AFRICA ICT INVESTMENT SPECIAL - THE GOOD NEWS OR THE BAD NEWS?

6 April 2001

Top Story

ICT investment creates jobs and skills. Those who have jobs spend money and create more jobs. This process may not solve all of Africa’s problems with poverty but it is - as the Americans say - a "no-brainer". So how is Africa faring in the worldwide competition for external investment? With the exception of its larger markets (Egypt, Nigeria and South Africa), Africa barely registers on the world scene. Its capital markets are small and it has a damaged reputation with external investors based on the many troubles that affect the continent, most notably HIV/AIDS and corruption.

In this Africa ICT investment special, Pam Sykes looks at two countries - Tanzania and Uganda - who have attracted investment and how well this has worked. One of the external investors - Adrian Robinson of CDC - describes the conditions needed in a country to attract investors. Finally a long-time watcher Ian Grant offers a challenging, downbeat assessment of Africa’s prospects and makes a plea for self-reliance.

THE IMPACT OF INVESTMENT IN TANZANIA AND UGANDA

Pam Sykes writes: Africa is massively under-supplied with telecommunications services: according to ITU figures for 2000, it has 12.8% of the world’s population but just 2% of its fixed-line and 1.5% of its mobile telephones. It has 1.5% of the world’s personal computers and 1% of its Internet users (as near as anyone can tell).

This lack of supply does not reflect a lack of demand: across the continent the liberalisation of telecommunications service provision and the licensing of new fixed and mobile operators has been followed by explosive growth, often far outstripping initial market forecasts. There are more mobile than fixed-line subscribers in at least Uganda, Botswana, Tanzania and South Africa, with several others likely to follow soon if they haven’t already.

Uganda is the poster child for successful telecommunications liberalisation in Africa. The state-owned Uganda Telecommunications Limited (UTL) was joined in 1995 by GSM mobile operator Celtel, owned by pan-African operator MSICellular (www.msi-cellular.com).By 1998 Celtel had added 8,000 cellular subscribers to UTL’s 56,000 installed lines ­ a picture which was dramatically altered by the entry of MTN (www.mtn.co.ug) as the second national operator late that year. MTN Uganda’s licence came with the usual rollout obligations, requiring that MTN provide 89,000 lines in the first five years of operation—but (unlike Telkom SA’s 1997 licence, for example) left the choice of technical solutions entirely up to the operator, defining targets solely in terms of service quality, availability and price.

MTN, opting for a combination of mobile and fixed (for public payphones) wireless services, notched up nearly 54,000 subscribers in the 14 months to December 1999 ­ against an initial target of just 10,000. Celtel, cutting its tariffs 33% on the day MTN launched, increased its own subscriber numbers to 19,000 over the same period. It took just a year from MTN’s launch to connect more people than UTL had managed in several decades.

The growth trend has continued. UTL, sold in 2000 to a Detecon-led consortium, launched its own mobile operation in February this year: total cellular subscribers in Uganda passed 188,000 in that month, and the total of fixed and mobile lines passed 250,000. This is still a tiny number for a country with a population of over 20 million ­ but 400% growth over four years augurs well for the future, with the potential market estimated at around 400,000.

Three factors are important in accounting for this unexpected growth. First, the size of the demand for telecommunications has been dramatically underestimated, not only in Uganda but throughout Africa. People are willing to allocate far more of their incomes to communications than anybody suspected five years ago. Uganda’s population is more than 80% rural and urban dwellers maintain strong links with their home villages: where cellphone service is available it is usually a far cheaper option than physical travel.

(The demand for other services has probably been equally underestimated ­ a soon-to-be released study by Uganda’s Utility Reform Unit suggests that up to 20% of the country’s five million households could afford the cost of an electricity connection and the monthly fees. Currently only 160,000 households have power.)

In addition, incomes in some cases may be far higher than official figures suggest. African economies are largely cash-based and relatively few transactions ever find their way into official statistics.The systematic lack of information about the real economies of nations like Uganda and Tanzania is a problem which is all too easy to overlook in a world preoccupied with an oversupply of data: but it is a considerable constraint on growth. Tax authorities over-rely on a tiny core of formal sector taxpayers, who are correspondingly frustrated (words like "extortion" are freely used); national budgets remain over-dependent on donor assistance; and the lack of reliable market information makes for conservative investment planning.

The introduction of prepaid services is a second, obvious explanation for the speed of telecommunications growth ­ they provide stable operator revenue streams in environments where the payment culture is weak at best, as well as making services accessible to people without bank accounts or credit histories.Postpaid subscribers are more profitable, but cannot realistically be offered to more than a tiny elite.

Thirdly, Uganda’s regulatory and legal environment has been relatively stable and easy to navigate: local operators agree that telecommunications regulation is "much more progressive than anywhere else in Africa", that the Uganda Communications Commission(UCC ­ www.ucc.co.ug) is "fair and equitable", and that contracts and agreements are generally honoured. One operator commented "I can concentrate on growing my business, not sorting out bureaucratic problems" ­ although there is a general feeling that large investors have a much easier time of it than smaller operators who enjoy less ready access to senior government officials.

The Ugandan market shows little sign of levelling off: operators are continuing to expand their networks into the smaller towns (UCC says 75% of the country is now covered), MTN just launched Africa’s first dual-band GSM service in Kampala and a range of mobile data services is being explored. Celtel recently acquired Infocom, one of the larger ISPs, and UTL is soon to launch an ISP of its own: sms to email gateways already operate (not always reliably) and more ambitious mobile data services are promised.

The national operators MTN and UTL currently enjoy exclusive rights to carry voice over IP, but UCC say it is negotiating with them to franchise these rights to ISPs ­ officials are clear that "we think the technology has something to offer & should be used".After 2005 the market will be liberalised further, with UCC saying it is likely to award as many licences as the market requires.

In Tanzania, although the total number of fixed and mobile subscribers is higher (best estimates are around 350,000 out of a population of 32 million), and the nation enjoys the advantages of political stability and a strong natural resource base, the prospects for telecommunications investment are bleaker.This is down largely to the uncertainty of its regulatory and legal environment: both the independence and the technical competence of the Tanzania Communications Commission (TCC) are questioned, and the legal enforceability of agreements is weak. A long-running dispute between cellular operator Mobitel and the recently privatised Tanzania Telecommunications Company Ltd (TTCL) over unpaid interconnect fees has seen a series of court orders and appeals culminating recently in the freezing of TTCL’s bank accounts. (Part of this problem is due to the old problem of inadequate information systems: the data on which to base clear assessments is to some extent simply not available).

Despite the evident frustrations of local operators, competition in the Tanzanian market is strong. Vodacom Tanzania has followed its August 2000 launch with an aggressive expansion campaign and currently has around 80,000 active subscribers &SHY; it recently confirmed the award of the $52m second phase of its rollout to Siemens and has set a target of 200,000 subscribers by the end of the year.Mobitel is maintaining its analogue network as well as continuing the national expansion of its GSM network, including public telephone booths; it has also acquired a local ISP and is about to roll out mobile data services in addition to the existing sms <--> email gateways. A consortium of Detecon and MSI is bedding down its acquisition of a 35% strategic equity stake in TTCL and preparing to launch a GSM service before the end of the year. Two smaller GSM operators, Zantel in Zanzibar and Tritel on the mainland, are expected to drop out of the market within months, probably being acquired by one of the larger operators.

While agencies like the International Finance Corporation and the CDC group (former Commonwealth Development Corporation) have minority stakes in several African telecommunications operators, it is worth noting that none of this investment is donor funded. Most operators agree that development assistance is at best a waste of time and at worst an active impediment. UTL, for example, has inherited a patchwork of incompatible legacy systems, all built with donor assistance tied to the use of particular suppliers, and much of which is now fit for nothing but scrap.None of the highly publicised regional government- and donor-led infrastructure projects appear to be making anything more than minor blips on the radar screen.As one Tanzanian operator says: "75% of assisted projects just don’t work. If a project is viable, it’s commercially viable and should be done commercially."

Pam Sykes writes for investment strategy group, Business Map ( http://www.businessmap.co.za )

INVESTING IN ICT IN AFRICA - WHAT ARE THE CONDITIONS FOR SUCCESS

Adrian Robinson writes: The past five years have witnessed the global tidal wave of liberalisation swell up in the regulatory regimes of Europe and the US and wash over the continent of Africa. This has led to an unprecented number of new TMT investment opportunites for Africa, resulting in a more diverse range of improved services for businesses and government, and cheaper and more accessible offerings for citizens.

But in a number of countries the process has not been as succesful as expected. One reason is the lack of appropriate funds being made available to Africa, as opposed to the "less risky" environs of broadband plays in the US or internet ventures in the UK.

What is needed to encourage funds into the ICT sector in Africa - particularly during this time of closed equity markets, ever-reducing stock market valuations and stressed balance sheets? This question should be discussed in both"micro" and "macro" terms.

Micro relates to the business itself and, to some extent, is the same for all businesses and takes into account factors such as location; management competence, proven technology, target market and relevant business models. These are elements that the sponsor of the project has control or influence over.

However, for many investors it is the "macro" components that are the key to encouraging increased investment in ICT in Africa. These are the enabling factors that set the scene for the businesses, and over which government usually has most influence. They include:

* Regulatory environment: This must be transparent, stable, independent and consistent to ensure comfort for any would-be investor. A case in point is Malawi where the regulator has tried to change the interconnect regime after operations have started. Nigeria did itself proud when it conducted what must have been one of the most transparent and fair mobile licensing auctions in the world.

* Legal: All investors rely on a solid legal foundation in which to set out the terms of their investment. Without this, investors are not certain of a fair playing field in times of legal redress. This can prove costly and frustrating. International arbitration can help, but a good local legal framework must be first prize.

* Commercial: All investors need to realise the fruits of their efforts in any investment, independent of where it is located. The ability to repatriate profits and convert currency is fundamental. Not being able to bring money in to buy capital expenditure items can be frustrating and delays the developmental and commercial impact of the business. Many countries give special benefits to encourage large-scale investments e.g. Tanzania. The development of a local stock market can create wider share ownership for successful companies and increase local ownership.

CDC Capital Partners is committed to providing risk capital to private sector businesses in Africa and currently has over US$370m invested across the continent. CDC’s strategy is to invest in commercial, sustainable businesses, in a socially responsible manner. Within the TMT sector, we consider investment opportunities within mobile, fixed, VSAT, VoIP, media, broadcast, IT, software and related deal types.

WHY INVEST IN AFRICA WHEN THERE ARE BETTER OPPORTUNITIES ELSEWHERE

Ian Grant writes: Africans have talked for the past 10 years of a liberalised telecommunications regime. It has sparked hope in the hearts of the phoneless, greed in the eyes of suppliers, and fed the power lust of the politically powerful. Sadly, once again, Africa has got its timing wrong.

Because of their populations and ability to pay, the three key countries are Egypt, Nigeria and South Africa. In each the governments have been slow to bring in market-oriented reforms that encourageinvestment in network infrastructure and expansion of the local loop.

South Africa’s creation of a duopoly in cellular services is a case in point. It deliberately protected the incumbent national telco by guaranteeing it a 50 perent share of one licence. Subsequent mishandling of a third cellular licence has guaranteed that the third licensee will battle for market share.

The duopoly has kept phone call prices high, guaranteeing maximium profits via taxation to government. In fact Vodacom and MTN became SA’s biggest advertisers and corporate sponsors. The main beneficiaries have been the shareholders, the government, print, radio and television owners, and national sports organisations. With few exceptions, cellphone owners also have fixed wirephones; the phoneless remain phoneless because they can’t afford the high price of calls, and may not even be covered.

Not that there wasn’t interest in investing in African telecommunications. But the message was plain when the Finnish telco, one of the world’s most experienced and successful mobile operators (and a former state-owned telco) pulled out of SA’s third licence beauty contest. "There are more and better opporutnities elsewhere," it said at the time.

This unusually frank statement stemmed from its lack of trust in the licence process and an unrealistic set of preconditions. Both these were controlled by goverment. Nigeria’s mobile licensing procedure has been just as fraught with uncertainty.

The wisdomof the Finns’ early exit is now evident; the five years where Vodacom and MTN had only each other to compete with has become seven, and the third licencee is still held up in the courts. Far from learning from its errors, SA now proposes to redo the duopoly trail, this time with fixed networks.

Things have not been much better with Nigeria and Egypt. Smaller countries such as Cote d’Ivoire and Mozambique have found it easier to move ahead. But political and natural disasters have limited their progress.

Are there grounds for optimism? Possibly. But the road ahead will be harder. The world has fallen out of love with the telecommunications sector because many operators won Phyrric victories in their battles for third generation licences. Unfortunately, many of them were the most likely to invest in Africa

While theoperators restore their balance sheets, Africa has a little breathing space to rethink its priorities in terms of attracting investment. At bottom it means governments should trust their people’s ability to find a way to live that works for them, and that government’s role is to encourage and support self-reliance.So far none seems willing to take that chance.

Ian Grant is the publisher of African Telecosm, a subscription-based market intelligence service on the African communications sector.