, in that Chinese loans tend to be less conditional. Nevertheless, they represent a potential burden on those countries, because the loans have to be repaid ultimately in hard currency. And it’s the ability to earn that hard currency that determines whether or not a sovereign remains a ‘performing’ debtor. I had a lot of sympathy for the people of Nigeria, because much of the debt they were expected to repay was the result of loans made by western governments, like Britain, to dictators. There was often very little evidence of the contractual arrangements around the loans and the public were often unaware of deals done behind closed
“South Africa is of course in a strong position to diversify. But historically her commodities, which are immensely valuable and are limited in their availability, have sold at what are effectively low prices.” - Ann Pettifor
doors. Naturally when these dodgy loans are made, creditors are unlikely to make them too public. In addition, movements in exchange rates could cause the value of the debt to rise (or fall). Often the outstanding debt rose well beyond the loans made, because of exchange rate movements, and the compounding of interest on unpaid debts. This meant that the debts just grew, and in the end bore no relation to the original loans. That’s in the nature of debt, as we know.
GTA: Do you think South Africa can effectively diversify? South Africa is of course in a strong position to diversify. But historically her commodities, which are immensely valuable and are limited in their availability, have sold at what are effectively low prices. I grew up in a small gold mining town (Welkom) in South Africa and we always believed that the gold beneath our feet was unlimited; that we would always be able to extract it. It turned out to be not so. And at that time (the 50s and 60s) I remember as a child asking my dad why the price of gold was fixed, while all other prices moved up and down? The point is this, South Africa and indeed all African countries with valuable commodities have, over time, been paid very little for those valuable, and scarce assets. And it’s been hard for them to diversify because western companies exploited those assets by adding value, and prevented (by way of control over technology, patents etc.) African entrepreneurs from doing the same. If you take the example of chocolate. The people of Cote D’Ivoire grow cocoa, but big companies turn that cocoa into chocolate, and make it very hard for Cote D’ivoirians to add value within the country – and I think that applies across Africa. Not only have African leaders been too dependent for revenue on basic commodities like copper in Zambia or the very valuable minerals that South Africa has, or the very pure oil for example that Nigeria has. But if they had wanted to diversify and add value they would have met stiff resistance from competing corporations and their western governments. And so on the one hand, African leaders were perhaps too easily content with the revenues that rolled in for their oil, copper, or their gold, or their diamonds. Without understanding, as for example Botswana has done, that they needed to do more to build a balanced economy and to share the gains.
December 2012 \ Final Word \ 29
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African debts written off between 2000-2011
10
African debt written off between 2000-2011 US$72.7bn
GTA: What about the perception of corruption in Nigeria? There is corruption, and a great deal of blame rests with Nigeria’s western friends the ones that welcome money that has been corruptly diverted into western banks - e.g. British, US and, Swiss banks. As we now see from the accusations of fraud at HSBC and so on, many western banks don’t mind doing a bit of money laundering for the odd crook. Stories of bank fraud and money
Combined current debt of USA, France, Germany, UK and Italy US$20.5 trillion
Uganda Liberia
Cameroon
Ethiopia
0
Mozambique
5
Zambia
It will be incredibly exposed…because it’s so open to international competition - in particular from China. Take Zambia for example. It is heavily dependent on one commodity, copper. South Africa is privileged, in that it has a range of commodities and other goods for export. So when one commodity price falls, there are other products to provide balance.
15
Tanzania
GTA: When the minerals run out, will Africa have nothing left?
Western vs African debts
20
Sierra Leone
I was really impressed with [late President] Meles in Ethiopia whose government is trying hard to expand investment in the agricultural sector. They definitely need to do that, because agriculture is vital to poverty reduction. Agriculture is a sector [that has been] long neglected as other commodity sectors were prioritised over all else. And that neglect distorted African economies. I think that we’re now seeing a change in approach. Of course the IMF and the World Bank, acting on behalf of creditors, have always sought to ensure that the debtor country earns hard currency (from e.g. commodities) with which to repay debts. Hence the emphasis on high-value commodity exports, and the neglect of agriculture for domestic consumption. So the IFIs (international financial institutions) distorted Africa’s development by insisting on export-led growth, in my view. And the reason they were able to do that was because of the need to generate revenues to repay foreign debts.
DRC
Agriculture and poverty reduction
laundering are only now beginning to surface. As Warren Buffet once said, it’s only when the tide goes out (on these banks) that you see who has been swimming naked! I’m a great defender of Nigeria, and so should free marketeers be, because it is the most free-market economy in the world. There’s virtually no regulation at all. Nigerian people are incredibly resourceful and entrepreneurial. I think Nigeria gets a bad press for the wrong reasons, and for the most arrogant of reasons – often for the most racist of reasons. Having said that, given Nigeria’s assets and its wealth, the degree of poverty that exists is wholly unacceptable. The polarisation of wealth between the small elite that openly extract rent from the state, and the rest, is shocking.
Ghana
I am stunned when I go to other countries in Africa at the extent to which South Africans have engaged in those economies. I mean if you visit Abuja [Nigeria] some of the best hotels are owned by South Africans. In Tanzania the beer company has been bought up by SAB Miller, [who have] taken over almost all of the breweries in Africa. And there is a degree of resentment towards South Africans. If you visit some of these countries it feels like South Africa is the new colonial power. So I think the extent to which SA companies have now taken root in other African countries must not be underestimated. Now inward investment into those countries is of course welcome. And South Africans are doing good things and building management capacity in those countries. The question becomes, when those South African companies repatriate their profits back home, to Johannesburg or Cape Town or whatever, whether or not those are affordable costs for poor countries that don’t have the hard currency reserves needed to ensure that those kind of transfers can take place without unbalancing the exchange rate or indeed the economy. So there’s just a question there. African countries, most of whom were heavily indebted, were obliged by their creditors to open up their economies well before they were ready to do so…I would prefer to see countries build up demand in their own domestic economies. And when they’re ready and prepared to open up their markets, to do so in a measured and sustainable way. Unfortunately debtor nations lose what is known as ‘policy autonomy’ in economic circles, to their foreign creditors. As a result, they have little choice. Americans and Europeans have frequently dumped their excess agricultural exports on African countries…just to find outlets for these surplus products. These same Western economies grew and developed behind protectionist barriers and when they were strong enough opened up. Africa was obliged, thanks to pressure from creditors operating through the IMF, to open up her economies, regardless of preparedness. In other words, most African economies have not gone through the processes western economies went through, in protecting and building up their home sectors, before facing
competition from abroad. The three key pillars of any western economy are agriculture, textiles and housing/ construction. And these three sectors are the most protected in every rich economy. Not surprisingly, because they are the sectors that provide food, clothing and shelter for their people. Africa is denied that sort of protection…it’s just very unfair.
US $ billion
GTA: What about South Africa’s role as the new regional economic power?
30 \ Destination \ December 2012
www.GatewayToAfrica.com
DESTINATION:
Malawi Tanzania
Zambia
MALAWI, one of the most densely populated countries in the world, has taken significant strides over the past two decades, as recent government reforms initiated by new President Joyce Banda have enabled the small, landlocked nation to better utilise its agricultural production to help bring its citizens out of poverty. In 1994, President Dr. Hastings Kamuzu Banda was defeated in the Malawi’s first democratic elections since gaining independence in 1964. His successor, Bakili Muluzi, took steps to reverse years of economic stagnation under Banda’s authoritarian presidency - though poverty and HIV/AIDS rates continued to rise throughout the end of the decade. Previous President, Bingu wa Mutharika, who was elected in 2004, began the process to reverse Malawi’s socio-economic fortunes by stimulating private sector growth through the liberalisation of trade
and foreign exchange and privatisation of state-owned enterprises. The Malawian economy has been further bolstered by working with the IMF’s Poverty Reduction and Growth Facility, as well as the cancellation of over $2bn of debt through the Heavily Indebted Poor Countries (HIPC) Initiative. The Malawian economy relies heavily on its agricultural sector, which ranks second behind the service sector in its share of Malawi’s GDP. Agricultural products comprise 80 per cent of the country’s profit from exports, with tobacco, tea and sugar making up the vast majority of export crops. Malawi has been very active in regional trade and is a member in Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC). Fishing on Lake Malawi
MALAWI Lilongwe
Mozambique
Malawian Economy
Currency: Kwacha (MWK) Population: 14,901,000 GDP based on PPP: $13.901 bn GDP growth 2012 (2011): 4.6% Head of Government: Joyce Banda Finance Minister: Ken Lipenga Central Bank Governor: Charles Chuka
Malawian Business
Language: English, Chichewa World Bank Doing Business rank: 157 World Economic Forum Global Competitiveness rank: 129 Investment agency: Malawi Investment Promotion Agency (www.malawi-invest.net) Public sector opening hours: 0800 – 1700 Private sector opening hours: 0800 – 1700 Legal system: Based on English law
Getting There
Airlines: No airlines fly from London to Malawi. Travellers must go via Johannesburg Visas: Tourist visa not required for citizens of US, UK and EU Hotels: £47-117 a night
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