The Continent, August 2015, Vol.1 Issue 3

Issue 03 • 3rd Quarter 2015

Inside this Issue Going Solar Towards a Common Currency Investments that Return

Frontier finance Private equity pursues East African growth

thecontinentmag.com

Letter from the Editor

Is financing always good news?

I

t has been a season of rather bad news. Terror in Kenya, protests in Burundi, attacks on migrants in South Africa. Many following our region would wonder if anything good even happens over here.

This issue, however, is surprisingly full of positive stories. Pleasantly, a number of solutions are appearing to two of our largest problems: a lack of financing and a lack of electricity. This quarter, we highlight the expansion of private equity in the region, where it is growing faster than even in South Africa and the west. Of course it is not perfect, as the Bain example in South Africa proves, but at least it is a form of money that has interest in building better business capacity and governance, a form that gives as well as it takes.

Another plus of private equity is that it is a way to raise capital for even large infrastructure projects without contributing to government debt. In the scramble to develop, many of our governments are taking out loans. South Sudan’s recent approval of US$600-million financing from a Qatari bank is a scary case in point for a government that lacks the capacity to pay its staff, let alone meet its interest payments.

Eurobonds will be interesting to watch as more of our governments launch them, and across the continent they come to term. Are these a continent-saving form of finance, or just another way to increase our liabilities? Debt by any other name may just be debt.

Debt loading for infrastructure projects presents a bit of a conundrum for members of the East African Common Market (EAC) and for those who one day might want to join. On the one hand they need to build capacity to develop and grow their GDPs; on the other hand, preconditions for

moving towards a common currency and later political union requires a minimum debt to GDP ratio of 50 percent. Kenya’s ratio has hovered around the 50s, although debasing it last year brought it down to 43; other EAC members sit in the 30 to 40 percent range. Sudan is at about 70 percent.

On a lighter note, solar energy is posing a solution to electricity shortages and power cuts across the region. This is one area where we are seeing marketing more innovative than most other parts of the world. Pay-as-you-go solar power providers, for example, are creating access for people who cannot afford solar energy upfront. We are seeing political openness to renewable as well, for example value-added tax exemptions and regular initiatives such as Djibouti’s announcement to pursue power from its volcanic sites.

Solarcentury founder Jeremy Leggett spoke recently at the London School of Economics on the global war of renewable energy. He described the oil and gas and traditional power sector’s highly funded political and public relations campaign against solar, and the small gains the renewable energy sector has made. It struck me that we actually have fewer challenges than OECD countries when it comes to overcoming traditional energy dominance. Because our power sectors are less developed, we may have more institutional flexibility when it comes to hooking up to solar, wind, or geothermal. If this development continues, we can expect to hear more good news.

Kathryn Semcow Editor, The Continent editor@thecontinentmag.com

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contents Eritrea

• Eritrea Airlines launches flight to Port Sudan, p. 12

Ethiopia

• Coca Cola franchise builds new bottling plant, p. 28

Somalia and Somaliland • Record livestock numbers reach the Gulf, p. 19 • Money transfers to Kenya no more, p. 33

Sudan

• Bank of Khartoum to open in Bahrain, p. 19 • Government aims to up oil production in Darfur, p. 26

Kenya

• Mobile phone healthcare pilot launches, p. 10 • Facebook and Coco Cola tell stories, p. 11 • Shilling continues to fall, p. 19 • Stampede Natural Resources buys share of Africa Oil, p. 19 • Dusit decks out Nairobi, p. 28 • New chair for publishers association, p. 33 • Sugar protectionism is less and more, p. 33 • Go-ahead for Airtel 4G, p. 34

Djibouti

• National airline merges with Kenya’s Jubba Airways, p. 12 • Government goes geothermal, p. 26

Tanzania

• Country’s richest man to invest US$250 million, p. 10 • New Airtel Chairman, p. 10 • Tigo transitions to 4G, p. 10 • Jovago.com moves in, p. 11 • Government plans to sell Eurobonds, p. 18 • Tourism campaign begins, p. 34

Uganda

• AFD aid doubled to US$55 million, p. 26 • Oil waste treatment plant a first, p. 28

Rwanda

• Power to connect to Ethiopia, p. 26

Burundi

• Flydubai scales up flights to Bujumbura, p. 12

Zimbabwe

• Volkswagen distribution agreement includes Malawi and Zimbabwe, p. 11 • Financial reforms are slight, p. 34

Malawi

• Greenpeace releases report on ecological farming, p. 11 4

contents

Features BUSINESS Intelligent Investment

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The dos and don’ts of putting your money into the region

Ingested Growth Mergers and acquisitions are the trend in Kenya insurance

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FINANCE Frontier Finance Is private equity too good to be true?

In Agreement Cooperation is key when it comes to mobile money expansion

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POLICY AND GOVERNANCE

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In Common At War with the Dollar Is the Tanzanian shilling worth fighting for?

ENERGY AND RESOURCES Solar Rising Renewable energy may be the cure for regional electricity woes

Energizing Somali Growth Recovering with wind and solar power

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Mixed-use developments take off in Nairobi

A Deeper Puddle South Sudan takes out yet another loan

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GUEST COLUMN Designing to Dazzle Make more money with your space

REAL ESTATE AND INFRASTRUCTURE Two Rivers and Garden City

The East African Common Market is becoming real

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LAST WORD 28

Unleashing the Beast Why we need business associations

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business

Intelligent Investment With offices across the region, from Kenya to Burundi, accounting and business consultancy firm PKF has seen plenty of investments rise and fall. In an interview with The Continent, Eastern Africa CEO Atul Shah shares the strategies he sees working, and the strategies that don’t matching long-term investments with long-term financing. Shortterm financing towards long-term financing does not give time to the company to breathe and may force short-term, quick-profit decision making.

What other strategies have you seen work best?

Atul Shah, CEO, PKF Eastern Africa

Your company often supports investors setting up new businesses in the region. What would you say is the difference between those companies that fail and those that succeed in East Africa?

Investors need to keep a longterm view. There will be the initial investment phase, or “sowing the seeds phase,” and then there

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will be a wait before reaping the rewards, namely the harvesting phase. What tends to happen is that investors may want a quick return so they make suboptimal decisions like paying themselves through additional borrowings and falling into the high gearing trap.

Appropriate and long-term financing is the key to success –

Involvement of stakeholders is important, and in our case involvement of the community for productive income generation is win-win. Take the example of farming. Engaging farmers towards an outgrower scheme enables the improvement of their economic livelihood. In turn, the company benefits from the supplies and value processes, and generates a return. An all-inclusive business will be more successful, as opposed to benefitting just the investor.

Low-cost financing is another strategy that is often ignored.

Where businesses have some export revenues then we encourage them to borrow in dollars to bring interest costs down to as low as six to eight percent. If the busi-

business

ness generates cash quickly then we would also encourage mezzanine finance to allow the company to grow, or alternatively take a currency risk that is uncertain but better than being slumbered with certain interest costs. Some new entrants in the market, such as West African, Chinese, or South African banks, as well as pension funds also offer cheaper or more flexible financing.

What about community-based initiatives? Are investors seeing returns from such schemes?

Any project that improves livelihoods and reduces production costs through technology transfer will provide added profit cushions.

In general value processing of agri-produce and exports of the same or for local consumption present great opportunities.

Infrastructure investments such as in roads, airports, and rail for public-private partnership projects present another great opportunity.

Social infrastructure such as

education, schools, and hospitals present immense opportunities alongside what the governments are providing. Governments encourage such investments with open arms.

local communities.

What are the biggest mistakes an investor can make?

Governments in East Africa are generally supportive of business and foreign direct investment, but sometimes the red tape can put off investors. However, use of local professional lawyers and accountants makes this rather and surprisingly easy as they have the local knowhow and regularly work with government agencies.

The issues of red tape are not different from country to country.

What may differ is easy access to finance and the cost of interest.

Usually we find the biggest mistake is lack of adequate business planning or appreciation of the market. Business plans are a central element of any project to evaluate risks, finances, and their movements, as well as appreciation and analysis of scenarios.

Another mistake is not engaging in community development activities. Activities such as building a school or a dispensary would provide great mileage and support the community as it touches them personally. Economic empowerment of the community adds a further impetus.

Thirdly, land issues tend to be sensitive, but are usually not insurmountable if done properly.

Investors sometimes resort to land grabbing that tends to upset

What are the differences between the countries in the region that investors need to understand?

The region is often perceived by international investors as a risky investment landscape. How accurate would you say this view is?

The East African countries have suffered negative publicity for some time now, for example terrorism and the perception of a negative investment environment. This picture is usually painted by a stereotype from developed economies that Africa is too far behind to attract investment. East Africa has for a long time suffered partly because of this and partly because we have not sold ourselves well in global markets.

I think this will change, however. Kenya, for example is now making headlines about oil, GDP

What tends to happen is that investors may want a quick return so they make suboptimal decisions like paying themselves through additional borrowings and falling into the high gearing trap. growth rankings, and the Eurobond issue, and is announcing large infrastructure projects. But we do need to market East Africa as an investment destination.

What kinds of investments are you seeing come into the market? In what sectors is your business experiencing growth?

PKF Eastern Africa staff in Nairobi

We see investments in energy infrastructure, including the development of geothermal energy.

This presents a great opportunity as Kenya is aiming to generate 5,000 megawatts in the next few years.

A number of other flagship infrastructure projects have been

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business

Any project that improves livelihoods and reduces production costs through technology transfer will provide added profit cushions. announced – Lapsset Project in Kenya, Ethiopia, and South Sudan; Kenya’s Konza City; and its new railway line to name a few.

These will be game-changing projects and will enhance economic velocity in all three countries.

At a local level, we see immense investments in agriculture for local produce or export.

Another opportunity will be food security projects and large-scale commercial farming, as large tracts of land are being made available for farming.

Real estate, while steady, has great fundamentals and will provide stable returns to investors

looking at the sector.

Service business, be they information technology, social services, hospitals, schools, or improvement of government efficiency, provide good opportunities at the moment. A number of innovations will come from this space, mobile cash transfer M-Pesa being a case in point.

From which countries and regions are you seeing foreign investment stream in?

Presently, investments are predominantly by government in infrastructure projects. Private investors are also rapidly invest-

ing into their projects or new projects. Foreign investors are few and far apart.

Recent good examples are investments by Nigerian and West African banks and South African financial services firms in the banking and insurance sector.

The governments are building railways in Kenya and Uganda, but predominantly financed

by Chinese Funds. West African conglomerate Dangote Group is looking at cement. A number of Canadian, British, and American companies are prospecting for oil under concession agreements. As well, a number of local investors together with foreign manage-

ment partners are investing in hotels in the cities.

How do the volumes of local investors differ from those of foreign investors? How do their strategies differ?

I think the number of investments by local investors is higher than those of foreign investors, which tend to be large ticket. Local investors are knowledgeable about local market conditions and are versatile in opening and operating businesses. Foreign investors are more involved in larger transactions concerning oil, infrastructure, and banking.

A Little Cut Capital gains tax returns to Kenya, but accountants say its no big deal Capital gains tax is back in Kenya, with the Kenya Revenue Authority (KRA) taking five percent on the transfer of property, which includes land, buildings, and securities. The government suspended the tax in 1975 to give a nudge to a sluggish real estate sector and stock market.

The KRA expects payment upon transfer of the property, or no later than the 20th day of the following month. A lack of clarity on how to administer the tax has caused commotion amongst securities traders in particular, but the details are expected to be sorted out in the coming year.

At 5 percent, the tax is much lower than

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neighboring Uganda, which takes a cut of 30 percent, and Tanzania, which takes 20 percent from foreigners and 10 percent from locals. The tax also holds a number of exemptions, for example income that is already being taxed in another country.

The rate of 5 percent may appease investors who howled at the originally proposed 30 percent, but some are still concerned it will turn off foreign investment in real estate, oil, mining, and equities.

Michael Mburugu, Partner with PKF, however, says he expects the market to move on fine with the new tax. “Real estate players and dealers in securities have always been considered to earn

taxable business income,” he explains. “Hence capital gains tax will only affect persons who do not on a continuous basis trade in real estate or securities, those holding property for a long period of time.”

He insists capital gains is good for the country.

“This puts Kenya in line with virtually all other countries globally,” he says. “The incremental tax collected will assist the government to meet its financing needs for flagship infrastructure projects as well as finance the cost of devolution.”

“Overall the tax will have a positive impact on the economy,” he adds. “This will then encourage investments with better return.”

business

Ingested Growth Consolidation continues in the rush to insure Kenya

R

egional insurer Jubilee Holdings has announced its intention to purchase smaller insurance companies to expand its market share. The company says it will focus particularly on Kenya where the insurance sector is expected to grow. The announcement follows a string of recent mergers and acquisitions in the country’s insurance market – at least five in the last year according to Jubilee’s CEO – including Centum’s sale of a quarter of its stake in UAP Holdings to Old Mutual.

Association of Kenya Insurers CEO Tom Gichuhi says he expects

more big buyouts in a landscape where insurance companies currently hold between 4 and 12 percent market share. “For now there are no companies driving the market but there are indications some of the companies are becoming big,” he told press. “I foresee market shares coalescing into five or seven big companies.”

Foreign money from a diverse pool of investors is making a significant mark. Morocco’s Saham Group in its purchase of Mercantile Insurance Company and Union Insurance of Mauritius in Phoenix Assurance of East Africa are two examples that stand out. A num-

ber of Indian insurance firms have also sprouted, such as General Insurance Corporation of India’s Kenya-based operations and New India Assurance Company’s establishment of KenIndia Assurance.

Securing a hold of the market appears as a smart move when the market is experiencing double-digit growth. According to insurance analysts A.M. Best, Kenya’s premium volumes in 2012 increased by 24.5 percent. In 2014, Jubilee says its gross written premium growth rate was 30 percent, with earnings per share increasing by 26 percent.

A.M. Best has identified Kenya

as one of the fastest growing insurance markets in the world, following only Lebanon. In Africa, Kenya, along with Ghana and Nigeria, is considered to hold the greatest opportunities on a continent where penetration rates are estimated at one percent. Kenya’s penetration in 2012 stood at 3.2 percent of GDP, ranking number 67 in the world. Neighboring South Africa, however, ranks 17th, with penetration of 14.1 percent.

Low penetration rates coupled with political and macroeconomic stability and favorable demographics mean the sector in Kenya is expected to dramatically grow.

A growing population, young workforce, and rising middle class have investors coveting their coverage. Urbanization and increased trade with economies where insurance is the norm also add to its appeal.

Mobile services are expected to fuel demand even further.

Pan-Africa Life recently signed an agreement, for example, with Bharti Airtel Kenya to sell life insurance through a mobile platform.

Subscribers pay as little as Ksh 15 (US$0.16) per week to cover themselves or a family member. If the subscriber or the covered family member dies, a simple text of *305# to the provider ensures the next of kin receives funds at their time of need. When obtaining insurance becomes that easy, how could a Kenyan even resist?

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business

Tanzania’s METL to invest US$250 million M

ohammed Dewji, the CEO of Mohammed Enterprises Tanzania Ltd (METL), says he has ambitious growth plans for his manufacturing and trading firm in the region. “Our vision is that by 2020/21, we want to be a US$5 billion revenue company,” he told Reuters. Dewji, known to be Tanzania’s wealthiest man, says METL will invest US$250 million in the near term, half of which the company will fund and half of which will come from banks. Expansion, he said, would focus on manufacturing, particularly in cotton. The group currently has cotton mills in Mozambique and Zambia, as well as 30 manufacturing facilities producing a range of products, including bicycles and Dewji’s Coca Cola competitor Mo Cola. METL currently operates in 11 countries in Africa, primarily Kenya and Uganda. “We want to expand our presence in countries such as Zambia, Mozambique, Rwanda, Burundi, Madagascar and Ethiopia,” he added. Said to be Tanzania’s largest employer, METL also plans to quadruple its employees from Source: www. metl.net 24,000 to more than 100,000.

Telecom providers transition to 4G T

igo Tanzania has launched its fourth generation (4G) network in a number of districts in Dar Es Salaam. The company says it will cover the entire city, as well as the cities of Arusha, Moshi, Dodoma, Morogoro, Mwanza, and Tanga by this August. Tigo has said it will invest US$20 million in 2015 in improving and expanding its network, including increasing its 3G sites and fiber networks across Tanzania.

As well, Ethiopia’s state-run Ethio-Telecom has launched 4G in Addis Ababa. It is one of the last countries in the region to move towards 4G. According to Reuters, the development is part of a US$1.6 billion agreement with China’s Huawei and ZTE to expand the country’s mobile infrastructure. The plan includes doubling 3G capacity to reach 3 million subscribers by the end of this year.

Also known as Long-Term Evolution (LTE), 4G is two to three times faster than current 3G technology, with quicker and more stable connections. “It also allows more connections at higher speed than the old 3G technology,” Strategy Worx managing director Stephen Ambrose told CNBC Africa. “So it’s a very relevant technology for the coming age because everybody’s usage of broadband is increasing exponentially as devices get better, as people download more Youtube videos, as their experience on the internet gets more and more rich.”

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Airtel and Medanta pilot mobile phone healthcare A

irtel Kenya and Medanta Africare have partnered to launch a new mHealth service that will allow customers access quality health advice from doctors through their mobile phones. The plan known as mHealth allows Airtel subscribers to consult with doctors from Medanta Africare and access health care Adil El Youssefi, CEO, advice at normal calling rates from their mobile Airtel Kenya. phones. This service, which is being piloted in Source: Airtel.com Nairobi, will be available daily from 8 am to 8 pm. Airtel says all its customers will be able to access health services at home at pre-defined rates and receive second opinions from specialists in Medanta India through Medanta’s Telemedicine Centre in Nairobi. Airtel Premier customers will receive additional benefits such as discounts on pharmaceuticals and dental consultations.

“In today’s fast-paced world, people are health conscience and are always looking for solutions that offer convenience,” says Airtel Kenya CEO Adil El Youssefi. “Mobile technology remains the most powerful communications platforms. This therefore presents an opportunity for us to offer a service that gives our customers the freedom to access healthcare services from the convenience of their phones wherever they are, giving them more peace of mind knowing that they are now able to reach quality and affordable medical care.”

Airtel Tanzania appoints EAC’s Mwapachu as chairman A

irtel Tanzania has appointed Juma Mwapachu as its chairman. Mwapachu is the immediate past Secretary General of the East African Community (EAC). He was also Tanzania’s ambassador to France. Mwapachu brings to Airtel Tanzania vast boardroom experience. He has served as chair of boards of Tanzania Investment Bank and Tanzania RailSource: East African ways Corporation, the Daily News reported.

Community He was at one time a director on the board of East African Breweries, Kenya and Tanzania Standard Newspapers Limited (TSN). Mwapachu holds a degree in law from the University of Dar es Salaam and a post-graduate diploma in international law from the Indian Academy of International Law and Diplomacy.

business

CFAO signs Volkswagen distribution partnership deal M

ultinational distributor CFAO and Porsche Holding Salzburg have announced a joint venture to the import and distribute Volkswagen passenger cars and light commercial vehicles in six East African countries: Kenya, Malawi, Uganda, Tanzania, Zambia, and Zimbabwe.

“This joint venture agreement with Porsche Holding Salzburg reinforces the distribution contracts signed with Volkswagen at the end of 2014,” says Richard Bielle, Chairman of the CFAO Management Board.

“The quality of CFAO teams and network in East Africa will allow to develop the sales of Volkswagen and strengthen the image of this leading Brand in East Africa.”

Jovago opens in Tanzania A

ccording to telecompaper.com, African online hotel book system Jovago.com has announced the opening of its first in office in Tanzania, in Dar es Salaam. The company already has offices in Lagos, Dakar, Abidhan, Douala, and Nairobi. Outside of Africa, it maintains offices in Pakistan, Portugal, and France. Jovago was launched in 2012 with backing from German internet company Rocket Internet and telecom providers MTN and Millicom.

Rocket Internet builds online startups and owns shareholdings in a number of internet companies, including Dafiti, Foodpanda, HelloFresh, Home24, Lazada, Zalora, Spotcap, and Jumia.

Farmers cash in on ecological farming G

reenpeace Africa says ecological farming practices can provide more financial benefits to small-scale farmers than farmers using agrochemicals. The announcement comes with the release of its recent report “Fostering economic resilience: The Financial Benefits of Ecological Farming in Kenya and Malawi.” Agro-ecology manages agricultural systems as ecosystems, linking traditional knowledge, sustainable agriculture, and local food system experiences. Principles of agro-ecology include diversification, the use of renewable resources, minimizing toxics, the conservation of resources , managing ecological relationships, and valuing health and culture. It is an alternative to industrial, export-driven agriculture which tends to use high amounts of agro-chemicals.

“Agroecology can comfortably feed everyone in the country,” says Anne Maina with the Kenya Biodiversity Coalition. “All we ask is for the government to start a national irrigation fund and invest substantial financial resources into it. With enough water on our lands, we will be able to grow more food throughout the year using sustainable and ecologically friendly farming methods and eradicate hunger across Kenya.”

Facebook targets Kenyans with storytelling A

ccording to Ventures Africa, Facebook is targeting the African countries of Kenya and South Africa with a new social network. Creative Accelerator is a program that enables brands to reach customers through storytelling in high-growth markets. In Kenya, Coca-Cola used the platform to spread messages of happiness uploaded by Facebook users across the country. The program adjusts to different bandwidths, ensuring users only receive messages they are able to view.

“Since Africa is mobile-first and in many cases mobile-only, we are particularly excited about reaching its massive base of feature and smartphone users with targeted marketing,” said the Creative Director of Facebook Creative Shop Fergus O’Hare.

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business

Airlines add flights to the region, terror hurts Kenya market T

urkish Airlines says it plans to increase flights to Africa in the next year, including to Kenya. “Kenya is very strategic for us especially because it is a regional hub and with the construction of the new airport going on there is no reason why we should not have more flights,” Turkish Airlines Vice President for Marketing and Sales Karem Sarp told The Star.

“Although business is currently low because of insecurity we will review the situation with time.”

Sarp says that by the end of 2015 his company should have at least 45 destinations in 30 African countries. Of Middle Eastern airlines, Emirates follows with 22 destinations in Africa, and Qatar Airways with 19. Etihad has nine after recently having added Entebbe in Uganda to its routes.

Meanwhile, Kenya Airways is suffering a cash crunch with passenger numbers and share prices plunging, particularly after a series of terror attacks. According to Reuters the company is seeking to sell planes and negotiate a bridge loan. Passenger numbers have dropped to 64 percent capacity in the first half of this year compared to 69 percent the previous share. Shares have fallen by approximately 20 percent in 2015. First-half losses totaled 12.5 billion shillings (US$134 million).

Flydubai has also announced that it will increase its number of flights in the region. Arabian Business reported that the low-cost carrier will expand in East and North Africa. It will scale up its services to Juba, South Sudan from five days a week to daily, and to Bujumbura, Burundi from two flights a week to three. As well, it will double its flights to Zanzibar from two flights a week to four. The airline has 12 destinations in Africa, having expanded from its first flight to Djibouti in 2009.

As well, Eritrean Airlines has commenced flights from Asmara to Port Sudan. According to the Eritrea Ministry of Information, Askalu Menkerios Minister of Toursim says that launching of the flight is a continuation of the developing partnership between Eritrea and Sudan. Dr. Mohammed Tahir Ella, Governor of the Sudanese Red Sea region, stated that the flight would facilitate the movement of people between the two countries, particularly Sudanese who want to spend their honeymoon in Eritrea.

Daallo Airlines and Jubba Airways announce merger D aallo Airlines, the National Carrier of Djibouti, and Jubba Airways, a low-fare commercial airline registered in Kenya, have announced a merger that will create the largest privately owned air carrier in the Horn of Africa. Based in Djibouti, the joint holding company African Airways Alliance will pool resources of the former competitors. The two companies have been operating duplicate routes for many years, overlapping their business structures and operational costs.

While the merger will result in unified management, operations, and marketing, the companies say the brand names of Jubba Airways and Daallo Airlines will remain. The goal of the alliance is to improve the airlines’ service quality, upgrade and modernize their fleets, and expand their flight networks.

The merger comes at a time when international carriers are moving into the East African market, undermining homegrown airlines and local initiatives. African airlines are strongly disadvantaged against the air-

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lines in the Gulf Region, Europe, and the rest of the world, due to limited access to credit facilities and a lack of supportive regulatory framework.

In 2012, rumors emerged that Kenya Airways was seeking to merge with Ethiopian Airlines and South African Airlines, yet the discussion failed to move forward. Such discussions are rare the region, largely due to governments coveting their respective national airlines as strategic assets. Globally, as well, anti-trust legislation has forced airlines to settle for joint ventures or alliances over mergers.

In 2014, the companies transported a combined number of more than 250,000 passengers and generated sales revenues of more than US$90 million. The new company will receive an initial combined capital investment of US$30 million. According to Daallo CEO Mohammed Yassin, Daallo and Jubba will introduce a new generation of turbo prop aircraft to their domestic routes and add seven destinations by the end of this year.

FINANCE

Frontier Finance W

Private equity may be the solution to a regional lack of capital. But is it a source of investment too good to be true? hen Actis completed the sale of Ugandan national electricity distributor Umeme last June for US$98 million, it signaled the power of private equity in Africa. Not only had the Actis investment transformed a company, it had helped to transform a country. When the panemerging market firm took ownership of Umeme in 2005, most of its infrastructure had fallen in to disrepair. Capital it raised helped to replace over 120,000 rotten telephone poles, increase customer connections by the hundreds of thousands, and increase sales from 17 gigawatt-hours (GW) in 2008 to 2,118 GWh in 2013. The capital Actis had injected meant the company now had significant returns and Ugandans had a significant supply of power. “Significant� is the word to describe the way private equity is changing the African investment landscape. According to the Wall

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finance

Street Journal, private equity funding for Sub-Saharan Africa rose to US$4 billion in 2014, three times more than in 2013. In 2014, a Global Limited Partner survey of 106 limited partners representing global assets of more than US$680 billion rated Sub-Saharan Africa as the world’s third most attractive private equity market, following Latin America and South East Asia. Forty-seven percent of respondents said they expected net returns of more than 16 percent from investments in the region. Thirty-seven percent said they planned to begin investing or to expand in Sub-Saharan Africa over the next two years.

In 2013, a respondent told the

Africa took a 25 percent share, up from 22 percent four years previous. South Africa is down to 24 percent from its 28 percent in 2010.

“South Africa’s slower economic growth versus rapidly growing economies in East And West Africa has meant that there have been shift in private equity capital over the last five years from the more mature South Africa market to opportunities in East and West Africa,” explains Graham Stokoe, the Africa Private Equity Leader for Ernst & Young, now known as EY. “The South Africa private equity market is however still significant, it’s just not growing and expanding at the pace

Private equity funding for Sub-Saharan Africa rose to US$4 billion in 2014, three times more than in 2013 annual survey, “Africa is the last frontier.”

The frontier has opened quickly, with Sub-Saharan African moving from number eight in 2010 to the third spot today.

Reasons for improvement include an increased number of fund managers with track records, significant investment opportunities, and low entry valuations.

As well, larger growth indicators such as market development and demographic, economic, and regulatory trends add appeal.

Amidst this growth, South Africa is losing its dominance and other regions are increasing their share. From 2011 to 2014, East Africa held 18 percent of Africa’s private equity deals, an increase from 13 percent in 2010. West

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that West and East Africa is.”

Despite small average deal size, a number of major investments have helped grow East Africa’s share. Infrastructure projects are coming with the highest ticket prices. In Ethiopia, for example, Blackstone Group will spend US$1.35 billion on a gas pipeline and Paul Tudor Jones US$2 billion for a geothermal power plant.

Large purchases in other sectors include Warburg Pincus’s US$600 million investment in African oil and gas exploration firm Delonex and the US$130 million capital injection by Helios, Altice SA, Liberty Global, Emerging Capital Partners, and ATMT into Kenya’s Wananchi Group, which owns of pay-television provider Zuku.

Stokoe says that besides the

handful of large investments linked to infrastructure, private equity investors have their sights on consumer-backed sectors, with an emphasis on financial services such as banking, insurance, microfinance, and payment platforms, as well as consumer products and agribusiness. He says he also sees strong demand for retail, but the region as a whole has not been able to meet the demand. “There are not that many retail companies in SubSaharan Africa outside South Africa,” he says. “Investors would like to see more.”

Actis, which has a legacy of investing in East Africa for more than 65 years, says its current investments are in response to the trend of rising personal wealth and domestic consumption in the region, as well as the urgent need for infrastructure in areas such as energy distribution, financial systems, healthcare, education, and real estate. Its 36 percent equity investment in AutoXpress in February last year, for example, is helping the Kenyan car part provider grow from a local to a regional brand. In the energy sector, Actis recently announced the launch of Lekele, a US$1.9-billion renewable energy platform aimed at providing between 700 and 900 MW of wind and solar power across Africa.

“We see vast potential in the African renewable sector, with a supply-demand gap and need for more power,” says Koome Gikunda, a Director of Real Estate at Actis. “With Actis’s operational experience, deep energy insight, and network, the opportunity is huge.”

In real estate, the company has led investment in 15 develop-

ments totaling US$1.5 billion across Sub-Saharan Africa, five of which have been sold. It is currently developing Nairobi’s Garden City, a US$250-million retail-led mixed use development. Actis says the project will be the first LEED-rated retail complex in Sub-Saharan Africa outside of South Africa, with part of its energy requirements supplied by solar power.

“The firm sees huge potential and interest in real estate in Kenya in particular,” says Gikunda.

“Kenya boasts a large and fastgrowing population, GDP per capita growth, high urbanization levels, and an expanding middle class. Nairobi is an attractive city to invest in.”

While individual countries such as Kenya and Ethiopia have captured headlines, regional funds are dominating, contributing 56 percent of private equity investments in Africa. “We are seeing more and more pan-African funds and smaller regional funds,” says Stokoe. He says Pan-African funds tend to be larger due to their larger geographical coverage. Major players include London-based Helios, which recently closed its third fund at US$1.1 billion, and Emerging Capital Partners which has raised more than US$2 billion over the past 14 years. In East Africa, Catalyst Principal Partners has raised US$125 million for a regional-focused fund and is targeting 20 to 25 percent net returns over four to six years from investments in consumer goods, financial and business services, manufacturing, technology, and telecommunications.

Smart Money In most cases, private equity is a

Finance

positive contributor to regional businesses and economies.

“Private equity has a big impact in the region because of a lack of listed companies and ability to raise capital,” says Stokoe.

“Banks are very expense to get debt from.” As well, partnering with a private equity company is a demonstrated way to create value. Research by EY and the African Private Equity & Venture Capital Association (AVCA) found that in aggregate, African private equity exits across the transaction spectrum outperform public markets.

Much of this value comes from the expertise and network provided by the investing private equity firm. The investing firm, for example, can transfer ideas,

In aggregate, African private equity exits across the transaction spectrum outperform public markets. knowledge, and skills to the partner company, as well as introduce management to potential bolt-on acquisition targets, suppliers, customers, and other stakeholders. The survey found that twothirds of the private equity firms provided invested companies with access to networks. When companies received access to these networks, they experienced 2.4 times the returns of invested companies without access.

And not all deals lead to the replacement of company leader-

ship and employees. In fact, 89 percent of private equity firms surveyed backed incumbent management teams, with most management changes taking place at the board level. When the investor backs incumbent management teams, returns are 20 percent more than when management is replaced.

As well, businesses receiving private equity investment are more likely to practice good governance in the areas of health, safety, and environment.

“Significant social benefits come with running the national grid in Uganda or developing real estate assets,” says Gikunda of Actis’s work in the region. “Developing real estate projects from scratch offers the ability to positively impact the local environment. Such an approach resonates with the regulators, tenants, and buyers; enhancing returns.”

Overall, private equity is known to build better businesses. It can even save a company about to go under. “Partnering with a private equity firm allows for corporatization of what was before a family or entrepreneurial business,” says Stokoe. “Obviously private equity wants to keep a business’s entrepreneurial spirit and growth, but with added corporatization.”

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Barriers and Bottlenecks

How Private Equity Works Private equity is equity not quoted on a public exchange. Typically it involves a private equity firm, a venture capital firm, or an angel investor investing in a mid-market company. Working capital is used to nurture expansion, develop new products, or restructure operations, management, or ownership. The investment window averages four to seven years, usually with the aim of selling the invested company to a corporation. At times, private equity may involve the purchase of shares of a public company and delisting it from the stock market, known as a “go-private” deal.

Private equity firms are managed by general partners, who earn management fees and a percentage of profits from exit deals. Limited partners provide the funds with no active management role. These funders can be high net worth individuals, institutional accounts, or pension funds. Investments are pooled into a fund which generally makes 10 to 12 investments over a lifespan of 5 to 7 years.

Private Equity vs. Venture Capital People often use the terms private equity and venture capital interchangeably.

Venture capital, however, tends to be a bottom-up approach with investors funding an organization before it has brought in major sales and revenue.

Often venture capital is attracted to organization because of its people and ideas, while private equity is drawn by existing performance. Private equity is generally a top-down approach, restructuring existing companies with demonstrated products and cash flow.

What is Angel Investment?

Angel investment tends to be smaller in scale than private equity or venture capital. Often, it is a one-time injection for a startup or continuous support for a struggling business. Capital may come from an entrepreneur’s own network of family and friends. A growing number of former entrepreneurs and professionals are also willing to act as angel investors, providing startup capital, advice, and contacts. Unlike venture capitalists and private equity firms, angel investors typically act alone or in small groups, with their role in the invested firm limited to advising.

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Despite its benefits, not all entrepreneurs in the region are convinced of private equity’s value.

Many business owners are skeptical of partnership; others want to keep their ways rather than make adjustments. Establishing a board or developing financial systems, after all, can be a headache when your business is already bringing in returns. Stokoe notes that local entrepreneurs and businesses are becoming more knowledgeable as the private equity market matures over time, particularly in East and West Africa where it is less mature than in South Africa.

Deal size also remains relatively small on a global scale (so small that many deals are never publically announced). This poses a challenge to larger private equity firms aiming to deploy significant funds across a limited number of companies. Stokoe says increasing the number of companies worth more than US$50 million in the region would encourage more private equity players to invest. In the Global Limited survey, 45 percent of limited partners said the small scale of investment opportunity is a turnoff in Sub-Saharan Africa. Their greatest concern, however, was a limited number of established fund managers.

“As Africa asserts its place in the global private equity rankings, sophisticated investors are insisting on higher systemic

standards for fund managers to mitigate risk and maximize returns,” says Alex-Handrah Aimé, Managing Director of ECP. “Many investors now have more stringent requirements relating to governance, track records, institutionalized back offices, and reporting.”

Private equity in the region, as well, maintains an imperfect track record. It has earned negative publicity in South Africa, in particular, due to cases of overleveraging. US-based Bain Capital’s purchase of fashion retail conglomerate Edcon is a high profile example. Bain paid 25 billion rand (US$2.3 billion) for the company in 2007 and, according to Bloomberg, at the end of 2014 Edcon stood 21.7 billion rand (US$1.8 billion) deep in debt.

As well, Stokoe says a number of deals likely fail to go through due to seller-buyer price differentiations. Sellers often overestimate the value of their assets and buyers have possibly also been conservative by sometimes underestimating. Still, he believes the region is not in a valuation bubble. This may be in part because deals sizes are smaller in the region. “We have not seen an overall trend in bubble-type valuations which were previously experienced in regions like India, China, and Latin America” he says.

“Average valuations are also still well below places like Europe and North America.”

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In Agreement M Interoperability helps mobile money grow

obile money and banking competitors in the region are teaming up to increase their market share. MTN and Vodafone recently agreed to interconnect their mobile money services, MTN Mobile Money and Safaricom-run M-Pesa. The Memorandum of Understanding between two of the region’s largest mobile operators means M-Pesa customers in Kenya, Tanzania, Democratic Republic of Congo, and Mozambique, and MTN Mobile Money customers in Uganda, Rwanda, and Zambia can now transfer funds to each other.

“Our agreement with MTN to connect our mobile money wallets in East Africa is a fantastic example of co-operation and interoperability between competing mobile operators,” says Vodafone’s Director of Mobile Money Michael Joseph. “By working together, we will deliver cheaper, faster money transfers, improving the lives of many people living in the seven countries involved.”

As well, in March, M-Pesa announced that its customers in Kenya and Tanzania could now transfer funds across the border for the same cost as local rates.

The company currently maintains more than 180,000 agents in both countries. “With a substantial unbanked population transacting mainly in cash, the Tanzania-Kenya corridor represents a significant opportunity for M-Pesa to give

people and companies an accessible, low-cost alternative to traditional international remittances,” says Joseph.

According to the World Bank, formal remittances between Tanzania and Kenya totaled US$133 million in 2012. M-Pesa says this offer will increase competition for existing remittance services, which can charge up to 30 percent of a transaction to make a transfer between the two countries. The company says an M-Pesa transfer of US$50, however, would receive only a one percent charge, as well as a small exchange fee.

In Tanzania, cooperation amongst mobile money platforms has set an example, since the government agreed on wallet-to-wallet interoperability in the fall. Since then the market has seen Tigo make agreements with Airtel, Zantel, and Vodacom. “By increasing the volume and reducing the cost

of transactions, interoperability benefits businesses and consumers and contributes to increased financial inclusion,” says Greta Bull with the World Bank’s IFC, which worked with the government to promote the cooperation.

Banking In Determined to gain customers rather than lose customers to mobile banking, a number of regional banks are also partnering with mobile money providers, such as Kenya’s KCB Group’s cooperation with M-Pesa. Over the last year, KCB says customer transactions using M-Pesa have tripled to Kshs 125 billion (US$1.3 billion), with an increase from 10,000 to 100,000 transactions per day. The companies recently extended their partnership with the KCB M-Pesa Account, which allows customers on the M-Pesa platform with sufficient credit to borrow up to KShs 1

million (US$10,640). A customer’s savings and M-Pesa balance help determine the size of the loan.

“This product is a crucial answer to our country’s effort to empower millions of Kenyans by availing credit conveniently through their mobile phones,” says KCB CEO Joshua Oigara.

Many see mobile money as the next big thing in financial inclusion, with more Africans owning mobile phones than subscribing to bank accounts. The Boston Consulting Group estimates that Sub-Saharan Africa could generate fees from mobile money transfers up to US$1.5 billion by 2019. East African countries, particularly Kenya, Tanzania, and Uganda, have shown the strongest growth, due largely to conducive regulatory structures and market leaders such as M-Pesa. The company currently earns one-fifth of its annual US$1.59-billion revenue from mobile money.

The notion that the region is close to reaching financial inclusion, however, deserves some skepticism. The majority of mobile money transactions after all average less than US$1, used to top up prepaid mobile accounts. As well, mobile money recipients tend to cash in their remittances almost immediately. Taking the cash out of the system prevents the use of mobile money as a medium of exchange in itself. In practice, the concept of the “mobile wallet” is not quite here.

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Tanzania pledges to raise at least US$700 million in Eurobonds D

espite several failed attempts since 2008, the Government of Tanzania says it will float its first Eurobonds this year to fund infrastructure projects. Total bond amounts cited range between US$700 million and US$1 billion. The funds will focus on oil and gas, and contribute to the country’s US$25.2-billion, five-year development plant, which includes the construction of power plants, ports, and roads. Tanzania is said to be the region’s second fastest growing economy, following Kenya, with its GDP growing more than 7 percent in 2014, according to the IMF. The country has appointed the UK’s Citibank Group as an advisor to the process. According to the East African, however, Bank of Tanzania Senior Advisor on Economic Research and Policy Alex Ngwinanila says the government is still searching for an appropriate rating agency.

Some analysts say the country has failed to secure a rating agency due to government bureaucracy. Rating agencies help determine the level of loans and potential risks involved, generally requiring documents relating to government budget performance over the past years, as well as debt management over the past five.

Zambia was the first country in the region to raise Eurobond funding, launching a 10-year bond in 2012 for US$750 million. In 2013, Rwanda secured US$400 million. Kenya followed, raising US$2.75 billion in 2014 through five- and ten-year notes, and has plans for another at US$1.5 billion this year. Other countries in Sub-Saharan Africa who have raised Eurobonds include Seychelles (the first to secure one in 2006), Gabon, Senegal, Côte d’Ivoire, the Democratic Republic of Congo, Nigeria, and Namibia. According to Bloomberg, Sub-Saharan African nations sold a record US$9.2 billion in Eurobonds in 2014, an increase from US$6.7 billion the previous year.

Commonly issued by governments, corporations, and international organizations, Eurobonds are denominated in a currency not native to the issuer’s home country. Often Dar es Salaam

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traded on international stock exchanges, they are underwritten by an international syndicate, issued to investors in a number of countries, and remain outside the jurisdiction of any single government. Governments are increasingly seeing the bonds as a way to raise capital for infrastructure projects, helping them to diversify past concessional debt, foreign direct investment, and international aid.

Standard Bank Group Ltd. and Citigroup Inc. have urged African nations to post Eurobonds while US interest rates are still low. According to a Bloomberg survey of economists, the US Federal Reserve will likely increase its policy rate first time since 2006 in the third quarter of this year.

Critics are concerned that African countries are taking on even more.

Sovereign bonds also tend to come at higher borrowing costs than concessional debt. In 2008, Seychelles defaulted on its US$230-million Eurobond after a year of poor tourism and excessive government spending. Other defaults include a missed interest payment by Côte d’Ivoire following election disputes in 2011. Ghana and Gabon, as well, have struggled to pay for 10-year bonds due in 2017.

finance

Sudan bank to open in Bahrain S

udan’s largest privately owned bank, the Bank of Khartoum, says it will open a wholesale banking branch in Bahrain. According to Reuters, the Islamic bank, which is majority-owned by Dubai Islamic Bank, has applied for a branch license and is expecting to finalize the process soon. “It comes logically because the bank’s vision and ambition is to be the biggest financial institution in Sudan,” says Genearl Manager Fadi Salim Al Faqih.

Local currencies continue to fall K

enya’s shilling fell to a three-year low at the end of April, reaching 94.55/65 to the dollar on April 29, a level last seen in November 2011.

The Central Bank stepped in to manage liquidity by selling an unspecified amount of dollars on the money market. The currency was hit by falling tourism exchange revenues following a number of terror attacks hampering the industry. As well, manufacturing, telecoms, and energy companies purchased dollars to meet end-of-the month obligations; and agriculture earnings fell from uneven rain.

Uganda and Tanzania have faced even weaker currencies. Tanzania’s shilling recently reached record lows. Uganda’s shilling picked up towards the end of April, however, due to a reduction in corporate dollar demand.

Africa Oil receives Stampede financing Somalia reaps benefits from A livestock investments A frica Oil has raised US$100 million through a share purchase by Stampede Natural Resources. Stampede is owned by a Helios Investment Partners fund. Upon completion of the sale, it will own approximately 12.37 percent of Africa Oil. The deal includes Stampede’s nomination of at least non non-executive director to the board of the African oil company. Stampede will also have the right to participate in its pro-rata share in future financings.

Vancouver-based Africa Oil says net proceeds of the private placement will be used towards the company’s appraisal and development work program in East Africa. It currently maintains asssets in Kenya and Ethiopia, as well as in Puntland through its equity interest in Africa Energy Corp. The company expects to close the Stampede deal by the end of May following approvals from authorities, including NASDAQ and the Toronto Stock Exchange.

“We are very pleased to have been able to attract a large investor with the credentials and reputation of Helios into the Company which we consider as a strong endorsement of the Lokichar Basin project, despite the current oil price downturn,” says Keith Hill, President and CEO of Africa Oil. “This relationship will not only be of short term benefit by strengthening our balance sheet and allowing us to continue with drilling operations and pre-development work, but also has the potential to provide a core investor as the development project progresses.”

Andy Bartlett, Oil and Gas Partner with Helios explained the Africafocused private equity firm’s strategic decision. “This is a flagship transaction for the firm to help develop Kenya’s nascent petroleum sector,” he says. “The capital is being deployed to further this exciting project which we consider to be world class in terms of potential. It has all the right characteristics for the sector in a lower oil price environment.”

ccording to the FAO, heavy European Union and United Kingdom investments in animal disease prevention helped Somali livestock exports to Arabian Gulf markets reach a high of five million in 2014. This is the highest number of live aniSource: FAO mals exported from Somalia in the last 20 years. It includes 4.6 million goats and sheep, as well as smaller numbers of cattle and camels, worth an estimated US$360 million.

“This is a key milestone for the Somalia’s livestock sector that reflects the large investments being made to support the commercial development of the livestock sector to become more competitive in international markets,” says Said Hussein Iid, Somalia’s Minister of Livestock, Forestry and Range. “This is important for both Somalia’s economy in general and for the livelihoods of the millions of livestock owners throughout Somalia.”

The FAO says buyers from Saudi Arabia, Yemen, Oman, Kuwait Qatar, and the United Arab Emirates have all taken advantage of Somalia’s improved disease surveillance and control mechanisms. Saudi Arabia, in particular, has contributed to steadily rising exports over the last six years, following a move to lift a nine-year ban on the import of livestock from Somalia aimed at preventing the spread of Rift Valley fever.

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Solar Rising

Sunshine is becoming a growing source of power for lighting and electricity in the region.

For savvy households, businesses, and non-profits, it provides a growing number of returns

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he Somali city of Burao, like many other cities across the continent, has long been known for electricity shortages. Power cuts are regular and expected, occurring at even the most critical of times. Hassan Rooble, a nurse at Burao General Hospital, recalls the night the lights went out in the middle of an emergency surgery.

“It was horrific,” he remembers. “I thought the patient was going to die.

It was so dark and all the machines stopped. We did not have a generator and even if we did there was no fuel. The doctor had to leave the wound open and only began stitching it once the electricity was back on.”

Today, thanks to solar panels installed by the United Nations Development Programme, Burao General’s lights can shine bright at night. The panels produce enough electricity to cover nearly 75 percent of the hospital’s needs and electricity costs are now a quarter of what they once were. “We used to spend a lot of money on electricity that we simply did not have,” says hospital administrator Hassan Ismail. “Even after a 50 per-

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cent [public service] discount, we used to pay US$6,000 per month.”

While high electricity rates are a challenge across the continent, it is the lack of electricity that is the greatest concern. The International Energy Agency estimates that the electrification rate for Sub-Saharan Africa is as low as 14 percent in rural areas. Those without access to the grid mostly rely on expensive kerosene or biofuel such as charcoal. These traditional fuels present their own health threat with 1.5 million people dying globally from indoor air pollution and house fires each year. According to the World Health Organization, breathing kerosene lantern smoke regularly is equivalent to smoking 10 cigarettes a day.

Electricity, as well, is intrinsically linked with the health of the economy and local businesses.

A 2005 study in Tanzania found that electricity access reduces household poverty between 4 and 13 percent. As well, the UNDP discovered that electrification in Mali raised the average annual income of women by US$68. Access to lighting, after all, can significantly extend the work day. This increases domestic productivity, offers more hours for home-based businesses, and provides greater study time for children at school.

As well, small-scale farmers can rely on lighting to support the use of fertilizers that require application at night.

In the move to fill this electricity gap, governments, non-profits, and local and international investors are turning towards the sun.

The sun, after all, is the region’s greatest natural resource, shining on average at least 320 days a year. And unlike the other highdemand resources such as oil, gemstones, timber, and ivory, solar

energy is permanently available and impossible to hoard.

While solar penetration rates are low (pico-powered solar and wind systems stand at a rate of less than 4 percent across the continent), investors small and large, urged on by improvements in technology and lower capital costs, are seeing this as room to grow. Between 2008 and 2013, according to GTM Research, solar photovoltaic (PV) module costs fell by approximately 30 percent each year. Since 2000, solar technology has grown faster than any other renewable energy technology. Solar, according to the International Energy Agency, could become the world’s top source of electricity by 2050, generating up to 16 percent of global power.

Local and global finance is following this trend, and the solar sector in Africa is steadily developing from a charity case to a business case. Solar deals and developments are increasing in size and frequency, and local PV assembly plants have even sprouted in Kenya, Ethiopia, Sen-

A 2005 study in Tanzania found that electricity access reduces household poverty between 4 and 13 percent. egal, and South Africa. According to the Renewable Energy Policy Network for the 21st Century, investments in renewable energy on the continent in 2012 and 2013 were greater than the previous eight years combined.

Prize-Winning Projects Large investments in solar in the region include Gigawatt Global’s recent US$23.7 million solar energy plant in Rwanda which has earned the company a nomination for the 2015 Nobel Peace Prize. The American-owned, Netherlands-based company secured funding from an international consortium to build the 8.5 megawatt (MW) field to power 15,000 homes. The project is part business, part charity: The land the project sits on belongs to the Agahozo-Shalom Youth Village, whose mission is to care for chil-

dren orphaned before and after the Rwandan genocide. Leasing fees will help pay for a portion of the charity’s costs. Gigawatt Global, as well, says it will provide training on solar power to students at Agahozo-Shalom’s local high school.

Attention from the Rwanda project has helped Gigawatt secure nearly US$1 million in grants for its next field, which is planned for Burundi. The proposed US$20-million, facility slated for a 15-hectare site in the Gitega region, 65 miles from the capital of Bujumbura, would produce enough electricity for 60,000 homes. By adding 7.5 MW to the grid, the project is expected to increase total generation capacity by 15 percent. Of the current capacity of 52 MW, over a quarter is generated by diesel. As well, Burundi faces a high frequency of blackouts, with

Gigawatt Global’s solar plant at Agahozo-Shalom, Rwanda

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electrical downtime averaging two days per week.

“Our impact investment model is to strengthen developing nations, both economically and environmentally, by providing renewable energy sources where they are most needed,” says Yosef Abramowitz, President of Gigawatt Global. “We plan to build 1,000 solar MW in Africa by 2020, thereby providing electricity to millions of households and institutions that are currently without the most basic of human needs.”

Dollars and Sense While solar energy can benefit social and environmental bottom lines, many regional companies are finding they can justify solar technology as well financialy.

Last year, Williamson Tea hired UK-based Solarcentury to launch a solar project at its Chagoi Team Farm in Bomet County, Western Kenya. According to the client, the solar system has cut its energy costs by around 30 percent.

Guy Lawrence, Director of Business Development at Solarcentury in East Africa says solar energy has become a competitive offering for

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businesses that want to reduce their energy bills and reliance on fossil fuels. “Solar is especially beneficial for high energy users such as those in the tea, flower, horticulture and manufacturing sectors where high energy costs can reduce their global competitiveness,” he says.

The company, which has worked in Europe for over 15 years and more recently South Africa and Latin America, is on a growth trajectory in the region. Solarcentury is currently building what it says will be the region’s largest solar car port for Nairobi’s Garden City retail complex, with 300 solar panels expected to generate 1,256 megawatt-hours per year.

In January, Solarcentury merged with Kenya-based development company East African Solar in a move it says will help respond

to growing demand. The next stage, the company says, is further developing its local network of suppliers.

Going Home For the residential solar market, network development has become a business model of choice. Global energy company Greenlight Planet, for example, recently launched its Direct to Village channel in the region, a model it developed in the Northern Indian state of Bihar.

Full-time employees manage a network of commission-based agents, or “micro entrepreneurs,” who sell the company’s Sun King Solar Lamp products in remote areas.

In 2012, The Economist Magazine described the Sun King as the “best solar lamp” and Lighting Africa recognized it as the market’s best

Investments in renewable energy on the continent in 2012 and 2013 were greater than the previous eight years combined.

mid-sized solar light. The current Sun King models offer 30 hours of straight light with a five-year battery. The Sun King HOME launched in 2014 features three hanging lamps with individual wall-mountable light switches and three light settings, as well as two USB points. The unit is not only sturdy but it provides light fifteen times brighter than kerosene. A Sun King lamp can range between US$10 and US$50, and the HOME system costs less than US$100. Over the five-year lifespan of the product, a household using kerosene could be expected to pay up to US$600.

Kenya-based Jua energy, which is already active in Ethiopia, is hoping to electrify homes with its solar products sold online. The company recently launched on Kenya’s online mall Jumia.com and says it is also considering expansion in Tanzania and Uganda. “Right now is the time of the internet,” says cofounder Hill Ren. “It is a very effective way to reach potential users as African e-commerce is growing amazingly.” He says customers most likely to purchase his products are young people, company workers, and people without grid coverage.

“People love electronic products, which they are updating day by day,” he adds. “At the same time, they are going to need more accessory products to support this product environment.”

Ren says a lack of consumer knowledge and product costs still stand as obstacles to solar growth in the region. Jua’s home system currently costs less than US$100, and he estimates a household can save an average US$1,100 over the product’s lifetime of 10 to 20 years.

“As for brand owners, we need to try our best to keep the product more cost-effective,” he says. A number of lower cost products with compromised quality have

energy

turned consumers off solar technology, he adds.

Quick Charge The upfront cost to purchase and install solar products can make solar slow to pick up in residential and rural markets. Kenya-based M-KOPA Solar, however, has developed solution in the form as “pay-as-you-go” solar energy for customers off the grid. Subscribers purchase the company’s solar system for a deposit of around US$30, and make 365 daily payments with their mobile phones.

After a year of payments, the customer becomes full owner of the system and continues to use it with no further cost. The company says that, at less than US$0.50, the daily price is cheaper than what customers would pay on average for the equivalent in kerosene lighting and telephone charging.

Current mobile partners include MTN Mobile Money, Airtel Money, and Safaricom.

Pay-as-you-go has more than worked for M-KOPA, with the company’s revenues estimated at US$20 million a year. Since launching in 2012, the company says it has connected more than 150,000 homes in its base of Kenya. It is currently expanding in Uganda where it launched a pilot project in the Eastern part of the country in 2013. To date, M-KOPA had served 20,000 Ugandan households and has plans for at least 50,000 more off-grid setups by the end of 2015. Management, as well, says it plans to double its service centers in the country by this time.

“In many markets around the world, solar is seen as something of a luxury,” says M-KOPA Solar Managing Director and Co-Founder Jesse Moore. “But in Uganda solar is giving people an essential foot on the energy ladder and helping them save money.”

Supporting the Sun Policy makers have taken note of the rewards of solar energy for the region. Many East African governments offer incentives such as value-added tax exemptions, feed-in tariffs, and subsidies to promote solar technology. A number of government programs exist to promote solar’s spread. Uganda’s Rural Electrification Strategy Plan, for example, has set the goal of adding 140,000 off-grid PV installations by 2022. Recently, Tanzania moved to lower consumer costs with its PV Clusters Project, which supported private households in buying and installing solar home systems collectively (bulk purchasing) to reduce the overall cost. Kenya’s conducive government policy, as well, is a reason the country’s solar market is one of the continent’s most mature.

“Government support for renewables in this region is growing,” says Dan Davies, Director of Solarcentury in East Africa. “It is encouraging that in Kenya, for example, the Government’s Kenya Vision 2030 recognizes the opportunity for renewable energy to support economic growth and the need for the country to switch to more sustainable energy sources.”

Language of the Sun As the solar sector shines, words we will need to know Feed-in Tariff — A government policy mechanism designed to

encourage investment in renewable energies by providing renewable energy generators with long term contracts which pay a cost-based priced for the energy that they provide.

Grid Parity — Grid parity is achieved when for a given area at a certain time of day, the cost of an alternative technology for electricity production matches the existing average for the area at that time. Grid parity is considered to be the point at which an energy source becomes a contender for widespread development without subsidies or government support.

Insolation — A fusion of the phrase “Incoming Solar Radiation,”it is a

measure of the amount of solar radiation energy received on a given surface area over a given time, usually measured in megajoules per square meter (MJ/ m2) or watt-hours per square meter (Wh/m2).

Net Metering — A service provided to an electricity consumer wherein

any electricity generated by that consumer and distributed to the local grid is used to offset the costs of electric energy provided to the consumer during the applicable billing period.

Photovoltaics (PV) — A method of generating electrical power by converting solar radiation into direct current electricity.

Source: Gigawatt Global

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energy

Energizing Somali Growth Guest author Dr. Jami Nelson-Nuñez with One Earth Future Foundation discusses the potential of solar and wind power for economic recovery

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Berbera Hospital

PV panels at Berbera Hospital

Solar-powered operating room at Berbera Hospital

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he Somali private sector, the country’s engine for growth and recovery, is running at half-power. One of the limiting factors for Somali businesses is electricity. For the roughly one-fourth of the population that has access to electricity, costs are the highest in the world and supply is limited and unreliable.

Somali households and businesses, for example, typically pay between US$0.80 and US$1.00 per kilowatt hour, while their counterparts in neighboring Ethiopia and Kenya pay less than US$0.20.

The limited supply and high costs of energy explain why Somali consumption of energy is a small fraction of its neighbors’ consumption rates. Electricity bills erode Somali business margins, making it difficult to compete with imports.

High tariffs and unreliable services have forced some manufacturers to reduce production and consider relocating to neighboring countries.

What makes the energy landscape of the Somali region unique among African countries is that more than 20 years of conflict have left municipal grids defunct and placed the lion’s share of energy generation in the hands of private entrepreneurs who have set up their own generation and distribution grids. These energy entrepreneurs address the needs of citizens and businesses, filling the roles that Somali governments have been unable to perform. They have even supplied power at (sometimes highly) discounted rates for essential services, such as police, hospitals, and schools.

While resilient and creative, the current Somali urban energy sector is also inefficient and problematic.

Generation and distribution systems, often installed and operated without technical expertise, draw power from refurbished diesel generators without the equipment to monitor use or optimize generation.

As a result, losses from generation to distribution are as high as 40 percent, perhaps the highest loss rate in the world. With outdated, inefficient systems and lacking the economies of scale to bring prices down, producers lose 60 to 65 percent of revenues to pay for fuel alone. Moreover, the distribution grids are dangerous and have led to the electrocution of electricity workers and bystanders.

A new report by the One Earth Future Foundation, “Powering Progress: The Potential of Renewable Energy in Somalia,” details the hurdles Somalis face in accessing the affordable energy they will need to drive recovery and growth in the country.

The key to this turnaround will involve renewable energy which is playing a role in development – from industrialized to poor countries – on an unprecedented scale. This surge is partly driven by dropping prices for renewable energy systems. For example, improvements in technology of solar photovoltaic (PV) panels cut prices in half between 2008 and 2011. Long-term projections indicate further decreases in prices of renewable components. Battery storage, a critical element of renewable systems, has dramatically improved as costs have declined.

energy

According to energy experts Dickon Pinner and Matt Rogers of McKinsey and Company, battery costs have dropped 70 percent in the past five years and could drop another 70 percent in the next decade given current trends.

Countries are eager to buy in.

Even the Saudis, who benefit from abundant oil, have announced plans to dramatically expand solar powered energy generation, purportedly to 41 gigawatts (GW) by 2032. While much of the growth has happened in the economic power houses of China and the US, countries like Bangladesh, India, and Mongolia have all experienced sharp increases in renewable energy use. These early successes, in a future that will be largely driven by renewable energy sources, are important role models for other countries – and Somali energy entrepreneurs are paying attention.

The growth in renewable energy around the world is primarily in wind and solar resources, two resources in which the Somali region is well endowed. The country has one of the highest daily averages of total solar radiation in the world.

Wind speeds of greater than 6 meters per second are common in over half of the country and are strong throughout the year to support consistent wind-generated energy.

Wind and solar installations are beginning to proliferate. Over 20 medium- and large-scale renewable energy projects have been constructed in the last three years.

These projects, such as a wind farm in Oog, Somaliland that has brought 24-hour electricity, show the feasibility of renewable energy and are stimulating further demand for renewable energy solutions.

There is also significant growth in “off-grid” renewable household and commercial products, such as solar lightbulbs and solar PV panels that power households or buildings

without connecting to grids.

As successful examples from India and Bangladesh indicate, financing mechanisms to allay initial capital costs are critical tools for access to off-grid renewables.

For African countries, channeling investment to enable credit options through local financial institutions or renewable energy companies is a lucrative investment that pays social dividends. For example, when Somaliland’s Golis Energy began offering a credit system for clients in 2014, their sales increased by 40 percent within the first few months.

Golis also found that these new financial instruments attracted more women clientele.

for many African countries, but Somalia’s lack of a central bank and weak institutional frameworks are significant impediments.

Financial support is further limited by lack of government support. There are no energy laws or regulations for the sector, which would reduce investment risks, create safety standards, and promote energy efficiency. Somaliland has developed an energy policy, but the Somaliland Energy Act that entrepreneurs and international organizations are promoting is stalled and is yet to be approved.

Puntland and South Central Somalia are further behind and have yet to draft regulation or even an energy

Investment in the Somali energy sector not only offers a promising financial return, it also portends a multiplier effect to stimulate the economy.

Renewable energy is also entering the conversations in large-scale energy generation and unified distribution grids. These approaches are lucrative because they offer the economies of scale necessary to reduce electricity prices to levels that permit competitiveness in international markets while also making electricity access more equitable.

Integrating renewable energy into large-scale energy production and distribution will reduce costs and increase energy security, allowing Somali communities to lessen their dependence on diesel which has skyrocketed in price.

As Somalis tackle issues with the inefficient urban grids, including the integration of renewable energy sources, three issues have remained to be formidable obstacles. The primary challenge is finance. Attracting international investment for electrical infrastructure is difficult

policy framework.

Technical capacity is the third obstacle to overcome to develop renewable energy and to revamp electrical infrastructure. With no formal training, companies specializing in renewable energy have had to train employees themselves, slowly building a foundation of expertise with each new installation. For more complex issues, companies must fly in experts.

In the vacuum of regulation, access to finance, and technical capacity, Somali entrepreneurs have still pressed ahead. The sector is also beginning to coalesce and organize itself. Across Somali cities, energy companies have merged into larger electrical service companies to address the fragmented nature of the sector. Even without government support, these efforts will help to create conditions necessary for establishing more efficient

grids and economies of scale.

In March 2015, energy entrepreneurs from various regions of the country convened in Nairobi at the Somali Investment Forum hosted by the US Embassy, the World Bank, and Shuraako, a non-profit encouraging investment in the Somalia.

They were met by representatives of the IFC, different aid agencies such as USAID and SIDA, and leaders from investment banks. The dialogue helped to launch feasibility studies and facilitate cooperation among Somali entrepreneurs and international actors.

As international organizations and Somali businesses and governments work to address the obstacles for revamping large-scale energy infrastructure, entrepreneurs seeking smart investments and organizations interested in economic and social impact should focus on the low-hanging fruit. One such way is to target households and businesses with off-grid products. This approach not only addresses immediate needs but these systems could tie into future grids that may be capable of delivering and receiving energy from clients.

Another way is to bring villages and towns online through such renewable-based microgrids, which offer higher financial returns over time than those which are strictly diesel-based. These microgrids are a solid investment opportunity as well as a means for reducing energy poverty.

International finance and energy experts note how impressive and lively the Somali private sector is. Lessening the burden of high costs of electricity and unreliable access will open new opportunities and invigorate growth throughout the country. Investment in the Somali energy sector not only offers a promising financial return, it also portends a multiplier effect to stimulate the economy.

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energy

Ethiopia, Rwanda, Kenya to African Petroleum Producers call for production cuts; connect power Sudan to boost production A A ccording to The Reporter, Ethiopia and Rwanda have announced the decision to trade electricity between the two countries. A project partly funded by the African Development Bank will extend the 1,068-kilometer transmission line connecting Ethiopia and Kenya to include Rwanda. The development is one of many aimed at connectivity across the region.

Ben Chumo, CEO, Kenya The US$1.2-billion project will include a 500 Power. kilovolt power transmission line with transfer Source: Kenya Power capacity up to 2,000 megawatt (MW). An agreement made between Ethiopia and Kenya in 2011 outlines that Kenya will import 200 MW at US$0.06 per kilowatt per hour in the first phase of the project and an additional 200 MW when all of Ethiopia’s current power generation projects are complete.

Kenya Electricity Transmission Company (KETRACO) recently signed a US$89-million deal to build a 313-kilomter high voltage transmission line across Kenya. According to The Africa Report, the line will connect the Olkaria geothermal power plants the western part of the country, offering access to communities currently off-grid. The development financed in part by the Japan International Cooperation Agency is part of the government’s plan to increase current generation capacity of 1,664MW by an additional 5,000 MW by 2017.

Kenya Power recently launched a US$24-million improve Nairobi’s substation and improve efficiency on the grid. “We [Kenya Power] are undertaking major power projects including fast-tracking the ongoing construction of 29 new substations and conclusion of tenders for 36 new substations located countrywide to further reinforce the system and enhance service delivery to customers,” said CEO Ben Chumo.

Djibouti turns to volcanoes for geothermal energy T

he Djibouti Government is aiming to produces at least 1,000 MW of electricity from its volcanoes, according to Bloomberg. Geothermal energy is seen as a solution to the high cost of electricity in a country where it accounts for about 25 percent of business expenses. The government expects four exploratory wells to be drilled over the next year near the lava lake of Asal-Fiale, which exploded 50,000 years ago. Last year, the Japan International Cooperation Agency completed a survey of the 13 volcanic sites. Those showing potential for geothermal energy included HanleGarabbayis, North Goubet, and Gaggade.

The Icelandic financial crisis slowed down geothermal development in the country with the cancellation of the 2007 agreement between Reykjavik Geothermal Ltd. and the Djibouti government that aimed for production commencement in 2012. According to the Ministry of Energy, companies that have prequalified to drill new wells include Halliburton, Baker Hughes, Turkish Petroleum Corp., and Exalo Drilling SA of Poland.

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frican oil producers have launched an initiative to encourage OPEC and other oil producing countries to scale back output and stabilize prices, according to Bloomberg. The African Petroleum Producers Association (APPA) represents oil and gas producers across the continent. Only Algeria, Libya, Nigeria, and Angola are members of OPEC. “The current prices are unfair and are having an impact on the economies of African countries,” said Libya’s oil minister Mashallah Zwai. “We will ensure our voice is heard about this crisis so as to emerge from it as soon as possible.”

Meanwhile, Sudan says it is planning to expand production with new exploration and wells in Darfur. “Our plan for this year is to raise production to 140,000 barrels per day,” the Sudanese Minister of Oil told AFP. Current production is 120,000 barrels per day.

French development agency doubles Ugandan energy investment

Source: African Development Bank

T

he Agence Française de Développement (AFD) says it is allocating US$55 million to Uganda’s electrification development, more than twice its investment of US$21 million since 2013. “As a development agency, we have a specific interest in improving people’s access to the grid,” said Virginie Leroy, AFD’s representative for Uganda. “The rate of access in Uganda is one of the lowest in East Africa and within Africa, especially in rural areas.”

From 2009 to 2013, AFD investments totalled US$139 million, which was largely allocated to the water and sanitation sector. Its commitments include the Muzizi hydro power plant in Uganda, which it pledged to supply jointly with German development bank KFW for US$48 million in 2014.

guest column

Designing to Dazzle Increase your sales and customer satisfaction with strategic zone merchandizing merchandizing strategies that are known to work. Whether they are a grocery chain, a bank, a clothing store, or a food outlet, they are leading because they are getting retail “right.”

Just Think Zones

Howland Blackiston, Principal, King-Casey

T

he retail landscape in the region is changing quickly.

Traditional local stores that have dominated the economy are beginning to face competition from major multinationals moving in. Big brands such as Carrefour are ready to lure customers to the mall, away from family-owned businesses and neighborhood shops. Food outlets such as McDonalds and KFC are already here. And as we have seen from examples in other emerging markets, it is usually these big brands that win.

Why is it that the big brands almost always win? Why do only a handful of retailers dominate the market? Why do customers continue to return to their stores?

The fact is that leading retailers are leading because they follow

The most successful retail providers have recognized that their stores are not just big branded boxes.

Each store is actually a collection of many individual “customer operating zones.” Customers behave differently in each zone. Their needs and expectations are different. Each of these unique zones is right for one merchandizing strategy, and dead wrong for another.

Decades ago, King-Casey pioneered the concept of developing merchandising and communications strategies based on “customer operating zones,” or COZI®. We use this blend of science and creativity to help clients manage the entire customer experience. Is it worth it? You bet! Double-digit improvements are the norm.

So how is your business doing?

Let’s measure how your customer experience adds up.

1. Zone Assessment Begin by identifying all of the customer operating zones within your store. What are your “zones of opportunity”? Note how customers use and interact with these zones.

Measure the time they spend in each zone. For each zone probe to discover customer needs, expectations, attitude, and behavior. What problems do they encounter in these zones? Do they understand what’s being communicated to them?

2. Zone Strategy This step consists of three elements: what is it that you want to achieve; what is it that you want to say; and how you are going to say it?

Business Objective We begin by identifying the business strategy for each of the zones.

What is it that you hope to achieve in this zone? How will you measure improvement?

Message Content What is it that you must communicate to achieve your business objectives for this zone? The message should be responsive to how customers use this zone.

Physical Element What is the physical nature of communications in this zone that will best communicate your message?

What would work best in this zone?

A poster? A window decal?

Design Development This step includes the creation of graphics, images, typography, and branding. It is tempting to jump straight to this step. Many wellmeaning design firms do. Avoid fall-

ing into this trap. Design, however, should be driven by thoughtful analysis and strategy development.

3. Zone Implementation By now you have identified your business objectives; you know what you want to say and you know how you are going to say it. During this step you fine-tune and finalize your zone merchandising elements. By all means evaluate the concepts and get team consensus. Keep things objective by using focus groups to validate the concepts with customers and non-customers.

4. Improvement and Roll-Out Continue to monitor key measures of success to identify opportunities for improvement. What is working?

What is not?

Get in the Zone It’s amazing how many organizations (even the really smart ones) overlook the value of developing strategies based on “customer operating zone improvement.” The good news, however, is that there is no reason a homegrown business cannot dazzle like a Carrefour. Through our work in the Middle East, we at King-Casey have seen how quickly best practices in retail can spread.

We see this potential in East Africa, and are already receiving calls from local business owners ready to adapt.

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REAL ESTATE AND INFRASTRUCTURE

Region’s first oil waste Dusit International enters treatment plant in Uganda Nairobi W D aste management firm Enviroserv International has opened East Africa’s first oil waste treatment plant in the Hoima district of Uganda, according to allafrica.com. The US$20-million facility has the capacity to treat and dispose 1 million tons of oil waste per day, as well as 500 liters of waste water. The plant is also equipped to handle industrial waste.

“As a country, we had to ensure that we are not left with the burden of poor management of waste,” said Executive Director of the National Environment Management Authority Tom Okurut at the plant inauguration. “We had oil waste in a number of consolidation sites and we were not at peace, but with this infrastructure in place, we now have peace of the mind.”

usit International has opened dusitD2 Nairobi, the Thai hospitality group’s first hotel in sub-Saharan Africa. The 101-room venture is the company’s second foray into Africa, following the launch of the Dusit Thani LakeView Cairo in Egypt in 2009. Dusit describes dusitD2 a “next generation” hotel brand, offering modern design and high-tech connectivity in a contemporary, colorful décor. Nairobi’s Cape Hotels will manage the facility.

“We believe our hotel has raised the standard of the local hospitality scene and set a new benchmark for quality, service and innovation,” says Cape Hotels Director Snehal Sanghrajka. “Partnering with Dusit and melding their iconic brand of gracious Thai hospitality with our Kenyan style and creativity has really been a key differentiator for us, and we are delighted to collaborate with Dusit on this project.”

Two Rivers secures financing K

enya’s Centum Investment Company says its Two Rivers Development being built in Nairobi’s Runda district has attracted more than Sh14 billion (US$155 million) financing in debt and equity. Equity investment comes from China’s AVIC International, which has put down Sh6.3 billion (US$70 million), and Industrial and Commercial Development Corporation (ICDC), which has contributed Sh450 million (US$5 million). As well, the Co-operative Bank of Kenya has offered local debt funding of more than Sh7.2 billion (US$80 million). The AVIC equity is one of the region’s largest foreign direct investments.

Two Rivers is a mixed use development consisting of retail, offices, hotels, and apartments. Its flagship project, the 67,000-square foot retail space is Sub-Saharan Africa’s largest mall outside of South Africa. Currently let at 60 percent capacity, the mall managed by Athena properties is set to open in October 2015. Other planned projects include a three-star City Lodge Hotel planned to open in 2016, and more than 100 apartments that are just coming up for sale.

“The Sh14-billion investment into a project promoted by Centum is testament to our unique ability to create these investment grade assets,” says CEO James Mworia. “We are very pleased and able to create projects of scale which attract both local and international investors and will continue to do so.”

French hypermarket chain Carrefour has signed on to be the anchor tenant at Two Rivers Lifestyle Mall. The store managed internationally by the Majid Al Futtaim Group (MAF) has book ed 100,000 square feet of the 620,000 square-foot complex. Carrefour is the world’s second largest retailer after Walmart. At the signing ceremony, executives of MAF Retail - Carrefour said that their Kenyan outlet will replicate the firm’s strategy of stocking major brands alongside its own branded items, with most of the fresh produce sourced from local suppliers. Additionally, they said the store would create at least 400 direct jobs and another 400 indirect jobs through their suppliers.

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Coca Cola franchise builds new plant in Ethiopia E

ast African Bottling S.C (EABSC) has begun construction on a 420-million Br (US$20 million) bottling plant in Bahir Dar, in Amhara State, according to Addis Fortune. EABSC holds the Coca Cola franchise, producing and bottling beverages from Fanta, Coca-Cola, Sprite, Schweppes, Coke Light, and Dasani water. The plant is part of a US$500-million investment launched by the company in 2012, which includes another plant in Hawassa and another in the western part of the country, to be completed by 2020. The plant on the 30-hectare site will be built by local construction company Elmi-Olindo Plc, which built East African’s bottling plant in Dire Dawa.

policy and governance

In Common

The region is moving towards its own version of the Euro. But with the European Monetary Union on fire, could the East African equivalent ever be cool?

W

hen the East African Community (EAC) fell apart in 1977 after only 10 years of existence, no one believed it would be back again 30 years later.

The original participants Kenya, Uganda, and Tanzania, with new additions Rwanda and Burundi, however, are moving forward confidently towards the East African Monetary Union (EAMO). Similar to the Euro Zone in Europe, the union follows a number of phases leading to a common currency in 2024.

Supported by the heads of state of the countries, the EAC has already implemented two phases: simplifying trade barriers with the customs

union in 2005 and promoting the movement of labor and capital through the common market in 2010. The next phase includes the creation of institutions such as an East African Monetary Institute, leading to a regional central bank, culminating with the single currency. The new money received the working name of the East African Shilling, a reference to Britishissued currency for the region from 1929 to 1969.

Political backing for the union is strong, with results already showing in the business world. Oral Williams, Deputy Division Chief of the International Monetary Fund’s (IMF) African Department, says gov-

ernments have made concerted efforts to simplify the movement of goods across borders. “Whereas it took almost three weeks to move goods from the coast in Mombassa in Kenya or from Tanzania to Uganda, it is now a matter of four to six days,” he says. “You have onestop customs verifications of goods at the border.”

Williams says other union-related initiatives such as harmonizing fiscal policy and strengthening the banking system have contributed to the growth rates of the five EAC countries. “Debt has come down considerably, apparently from debt relief,” he says. “You see inflation coming down considerably as well.” He points to the coordinated tightening of monetary policy that helped to tame inflation during the 2011 regional food and fuel shock.

He says the issuance of sovereign bonds in participating countries such as Kenya and Tanzania are also a sign of progress.

The African Development Bank recently ranked the EAC as the most progressive regional economic community (REC) in Africa, beating seven others including the Arab Maghreb Union, the Common Market for Eastern and Southern Africa, and the South African Development Community. Of all the REC’s the EAC is the first to establish a fully operational common market.

Yet many business leaders say

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policy and governance

the market is not liberal enough.

The East African Business Council has criticized the slow pace of implementation. Chairman Felix Mosha has called attention to the appearance of new non-tariff barriers while others are being chopped away. Work permits remain expensive, he says, and transferring social security benefits across borders is a challenging feat.

The recently published East African Common Market Score Card 2014 outlines a number of barriers, new and old, currently hampering the regional movement of goods, services, and money. Since the Common Market Protocol Came into force in 2010, for example, Rwanda, Tanzania, and Uganda have introduced at least 10 restrictions on the movement of capital.

Kenya is said to provide the easiest atmosphere for cross-border capital transfers. Burundi and Tanzania are reported to provide the worst.

Participating countries have also found a number of excuses for legally exempting themselves from goods and services trade liberalization. Services such as engineering and accounting are most commonly exempt, as well as trade in dairy, agricultural products, pharmaceuticals, aluminum, and alcohol. Tanzania is the most notorious for imposing tradehampering measures, followed by Uganda, Kenya, and Burundi.

Furthering the union is expected to benefit participating economies by increasing intraregional trade, encouraging economies of scale, and accelerating competition.

Policymakers expect to challenge monopolies, improve efficiency, and trigger innovation. Consumers, in turn, expect a greater variety of

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products at lower prices, supplied by more efficient providers.

By sharing policies and regulations, participating countries offer each other pressure to implement best practices, often with legal backing. More importantly, sharing a currency means that individual members can no longer devalue their own exchange rates to compete with similar exports from their neighbors.

While technocrats and politicians consider a common currency to be ideal, the current state of the Euro reminds the region that the EAMO could in reality fail. Over the past five years they have watched Europe European debt crisis, as economies shrink, currencies deflate, and employment wanes.

Would the EAC be naïve to believe that its own monetary union is immune to such a fate?

“We have learnt lessons good and bad from the Euro Zone and from other currency unions,” says Uganda Finance Minister Maria Kiwanuka. “The International Monetary Fund has been with us every step of the way, through its own expertise and also helping us to improve our capacity for solving problems ourselves.”

While some point to the challenges of the European common currency and monetary union as proof that federalism in Europe is a losing strategy, others argue that in fact the crisis stemmed from Europe not being federal enough. “The project of creating an economic and monetary union was not flawed,” says Fabrizio Saccomanni who served as Italy’s Minister of Economy and Finance up to February 2014. “What went wrong is that it was not carried out

to its full realization.”

Saccomanni argues that the EU tapered off development of the union upon the creation of the European Central Bank, failing to give the bank the authority necessary to make financial decisions and to take executive action such as interfering in the bond markets.

Economic policy coordination relied on intergovernmental consensus, rather, with the central authority mandated to perform little more than a forum for the exchange of views and peer review.

“We did not have the instruments to deal with the global financial crisis,” he admits.

Williams says the EAC is learning from the experience of the Euro and other monetary unions, and argues that aligning federal decision making may be easier in East Africa than in other regions. “It was the heads of state that originated the idea [of the monetary union], so it has strong political backing,” he says. “This is primarily because the end result would be the forma-

tion of a political union.”

The EAC is also setting strict standards for participants to ensure the currency starts out strong.

Convergence criteria include a fiscal deficit of less than 3 percent of GDP, inflation of 8 percent, debt-to-GDP ratio of 50 percent (net present value), and the existence of reserve cover to respond to shocks. “The countries will have a period of time to get to all these four targets,” says Williams. “Once they are within the range, then they can reach the ultimate goal of having a single currency by 2024.”

When asked if the region will meet this goal, Williams says he is not a betting man, but he does see signs the currency will take off. He points to a high level of political collaboration, as well as the engagement of financial institutions such as the IMF. “They are moving incrementally and not at a breakneck speed,” he says of the participating governments. “I think that holds well that the exercise can be successful.

Remember When From 1967 to 1977 Kenya, Uganda, and Tanzania held together as the original East African Community. Group priorities included maintaining a dual-language culture of English and Swahili, providing joint public services such as infrastructure, banking, transport, and telecommunications, and building shared governance bodies. The union disintegrated, however, in large part to perceived inequities amongst members. With Kenya dominating manufacturing, for example, Uganda and Tanzania experienced high intraregional trade deficits. As well, ideological animosities emerged, particularly between pro-capitalist and pro-Western Kenya and socialist Tanzania; as well as between Idi Amin’s Uganda and Julius Nyere’s Tanzania.

EAC administration remained paralyzed for a number of years, before finally dissolving when the Kenya-Tanzania border closed.

policy and governance

War with the Dollar T Tanzania fights to save the shilling

he Tanzanian government is turning against the use of the US dollar for local goods and services. A parliamentary committee and lawmakers have called for the repeal of a 2008 law that allowed the local use of foreign currency. Authorities say they will ban the use of the dollar for all sales, except those marketed to foreign visitors and investors.

The decision follows a period of exchange rate volatility and a rapidly depreciating shilling.

Government representatives say only five percent of the Tanzanian economy is based on dollars, but analysts believe the proportion to be much higher. Five percent, after all, is hardly a significant proportion to encourage a ban. A number of sectors are known for charging in dollars, particularly air travel, hospitality, housing, and educational institutions. Many businesses have also begun offering their own exchange rates, posting products in dollars and then converting them for customers to shillings.

Tanzania’s Deputy Minister for Finance and Economic Affairs Mwigulu Nchemba spoke out recently against the use of US money.

“All are aware that dollarization of the local economy has contributed to the steady weakening of the shilling,” he told East African Business Week.

The story of the shilling, however, is more complex than the

freedom to use foreign currency.

The current account deficit is pulling the exchange rate down and a market-determined exchange rate and capital account liberalization are encouraging it to fluctuate.

Trade liberalization through the East African Common Market (EAC) has allowed Tanzanians to invest in other EAC countries, and the government is expected to extend

this liberalization to the rest of the world by the end of 2015. As well, authorities intend to remove remaining capital account restrictions such as limits to investments in short-term papers and minimum holding periods for foreign investors. “Increased liberalization could lead to an increase in volatility as market sentiment, or geo-political or economic developments in

other countries could have a direct impact on the domestic monetary environment,” explains Jacques Nel with NKC Independent Economists.

Dollarization, he argues, can be detrimental to the Tanzanian economy. “Specifically, it constrains the effectiveness of domestic monetary policy, while also having a negative feed-back loop, with dollarization requiring more dollarization, which then puts additional pressure on the shilling exchange rate,” he says. “This then increases exchange rate risk, which is bad for the business environment more generally.”

“An impotent monetary policy is detrimental to macroeconomic stability,” he adds. “The economy is much more vulnerable to external shocks.”

The single act of banning the dollar, however, may not be enough to save the shilling.

Policymakers will need to address fundamentals by allowing the market to determine the exchange rate, building up currency reserves, and narrowing the current account deficit.

In the meantime, a black market is expected to develop, with the possibility of fines and legal actions raising the official cost of the dollar.

Expect official and black market exchange rates to diverge. Increasing values of black market currency could then further increase the use of foreign money.

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policy and governance

A Deeper Puddle South Sudan’s government says a Qatari loan will promote development, but opposition says the money will only buy guns. Either way, the country finds itself in a mess of debt

T

he Government of South Sudan’s recent decision to take a US$500-million loan from Qatar National Bank (QNB) has critics concerned about rising debt for an already struggling economy. According to Emma Vickers with economic corruption watch organization Global Witness, the amount including interest owed to the Qatari bank seven years from now with be US$781 million. “This is the equivalent of the US government taking out a loan larger than their military and education budgets combined,” she says.

South Sudan is already deeply in debt, having taken at least US$1.7 billion in loans in 2014.

Government spending, as well, has been said to be out of control, with the President’s office exceeding its budget by 369 percent, US$33 million, between July and September 2014. Meanwhile Parliament has had to halt most activities due to lack of funds; police say their salaries are often months overdue, and state governments say they are no longer receiving adequate government allowances.

The government has agreed to pay the loan in crude oil in case of a (likely) shortage of cash. “Using crude as collateral threatens to lock the country into a dangerous cycle of debt-oil dollars are used to pay off old loans while new loans fund the budget,” says Vickers. “By taking this loan, the government risks selling South

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Sudan’s future to pay for today.”

On March 24, Parliament overwhelmingly voted to extend President Salva Kiir’s term in office by three years to July 2018. The decision follows the calling off of elections scheduled for this summer, as well as the falling apart of peace talks with the North. Leaders fear a power vacuum in the event that the government fails to reach a permanent deal with rebels.

Parliament members in support of the Qatari loan insist the funding is necessary to save an economy where oil production has dropped dramatically and existing production faces a weak price.

Where the US$500 million will be spent, however, is still unclear

as MPs request transparency on which projects the money will fund as deliberation proceeds.

The Chair of the South Sudan Parliament’s Information Committee Thomas Wani Kundu says the loan will be used for infrastructure development and government operations. “We have roads and airports to be constructed and also the services that are supposed to be rendered to the people,” he told UN Radio. “To this money alone is meager, because war has devastated the production area.”

Last month, the opposition group SPLM/A-IO insisted the Sudanese Government would use the loan would for arms rather than development. “This loan

facility will not be used by the Administration [of Salva Kiir] for development; it will be used instead, to continue the war of attrition on the people of South Sudan,” said a statement signed by SPLM/A Public Relations Chairman Mabior Garang de Mabior, reported by Radio Tamazuj.

The group called upon Qatar to reconsider its decision. “The best way that the Government of the State of Qatar can extend a hand of friendship to the people of South Sudan is not by financing the war, but by using their influence to persuade the Salva Kiir Administration in Juba to return to the negotiating table and engage in honest dialogue.”

policy and governance

Kenya publishers assign new chair, aim to fight literary piracy T

he Kenya Publishers Association (KPA) has named David Waweru as its new Chairman. The CEO of WorldAlive Publishers, replaces Lawrence Njagi who completed two two-year terms. The KPA faces a number of challenges including high rates of industry piracy and government valueadded tax on reading material. According to Standard Media, Waweru promised to “slay the dragon of piracy, by working with key stakeholders to strengthen the legal infrastructure.”

Kenya cracks down on Somali money transfers F

ollowing the recent attack of Al Shabaab on Garissa University College that killed 148 people, the Kenyan government has banned Somali money transfer companies from operating in the country. The goal of the ban is to help cut off finances to terrorist activities. Thirteen firms known as hawalas, which transfer money throughout the Islamic world, have been affected. According to the BBC, Kenya government has long suspected Somali refugees living in the country of supporting Al Shabaab.

Meanwhile, a number of Somalis living in Kenya say their only sources of income, or their only way of sending money home, have been cut off, expressing anger at what they consider to be “blanket punishment” on their community. Somalis living abroad are estimated by the UN to send as much as US$1.6 billion home each year, more than half of Somalia’s GDP. Humanitarian aid agencies have warned that cutting off funding to Somalia could only increase hostility and further fuel terrorist activities.

As well, analysts have said the move may just push terror funding further underground. The government has not said if and when it will lift the ban.

“We’re talking about people who already live on the edge,” Emma Naylor-Ngugi, Regional Director for CARE International told AP. “We really feel very worried that in the next few weeks we’re going to see more and more distress.”

Transfer agencies affected by the ban • Amal Money Transfer • Dahabshiil Money Tarnsfer • Tawakal Money Transfer • Bakaal Money Tranfer • Jubba Express Money Transfer • Iftiin Money Transfer

• Hodan Global Money Transfer • Amana Money Transfer • Kaah Money Transfer • Continental Money Transfer • Kendy Money Transfer • Flex Money Transfer Source: Somali Current

Kenya ups Uganda sugar imports, still seeks protectionism K

enya has agreed to expand quotas on Ugandan sugar, accepting 97,000 tons per year, compared to the previous limit of just over 30,000 tons.

The sugar issue has been in contest between the two countries since Kenya reduced Uganda imports in 2012 out of concerns over dumping and unethical trade practices. Uganda’s total capacity for sugar export to Kenya is 150,000 tons. “Stories of Kenya blocking entry of Uganda sugar on her territory are now of the past,” Uganda State Minister for Foreign Affairs Okello Oryem told media. “We have been allowed to increase our export to 97,000 tons.” Kenya, however, has sidestepped further sugar market liberalization with the Common Market for Eastern and Southern Africa (COMESA) granting it a fourth year-long extension from removing protectionist barriers against sugar imports. The country has sought to maintain protections since 2004, as it privatizes state-owned sugar factories. According to Standard Media, the country has until 2017 to strengthen its industry to compete with other COMESA countries. Factories slated for privatization include Nzoia, Sony, Chemelil, Muhoroni, and Miwani Sugar Companies.

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policy and governance

Zimbabwe progresses with reforms, albeit slowly

T

he IMF says Zimbabwean authorities have made progress in implementing their macroeconomic and structural reform programs. Following the completion of its first review under its Staff-Monitored Program (SMP), the organization said the country had improved by clarifying policy redefining native lands, restoring confidence and improving financial sector soundness, and strengthening public financial management.

The 15-month SMP is part of a plan to normalize the relationship with Zimbabwe’s creditors and mobilize support from development partners.

According to the IMF, the program’s main goal is to strengthen Zimbabwe’s external position as a prerequisite towards arrears clearance, normalization of debt servicing, and restoring access to external financing. This requires further fiscal consolidation to rebuild the country’s capacity for debt repayment, restoring financial stability, and mobilizing international support for resolving the country’s external debt situation.

The IMF says Zimbabwe’s economic prospects remain difficult. Growth is slowing and is expected to weaken further. Despite the favorable impact of lower oil prices, the country remains in debt distress. Key risks include a further decline in global commodity prices, fiscal challenges, and difficulties in implementing policy.

Airtel, Orange approved for 4G in Kenya A

ccording to telecompaper.com, Kenya’s Communications Authority (CA) has authorized Airtel Kenya and Orange Kenya to start testing 4G technology. Safaricom is the only Kenya provider so far to launch 4G commercially. Orange Kenya says its focus to first make optimal use of its existing 3G network, currently present in 41 areas across the country. CEO Vincent Lobry says that despite the approval, his company still has not secured the frequency required for 4G, which it is working on with the CA.

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Tanzania targets tourism T

anzania recently unveiled nine new cultural sites in an effort to attract tourists, according to eTN. Sites include Bujora Cultural Tourism Enterprise, Ukerewe Cultural Tourism Enterprise and Kisesa Cultural Tourism Enterprise, in the Lake Zone region of Mwanza. Sites around Mount Kilimanjaro include Kiliman Cultural Tourism Enterprise, Rau Eco and Cultural Tourism Enterprise, and Lyamungo; and around Arusha, Forest Eco-Tourism and Momela Cultural Tourism and Campsite.

Cultural Tourism Program (CTP) Coordinator Elirehema Maturo said that the new sites made a total of 60 Cultural Tourism Enterprises (CTEs) in the country, encompassing over 120 major tribes.

“This is a way of doing tourism so that it focuses specifically on unlocking opportunities for the poor to benefit more within tourism, rather than expanding the overall size of the sector,” he told eTN. “This is also an approach that attempts to maximize the potential of tourism for eradicating poverty by developing appropriate strategies in cooperation with all major groups, stakeholders, central government, local governments, tourism operators and local communities to have a fair distribution of benefits.”

According to East African Business Week, the Tanzanian government has also announced a rebranding project to attract tourists by producing television commercials to be run on global networks such as BBC and CNN. Filming is already underway of sites such as Serengeti National Park, Mount Kilimanjaro, and the Ngorongoro Crater.

“The Re-branding Destination Tanzania project is expected result in an increase in the number of tourists’ entering the country with a goal of attracting at least 2.5 million tourists per year in the next five years,” says Natural Resources and Tourism Minister Lazaro Nyalandu. “I am optimistic that the advertisements would boost tourist arrivals.”

In 2013, Tanzania hosted more than 1.3 million tourists, bringing in record revenues of US$1.8 billion. Currently the sector represents almost 3.4 percent of GDP and employees approximately 500,000 citizens. The World Bank estimates that Tanzanian tourism could generate as much as US$16 billion by 2025.

last word

Unleashing the Beast The case for business associations in East Africa, by Dr. Victor Owuor, Research Associate with One Earth Future

A

s with many terms in popular lexicon, business has increasingly borrowed words from the biological and physical sciences.

One such word is “ecosystem” – a term in biology which denotes a group of interconnected elements formed by the interactions of a community of organisms with the environment. Parlayed into economics this term conveys the idea that all sectors of the economy come together in particular places, and their strengths and interactions determine the prosperity and economic growth of a particular country or region. If this analogy is extended to the business system, at least four activities will make the system operate optimally: turning ideas into sustainable enterprise; linking micro, small, medium, and large enterprises; better aligning and connecting education to jobs; and encouraging cross-border collaboration. These activities are all within the scope of the business association – generally a poorly understood institution.

The lack of understanding of business associations is surprising given that they are now widely accepted as an avenue for economic growth in emerging countries such as Rwanda, Uganda, Kenya, Djibouti, Ethiopia, Somalia, Tanzania, Burundi, South Sudan, and other nations in the region. Moreover, business associations are a demonstration of the social beast in all of us. In this demonstration, the human attribute of natural competition is matched by the instinct for cooperation with peers, even in the

least developed sectors. Individuals and enterprises that would otherwise compete with each other in the market place come together within a structure of collective selfhelp and cooperation that provides mutual benefits.

There are three primary characteristics that effective business associations share. First, they are the result of non-government initiatives, organized from the bottomup. Second, business associations are organized according to market principles. Membership is voluntary, and members are free to join or quit within specified schedules.

Third, business associations are selffunded and self-governed entities.

This puts considerable pressure on the organizations to be responsive to membership needs in order to justify their continued existence.

Business associations in East Africa therefore, primarily function as intermediate organizations. They serve as a bridge between member enterprises, the market and area governments.

To fulfill their mandate, business associations in East Africa play three broad roles. First, they meet membership needs through the offer of legal advisory services; conduct of training programs; promotion of events to advance member visibility; and the collection and dissemination of useful information. Second, business associations in the region selfregulate. A recent example of this is that of the Institute of Certified Public Accountants of Kenya that recently tabled a proposal for stiffer penalties to be levied on errant

members. Third, business associations assist area governments to regulate and improve the business environment. This role can take many forms such as the Uganda’s Association of Manufacturers work in promoting reforms in their sector; KEPSA directors’ quarterly Presidential Round-table meetings with the country’s executive arm to help improve policy implementation within Kenya; and KEPSA’s lead together with civil society and the government in conducting activities that contributed to a peaceful national election in the 2013 cycle.

However, in spite of the good business associations can do for East African economies these institutions still face significant obstacles in their formation. These include: • The lack of business association mentality both among business entities and even among many in the public sector, for countries that are still largely aid-dependent. There is therefore, a pronounced need to introduce a paradigm shift that emphasizes a disciplined approach to sustainable business revenue generation through market-driven activities – at the expense of aid dependency.

• Problems of trust. In the quest to establish democratic governance all over East Africa, challenges still remain in developing trust between business associations and area governments.

• The lack of communication between nascent business associations and their potential membership is still daunting. This is especially critical because the sus-

tainability of business associations hinges on surpassing a threshold of membership that perceives it benefits from the associations’ market driven programs.

The good news is that increasingly some business associations in the region are beginning to stick out because of their effectiveness.

These include those in Mauritius, a country deemed to be the gold standard of business associations in the continent. Business associations in the Island economy have been well organized for over one and a half centuries. The oldest of these is the apex group the Mauritius Chamber of Commerce founded in 1850 and lately its derivative, the Association of Mauritius Manufacturers. The equivalent group in Uganda, the Uganda Association of Manufacturers is also noteworthy in its work on sectorial reforms within the country.

Perhaps the most visible business association in the largest economy of East Africa is the umbrella group, KEPSA that has only been in existence since 2003. KEPSA is a homegrown institution that in spite of being relatively new operates a fully functioning secretariat under the guidance of prominent non-executive directors. Indeed the acceptance of business associations cannot come fast enough for all East African countries. Business associations remain one of the more effective ways for East African private sector interests to develop their operations to world standards and subsequently access new markets - from which all the regional economies can benefit.

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