Asoko Insight: Kenya Solar Power Players

High costs of on-grid electricity and a lack of access to electricity has spurred growth in the solar power space, encouraging businesses to innovate to capture the unserved market. Digitalisation and the strong penetration of mobile money has been crucial in enabling innovation in Kenya. M-kopa, a pioneer of the pay-as-you-go business model for solar power, allows customers to pay small amounts through their mobile phone for a home solar system or solar products. The model has been adopted by a number of companies, though M-kopa remains a market leader. Penetration of solar products such as rechargeable lamps, solar radios, solar torches, solar water heating systems and solar panels for households has also deepened due to mobile money enabling payments and credit scoring. Mobile technology allows companies to determine a payment schedule for customers who need this facility, offered in rural areas.

The take up of small-scale off-grid solar solutions has had a significant impact on the level of solar generation in the country. Kenya’s installed capacity of solar photovoltaics (PV) power totals 93 MW, of which 56.25 MW is connected to the grid, meaning 40% of solar power comes from off-grid sources. Increasing use of off-grid solar power by businesses will help the sector scale up, though securing private sector investment has challenges. Not least among these is the ongoing negotiations to implement regulations on net-metering for non-commercial and industrial projects which have been under discussion for two years.

Market Map

Asoko has identified 56 leading companies in Kenya’s off-grid solar ecosystem. We have categorised these firms by the goods and/or services they provide, of which there are four types:

1. Solar products such as lamps, batteries, pumps, televisions and refrigerators.

2. Solar systems, including payment structures

3. Advisory services

4. Engineering, procurement and construction (EPC) services for contracts involving small-scale solar installations of up to 20 MW.

The majority of players (71.42%) produce solar products, with 35% of these firms also involved in another activity, largely the provision of solar systems in which to plug their goods. The solar systems segment is the second-largest space, with a total of 26 companies operating in this space, most alongside other activities.

Almost all the leading companies operate out of Nairobi, with just one headquartered in Mombasa and one from Kiambu. The rapid development of the market has seen the entrance of a number of new competitors in a relatively small space of time, diluting the earning potential of individual players. Thus the majority (75%) of companies mapped earn annual revenues under $1 million. At the other end of the spectrum, a smaller number (15%) of firms have revenues above $10 million, with a majority of these players earning between $10 million to $25 million.

Investment

Asoko has tracked investment activity across Africa between 2015 and 2018 and found 29 investment deals among the identified solar companies in Kenya during this period. Of these, the value was disclosed for 24 deals, which were collectively worth $684 million. The investments listed include financing directed to Kenyan operations, parent companies and subsidiaries elsewhere in Africa.

In total, ten companies approached the market for financing during the period. While most signed a single deal, the top number of deals undertaken by an individual firm was eight. BBoxx and d.Light are among the companies that signed multiple deals, receiving $93 million and $183 million across four and six deals, respectively.

Investors in this space are mainly strategic investors with a focus on sustainable energy solutions. Two Kenyan-based firms specialising in clean energy financing participated in six deals. KawiSafi Ventures, for example, made capital investments in both BBOXX and d.light, while SunFunder was active in two of d.light’s funding rounds as well as that of another solar operator.

International bodies and development funds from several European countries are also active investors in the space. The Dutch Development Bank, for example, was involved in three deals and the IFC in four, while Norway’s Norfund took part in two of d.light’s funding round.

Content provided by our partners, Asoko Insight. Learn more at https://asokoinsight.com/.

Powering Africa: how private equity can help address Africa’s energy deficit

Scott Mackin, Managing Partner, Denham Capital

Over 600 million Africans do not have access to electricity. This energy deficit will need to be urgently addressed if the continent is to fully reap the benefits of industrialisation and technological innovation. However, Africa also has huge energy potential. The continent boasts some of the best solar radiation levels in the world and these remain largely unexploited. With the second longest river in Africa, the Democratic Republic of the Congo alone has the capacity to produce 300 gigawatts of hydroelectric energy while Nigeria and Tanzania between them could add another 400 gigawatts of gas-generated power. Botswana, Mozambique and South Africa possess 300 gigawatts of coal capacity and the continent as a whole could produce 109 gigawatts of wind power.

Over 600 million Africans do not have access to electricity.

With this wide array of opportunities, it is no wonder that private equity firms have been turning to African energy markets. One such firm is Denham Capital, a global energy and resources private equity firm. We spoke to Denham’s Managing Partner, Scott Mackin, about their African investments and the role that private equity can play in addressing Africa’s energy funding gap.

Denham Capital is a global firm that invests in Europe, Australasia, North America, Latin America and Africa. Why have you turned to investing in emerging markets?

For our clean power investing, the emerging markets offer a compelling intersection of being able to profitably invest while reducing the cost of energy to the consumer, that is, making money by solving people’s problems.  This dynamic is a result of the relatively high marginal costs of existing power today in these markets and the decreasing costs of cleaner energy sources.  It results generally in the ability to have long-term offtake arrangements for the clean electricity generated, which makes the investment shed commodity risks. Finally, there is a clearer path to fulfilling many UN Sustainable Development Goals in through clean energy in emerging markets. 

“For our clean power investing, the emerging markets offer a compelling intersection of being able to profitably invest while reducing the cost of energy to the consumer”

Can you tell us about Denham’s Africa Power Investment Platform? How can private investment initiatives such as this address Africa’s energy gap?

Denham has had three portfolio companies developing power projects in Africa.  Our first was predominantly South Africa focused, BioTherm Energy, a leading developer of wind and solar projects. BioTherm has differentiated itself in that market by, among other things, the track record of its locally-derived (and female-led) management team as compared with other IPP’s in the market. Our second platform has been Endeavor Energy, focusing on gas-fired projects in Ghana and Guinea.  To our knowledge, Endeavor has managed to close more megawatts of power deals in Sub-Saharan Africa than competing firms in these past couple of years. Our third platform is Themis Energy, whose senior management has years of African power experience both at the AfDB and elsewhere.  Themis has closed on the Singrobo hydro project in Côte d’Ivoire recently and has a significant pipeline of projects across the continent that should reach financial close by 2020.

Denham has published an impact report addressing the firm’s contribution to the SDGs. Why do you measure your impact and how do you ensure that your investments are sustainable?

We believe that it is important to measure the impact of our investments to show how each investment is contributing towards global goals, such as the UN SDGs. By tracking metrics, we can provide meaningful data and we see investors increasingly asking for such non-financial data points. For each investment, our portfolio companies use third-party consultants to assess impacts and implement management plans to ensure that an investment is being developed sustainably.  We require projects to be developed to international sustainability standards such as the IFC Performance Standards and the European Investment Bank’s Environmental and Social Standards.  Finally, we have a reporting framework in place to track the implementation of these standards.

 To hear Scott Mackin discuss “Powering Development - Delivering Long-term Energy Solutions for Africa” join The Africa Debate 2020.

Meet the Energy Panel

Jennifer Boca

John Lewis

Rosalind Kainyah, MBE

Tom Hickey

The Fintech Revolution: how mobile money is transforming Africa

Cellulant Co-founders Bolaji Akinboro (left) and Ken Njoroge (right)

The fintech industry in Africa is predicted to be worth $3 billion by 2030. Businesses in Africa cannot afford to ignore the digital revolution underway and some of the most successful African start-up stories of the last decade have built their business models on mobile money. We spoke to Milkah Wachiuri, Chief Growth Officer at Cellulant, a leading pan-African digital payment platform, about the impact of fintech on African markets and how Cellulant plans to scale-up its business.    

Over 57% of all mobile money accounts globally are in Sub-Saharan Africa. Why is fintech so popular in the region?

Sub-Saharan Africa leads globally in mobile phone uptake with a rapidly increasing mobile penetration rate in the last decade. Currently there are 420 million mobile phone users in the region (44% of the population). The advent of Mobile money, led by Kenya in 2007, heralded the fintech revolution and extended financial inclusion to the unbanked. The World Bank lists 66% of sub-Saharan Africans as ‘unbanked’. This is a huge market.

66% Sub-Saharan Africans are ‘unbanked’.

In most of sub-Saharan Africa, nearly 90% of all payments and transactions remain cash based. However, with two-thirds of the region adopting mobile phone usage, there is a large opportunity to increase mobile-money penetration and as a result, enable consumers across Africa to become financially empowered.

 Financial service providers in sub-Saharan Africa, such as Cellulant, are transforming Africa, which is largely a cash-driven society, by extending financial services to the unbanked populations, enabling peer to peer lending, powering micropayments, making payments to local and international merchants and enabling purchasing of goods and services.

The fintech market clearly has huge potential and Cellulant has achieved remarkable growth since founders wrote the company’s business model on the back of a napkin in 2002. The company now operates in 34 countries and processes 12% of Africa’s digital payments. Can you tell us about Cellulant’s business model? Why has it been so successful?

Since its inception, Cellulant has grown into a leading Pan-African technology company that connects buyers, sellers and other critical stakeholders in Africa’s marketplaces through an underlying payments solution, enabling them to make and receive payments. We provide a single digital payments platform that runs an ecosystem of consumers, retailers, merchants, banks, mobile network operators, Governments and International Development Partners.

‘Cellulant is digitising the entire agriculture value chain.’

Our business model hinges on building products and platforms that come together to serve multiple use-cases for businesses and consumers at both across all income levels:

• For consumers, Cellulant offers a single payment solution that integrates all payment methods, be they debit/credit card, mobile money or through a direct bank payment giving consumers greater convenience and flexibility.

• For merchants, Cellulant offers a comprehensive solution that allows them to receive payments from their customers hassle-free through their preferred store of value across Africa. Merchants can access a single connection that will enable them to collect with multiple payment methods from over 220m customers spread across 35 markets.

• For banks and mobile wallets, Cellulant offers a single point of connection for their consumers to pay over 600 merchants.

• For the Agricultural sector, Cellulant is digitising the entire agriculture value chain in Africa by building a blockchain based smart contracting and customer relationship management system used by millions of farmers across Africa; connecting them to market and helping them sell their goods to a diverse range of corporate buyers.

In 2012, Cellulant’s e-wallet powered the Nigerian Government’s Growth Enhancement Scheme. It has since powered more than $1 billion in subsidy payments to more than 17 million farmers. Can you tell us more about Cellulant’s involvement in this scheme? How can technology scale up the impact of business ventures and development projects alike?

In July 2011, a chance meeting between our co-founders, Bolaji Akinboro and Ken Njoroge, with Dr. Akin Adesina, who later become Nigeria’s Minister for Agriculture, led to a discussion about how the Nigerian government was spending $400 million on fertilizer subsidies but only 11% of this sum was reaching farmers. The remaining portion found its way back onto the market and was sold to the farmers through the black market. The resulting structural anomaly dropped farmer productivity, pushing 20 million farmers into poverty. Subsequent decline in food production drove the food import bill in Nigeria to 16 billion This led to the government initiating this GES project to distribute subsidies directly to farmers with Cellulant being awarded the contract to implement an e-wallet solution.

 With 14.5 million farmers being registered, this eWallet provided an efficient and transparent system for the purchase and distribution of agricultural inputs. Ninety per cent of farm inputs had reached 7.1 million farmers by 2013 as the government could now distribute fertilizer and seeds subsidies directly to farmers. As a result, income for every farmer moved from $700 to $1800.

 By 2014, the farmers were eligible for financing and approximately $600 million was created in lending and microfinancing opportunities. Upon implementation of the second phase of the project, the food import bill dropped by 75% as farming had contributed over $30 billion to the country’s economy.

To date, a total of $1 billion in government subsidies has been distributed through the scheme.

 This project was a defining moment not only because it allowed us to deepen and broaden our offering across different sectors but also because it built the foundation of our Agrikore platform. Agrikore is a blockchain based smart contracting system which today transforms people’s lives, communities and economies. Technologies such as mobile wallet or blockchain can be pivotal in transforming sectors such as Agriculture. We have now re-designed the value chain of subsidy payments and linked multiple players – corporate commodity buyers, farmers, banks and agro-input dealers - to digitize the Agri value chain in Nigeria and roll this out to the rest of Africa.

One of the core challenges in harnessing technological innovation is ensuring that the right projects receive funding. How was Cellulant able to stand out and receive Africa’s largest investment in a financial technology firm from the American fund, TPG? What advice would you give to startups seeking funding?

Cellulant Co-Founders & the TPG Rise Fund investors at the signing

Closing our recent investment was a key highlight in 2018. Although African fintech space is burgeoning, it continues to be poorly understood. We spent almost 2 years on the road, speaking to 60 investors and making 400 pitches selling our vision of Cellulant’s role in organising and powering payments in Africa’s marketplaces.

In the end, we got investors on board who not only understood our business but also believed in our mission and vision for Africa. This investment will give us the momentum to grow and scale the company.  We plan on entering new geographies across the continent, but also consolidating our presence in existing markets.

‘Entrepreneurship is not an easy fix…but a demanding journey that requires long-term commitment'.’

In view of the steadily growing capital investments in youth-led tech startups, it is tempting to sensationalize the achievements of a few young entrepreneurs and forget the multitudes who experience successive failures, despite the commercial viability of their solutions.  I echo the three principles our Group CEO, Ken Njoroge has noted to be particularly useful for young entrepreneurs who have tremendous talent but lack the benefit of experience:

1.  Reach out to experienced people outside your core network to help you set up a board and establish solid corporate governance structures.

2.  While it is understandable for entrepreneurs to be sentimentally attached to their first big idea, evolution and adaption are necessary, especially if there are other commercially viable opportunities within your ecosystem.

3.   Young entrepreneurs need to realise from the outset that entrepreneurship is not an easy fix to their financial problems, but a demanding journey that requires long-term commitment. You will be stretched during the fundraising process for sure - but clear intent on why and more importantly who you want as a partner will get you to the finish line.

To hear more from Milkah Wachiuri, join us at The Annual Debate on 5th June.

Connecting Africa: how tech is breaking down barriers to trade

Africa has more trade zones and the greatest average distance between major cities than any other continent. Logistical challenges are often cited by businesses as a major impediment to building scaled-up and profitable operations in Africa. Breaking down these barriers must be a policy priority and the African Continental Free Trade Agreement offers cause for optimism. Pioneering companies, however, have been taking matters into their own hands. Kobo360 is one such company. We spoke to Kobo’s Co-Founder, Ife Oyedele II about how the company uses technology to break down the logistical barriers to moving goods in Africa.

With the ratification of the AfCFTA there has been momentum building recently for intra-African trade to provide Africa’s next boom. But, many businesses continue to find the logistics very challenging. How does Kobo360 use technology to break down these barriers?

Kobo360 is using technology to connect cargo owners, truck owners, drivers and cargo recipients. By doing so, we bring efficiency and cost reduction to the supply chain framework. We transport large-sized goods and remove the stress of having to deal with seeking contractors to move heavy goods from one location to another, whether its within the same country, or across Africa. With the Kobo app, customers can also track the location of their goods, they can follow it step by step from pick up to delivery, so they are guaranteed safety for their goods.

‘Time, cost and quality are key drivers of success in logistics.’

Time, cost and quality are key drivers of success in logistics which is why we are building a global logistics operating system that will ensure fast movement of goods at a lower cost for businesses across Africa.

You’ve clearly had a marked effect on the logistics industry in Africa and Kobo 360 was named disrupter of the year at the Africa CEO Forum in March. How do tech-driven companies like yourself disrupt markets?

I would say that tech-driven companies disrupt markets by creating immense value and filling a huge gap in the market. We have spent the last two years fully focused on executing, at scale, on the enormous challenge of moving goods around Africa - starting with Nigeria, but quickly expanding to Togo, Ghana, Kenya and other key markets.

You’ve clearly got big ambitions for Kobo360 as shown by your recently opened office in Togo and as well as your expansion into Ghana and Kenya. Why have you chosen these markets and how do you plan to continue to scale up your operations?

Each African country we’ve chosen to expand into in 2019 has its unique value proposition. The expansion into Togo was a no-brainer as Lomé is home to West Africa’s largest shipping port whilst Ghana’s Port of Tema is the third-busiest in West Africa, after Nigeria’s port in Apapa. For East Africa, we chose Kenya as it is the most innovative market in technology. Winning Kenya will enable to connect the East African region.

‘The expansion into Togo was a no-brainer.’

By expanding our operations across Africa, we are in a better position to build a Global Logistics System that will help us to serve our customers across a seamlessly lined Pan-African market. By this, we create value to our customers as we are in all the key countries on the continent.

Tech-driven startups are often pointed to as evidence that African markets can leapfrog other developing economies. What needs to happen to ensure that technological innovation fulfils its promise of allowing African markets to unlock their full potential?

We need affordable internet, as well as sustainable e-commerce laws which ensure trust and security for traders and buyers alike. The people need to be confident in the system in order for it to progress.

For Kobo360’s success to be replicated, the right projects need to receive the right funding. What should investors look for when investing in tech startups and where should tech startups look for funding?

There are quite a number of things that investors would look for when investing in tech startups, but the product/service the tech startup is offering is very key. Tech products and services are built to eradicate problems, therefore a startup should be able to size the market opportunity for business growth. Being able to efficiently connect truck drivers with goods, track delivery and ensure product security without middlemen interference and, at a reasonable cost proved to be a challenge - and this is why Kobo360 exists. Using technology, we are able to address SME pain points and create more job opportunities for haulage drivers.

‘Tech products and services are built to eradicate problems.’

Tech startups looking for funding should apply to accelerator programs. We were accepted into Y Combinator's 2018 class and this helped in securing $1.2m pre-seed funding led by Western Technology Investment. Last December, we closed on a $6m seed funding round led by the IFC, so being a part of an accelerator has played a role in attracting investors.  

To hear more from Ife Oyedele II, join us at The Annual Debate 2019.

This time lucky for regional integration? by Nurmara

“Posterity will recall this day.” So said former African Development Bank president Donald Kaberuka in April, marking Gambia’s ratification of the African Continental Free Trade Agreement (AfCFTA).

The West African country became the 22nd to ratify the agreement, launched in March 2018, reaching the minimum threshold needed for it to come into force.

The AfCFTA is Africa’s most ambitious attempt yet to kick-start regional integration and trade. Its objective is nothing less than to unify the continent’s eight regional economic blocs into a single market of 1.2bn people, worth up to $3tr.

The first phase is a commitment by the 52 countries that have signed the AfCFTA to remove tariffs on 90% of goods.

Doing so could add up to $70bn to Africa’s GDP by 2040 according to the Economic Commission for Africa. Meaningful implementation could boost regional trade by 40% in the same period.

It is slated to become operational in July, fuelling hopes that it will transform the continent’s woefully low internal trade volumes of around 17%.

It’s a major milestone - on paper.

For one, ratification is not implementation.

A recent International Monetary Fund study on the agreement’s potential impact correctly points out that much more is needed than tariff reductions.

Improving trade logistics, developing infrastructure, and investing in human capital are all prerequisites for the AfCFTA to have a meaningful impact. These are core development challenges most of the continent is already struggling with.

The agreement’s ambition - while laudable - is also cause for concern. Harmonising trade across 54 countries is a daunting challenge - to put it mildly - and Africa has a poor track record when it comes to implementing cross-border initiatives which often fall flat due to a lack of political commitment.

The potential perils of lacking political support have already been demonstrated. Nigeria, Africa’s biggest economy, has yet to sign the agreement.

In short, the AfCFTA faces an uphill struggle. This doesn’t mean it can, or should, be dismissed. Africa only stands to gain from more meaningful integration, but policymakers must be honest about the enormity of the task ahead.

Let’s hope they’re prepared.

‘Africa Matters’: the future of British-African trade – a conversation with Emma Wade-Smith

Emma Wade-Smith OBE, H.M.Trade Commissioner for Africa

On his recent visit to Africa, Jeremy Hunt called for ‘the world to see African nations as partners for investment and trade’. British investment and trade with Africa has been growing steadily over the last decade. Foreign direct investment doubled between 2005 and 2014 from £20.8 billion to £42.5 billion and trade between Britain and Africa rose by 7% in 2018 to hit £33 billion.  

As policy uncertainty reigns in Westminster, we spoke to Her Majesty’s Trade Commissioner for Africa, Emma Wade-Smith OBE, about why Africa matters to the UK, the future of British-African trade, and how her team is supporting British businesses on the continent through this time of global instability.

The Prime Minister, Theresa May has set the ambitious target that the UK will be the largest G7 investor in Africa by 2022. Why is Africa a trade policy priority for the UK and how can this promise be achieved?

Throughout the British Government, we have been looking at at how Africa matters across a wide range of issues from security through to prosperity. Africa matters to the UK’s national interest now and, when you project forward to the next 50 years and beyond, the value of that relationship only grows. From my perspective, looking at prosperity and how our commercial partnerships can drive sustainable, inclusive growth and job creation is key. We know that developing markets across Africa will also be beneficial for the UK’s economy, so it feels very much like a win-win situation.

‘Africa matters to the UK’s national interest now.’

Investment is a particularly important part of the story because of its wider impact. The UK is already one of the largest foreign investors in Africa and the largest foreign investor in the continent’s biggest economies such as South Africa, Egypt and Kenya. The focus for the British Government is building on the £45 billion investment stock that the UK has in Africa to drive the kind of growth that we think is valuable. Not only because economic growth is of value in and of itself, but also because we want to drive ethical, sustainable, inclusive and values-driven economic globally.

When you look at our approach to trade globally, the UK is clearly a global leader on open and competitive trade. We want to ensure that we work with African governments on supporting open, free and fair trade and avoiding the allure of protectionism.  

Given your belief in competitive and free markets and the UK’s aspiration to be a global leader on these issues, which sectors are British companies particularly competitive in in Africa?  

The Department for International Trade has just completed a piece of analysis on what market share UK companies have in different parts of Africa, in which sectors, and where there is untapped potential. The great news is UK companies are doing business across the continent in an ever-wider range of sectors. The mixed news is that in every area there is untapped potential. For me that translates into opportunity.

Historically, the UK has been strongest in oil and gas, mining and the related infrastructure and we have long-term investments and business relationships in those sectors. Nonetheless, there is British expertise across the board. As the growth of renewable energy continues, British companies are operating in that space as well as in water and food security and agri-tech. Not to mention financial services, which fundamentally underpin the growth and diversification that we want to see in Africa’s economies. As we think about how governments prepare for the inevitable demographic transition in Africa, the UK can also contribute skills in healthcare and education.

Of course, underpinning all of this we have a huge amount to offer in terms of technological innovation. Technology is transforming the way that we do business and the innovation coming out of the continent itself is particularly exciting. As governments, we must reflect on how we connect our entrepreneurs and our innovators in this space.

Technology and innovation are clearly at the heart of your work in Africa and you’ve mentioned that one role for government is facilitating the connections that drive collaborative innovation. The UK and South Africa recently announced they would co-lead the Commonwealth Digital Connectivity Agenda, which aims to quadruple trade between Commonwealth countries by 2030 through digital innovation. Can you tell us how initiatives like this help to harness technological innovation? Do you have any other similar ongoing initiatives?

The UK hosted the Commonwealth Heads of Government Meeting last year and it will be Rwanda’s turn next year. We are working closely with the Rwandan Government on handing over the baton and making sure that we continue the pace and the range of trade initiatives that came out of London. One such initiative was SheTrades, which is focused on women’s economic empowerment. Alongside this we are facilitating intra-Commonwealth trade through standardisation and regulation in order to build the economic dividend of being part of the Commonwealth.

Having a common digital agenda with South Africa allows for a 360-degree perspective. Even though we have our own concerns about the implications of digitalisation and Artificial Intelligence for jobs in the UK, fundamentally we have the security of our economic diversity. In developing markets, where there are high rates of unemployment, the prospect of the 4th Industrial Revolution looks considerably scarier. By co-chairing the Commonwealth Digital Connectivity Agenda, we can bring out both the challenges and the opportunities that we face in the Commonwealth and as a planet.

‘The drive from African governments to build a manufacturing base…. is at odds with the potential to lose hundreds of thousands of jobs.’

The challenge is that the drive from African governments to build a manufacturing base, establish business processing capability and create jobs is at odds with the potential to lose hundreds of thousands of jobs because driverless vehicles and robots can do the work that people do today. Governments need to prepare people for this with education, skills and continuous learning. This way we can take advantage of these changes rather than fear and resist them.

Businesses are clearly having to contend with a wide range of uncertainties from technological disruption to climate change to policy uncertainty. What is DIT doing to support British businesses in this environment?

There is so much we do. Let’s start with Brexit. We have a network of partnership agreements and association agreements across Africa, which are currently held by the EU. A major focus over the last 18 months has been working with African governments towards continuity and transition from those EU trading arrangements to UK ones. Our number one priority is continuity. We want to be able to say to companies ‘whatever happens with Brexit, we know that your trading arrangements will be at least as good as they are today’.

‘Whatever happens with Brexit…your trading arrangements will be at least as good as they are today.’

In the course of our discussions, it is clear is that there is desire from both our African and UK partners to build on existing trading arrangements. Are there things that we can do that do not actually require a whole new FTA, to make it easier for companies to do business?  Once we leave the EU, we will then have control over our trade policy for the first time in over four decades. We can use that to continue to promote an open and competitive trading environment, which we think is the best possible way to bring about the prosperity we want to see.

As Britain prepares to leave the EU, Africa has been working towards its own free trade area. Surrounding the ratification of the African Continental Free Trade, momentum has been building around the idea that regional integration is the key to unlocking Africa’s economic potential. Do you think that AfCFTA can meet these high expectations?

Firstly, I think it is great that Africa now has the number of ratifications it requires make some real progress on regional integration. There have been many crucial developments before the African Continental Free Trade Agreement, but this is clearly a moment that unlocks a leap forward. When I talk to British companies, they are interested in the scale of the market they can access in Africa. The more progress there is in reducing those barriers to trade across national borders the more enticing Africa becomes to a greater number of companies and I think that’s a good thing for Africa.

This is also a crucial step for manufacturing. One of the first things British companies are asked when they set up operations in Africa is are you going to set up a local factory. Unfortunately, the answer often is no. One of the reasons for this is that the economies of scale do not make sense. The easier the flow across borders the more you will see companies doing those calculations and coming up with a different answer.

As the UK Government, we have supported the African Union some technical assistance and working with countries individually on capacity building around trade policy. In East Africa we have funded programme called TradeMark East Africa which has made extraordinary progress and has reduced the average time to transport a container from Mombasa to Dar es Salaam or Burundi to Rwanda by 15%. These numbers are compelling and change in this direction good for Africa and it’s good for the UK.

During Jeremy Hunt’s recent visit to Africa he visited Senegal and announced a new £4 million English language programme in French and Portuguese speaking countries. Opportunities in non-anglophone countries have often been missed by British businesses and investors. How does the DIT plan to support British businesses in these markets?

It’s a fascinating question. I often get asked why UK companies are less present in Francophone Africa than French companies are in Anglophone Africa. The easy answer is we don’t speak the same language nor do we have the same legal systems and therefore it is more complicated to do business. But I just do not buy that because UK countries do business all around the world. We are clearly able to operate across different legal systems and languages.

As part of our recognition of the growing importance of Africa to our interests we are growing our footprint across Africa by looking at new markets where we do not currently have a trade and investment presence. I have increased my staff across the continent significantly and am building a cadre of investment officers to support UK investment into Africa and engage pro-actively in reducing barriers to doing business.

‘There is a strong demand from governments and companies in Francophone and Lusophone countries to work with British companies and buy British products.’

Fundamentally, there is strong demand from governments and companies in Francophone and Lusophone countries to work with British companies and buy British products. The issue we have is more to do with supply than demand. We are currently working to understand the opportunities and constraints in those markets in order to identify the right targets and increase our market share.

Other than Johannesburg, the London Stock Exchange has the largest concentration of African publicly quoted companies. More than 120 African companies with a combined market capitalisation of $70 billion are listed. What role does the City of London have to play in attracting African companies to the UK and furthering UK-African trade?

I hear all the time about the importance of the City of London for African business leaders. Whether that is as the choice for listing, which I would highly recommend because I think it is the best place for African companies to list internationally, or as a hub for multinational financing.  

‘The public sector’s role is to strategically invest to de-risk private sector investment.’

Naturally, partnering with the City of London and the London Stock Exchange is a crucial part of the answer to how we become the largest G7 investor in Africa by 2022. However you package the amount of public sector investment we have, which is considerable through DFIs like CDC and PIDG, private sector investment dwarves that. The public sector’s role is to strategically invest to de-risk private sector investment. The City of London is, and continues to be, an extraordinary asset for the UK and a powerful part of our offer, particularly in relation to Africa.

Finally, as you mentioned, the Commonwealth Heads of Government Meeting is coming up in 2020. Is there a role could an organisation like Invest Africa to play in supporting government conferences like this?

The short answer is yes. I am a huge supporter of governments and the private sector working together to find solutions to the challenges we have been discussing today. Where we have productive partnerships, like the one between the DIT and Invest Africa, we absolutely should be looking for every opportunity to work collaboratively and bring our respective networks and contacts together.

‘Policies do not do business, people do business.’

Fundamentally, you can have all the laws and policies that you want but policies do not do business, people do business. At its core, the Commonwealth is about mutual prosperity and partnerships for the common good. Relationships are key to this and the relationships we have with organisations like Invest Africa matter in a Commonwealth context. The partnership that DIT Africa has with Invest Africa is the first of its kind and we are just starting to see its potential as we look at where our interests align and build meaningful activity around those shared interests. That is very exciting for us and we really value the membership of Invest Africa and the work that we can do together. 

Navigating global uncertainty by Nurmara

The International Monetary Fund expects growth in sub-Saharan Africa to increase from 3% in 2018 to 3.5% this year, as the region continues a fragile recovery from the commodities slump.

The average is weighed down by poor performance in large, resource intensive economies including the continent’s two biggest, Nigeria (2.1%) and South Africa (1.2%). More diversified economies are expected to drive growth, with 21 countries expected to grow at 5% or more.

It’s a mixed picture, but both sets of countries face the task of navigating an increasingly uncertain global context.

In April the IMF cut its global outlook from 3.5% - 3.3%, the lowest since 2009, amid a worsening outlook in advanced economies and the impact of the US - China trade war.

The latter has contributed to slower global demand, particularly from China, in turn leading to lower commodity prices and weaker demand for sub-Saharan commodity exports.

At the time, the IMF warned that this confluence of factors, combined with an intensification of trade tensions, could shave up to 2% off growth in sub-Saharan Africa this year. This was before Donald Trump raised tariffs on $200bn worth of Chinese goods in May.

The dimming global outlook is putting more pressure on the region’s economies, which are facing mounting debt and shrinking fiscal space for development spending.

To weather the storm the IMF urges governments to focus domestic revenue mobilization - which remains weak across sub-Saharan Africa - and regional trade integration.

On the latter there are hopes for the impending implementation of the African Continental Free Trade Area (AfCFTA), having secured the minimum 22 ratifications needed to come into force.

The good news is that investment flows to the continent have remained resilient despite growing global uncertainty. While total FDI of $40bn in 2018 remains well off levels seen prior to the commodities slump, this was up 6% from the previous year.

Assuming Africa can make meaningful progress on implementing the AfCFTA, and the global context doesn’t substantively deteriorate further, this gives some cause for cautious optimism.

Playing the long game: how DFIs can drive sustainable industrialisation in Africa

Franziska Hollmann, Director Corporate Finance Africa, DEG

The UN General Assembly has declared 2016-2025 the Third Industrial Development Decade for Africa. Yet, Africa’s manufacturing value added accounted for only 1.6% of the global total in 2014. The continent continues to lag behind other regions and adds value to only 14% of its exports, compared to 27% for emerging Asian economies and 31% for developed economies.

Promises of Africa’s industrial take-off have been made before, but, this time, there are signs that cautious optimism may be called for. The recently ratified African Continental Free Trade Agreement is a significant step towards breaking down barriers in the way of intra-African trade. Ultimately, with its booming population, Africa may have no choice but to rapidly expand its industrial base if it is to grow sustainably.

We spoke to Franziska Hollmann, Director of Corporate Finance at the German Development Finance Institution, DEG, about how sustainable industrialisation can be achieved in Africa and crucial role that patient capital plays in this process.

Why is it so important for Africa to industrialise?

Recent and the not-so-recent history provide enough evidence that that industrialisation plays an important role in economic development. Think not only of the Industrial Revolution in the UK but also the experience of the Asian Tigers like Korea or the economic “miracle” that happened in China. Such rapid economic growth would not have been possible without sustained industrialisation and successive integration into the world economy. Now, it is crucial that all stakeholders – particularly governments and the private sector - work together to make it happen in Africa.

How can industrialisation drive sustainable development in Africa?

There are several important advantages to industrialisation that are especially relevant in the African context.

The first is job creation. Manufacturing can provide a huge number of jobs and this is especially relevant in the context of the rapid demographic change experienced by African countries. For instance, Côte d’Ivoire will double its population over the next 30 years.

“The population of the Côte d’Ivoire will double in the next 30 years.”

Manufacturing does not just create new jobs but also improves their quality. Industrialisation creates many “unskilled” jobs but then enables the constant “upgrading” of skills. Think about someone who starts out working on an assembly line but then has the possibility to gain more product and management knowledge and move, with time, to other roles within the company (or move to other companies to more skilled roles).

This is all part of a structural transformation of the economy. Many African countries have developed from ‘frontier’ to ‘emerging’ markets and are in the process of transitioning into ‘developed’ economies. Generally, this transformation has involved human capital shifting from the traditional agricultural sector to the manufacturing sector where productivity – and in the end also wages – are higher. As such, industrialisation plays an integral role in sustainable development on the continent and DEG seeks to support this through a variety of initiatives. We work with African agricultural companies to increase “local value added” through higher local processing and up-grading of industrial capacity. Through our Business Support Services we assist clients in analysing and reducing their skills gaps and, for those on our DeveloPPP, we support vocational training centres.

You’ve touched on the ways in which DEG supports high-quality job-creation and bolster value-added though investing in manufacturing. With their ability to provide long-term capital, what role do DFIs have to play in sustainable macro-economic development, particularly in relation to Africa?

“Access to long term and risk adequate finance is especially difficult for African companies.”

In theory, deep and liquid capital markets provide companies with the necessary financial means to invest into new machines and equipment and to take advantage of profitable projects, thus driving the industrialisation process. In reality, empirical evidence and our own experience show that access to long term and risk adequate finance is especially difficult for Africa companies. While financial markets are evolving on the African continent, the local banking sector still struggles to provide enough capital – especially with the required maturity – for African companies. DFIs play a crucial role in addressing this market failure by complementing the markets with financial products and services that do not exist locally. Hence we do not crowd-out local investors. Furthermore, DFIs – and DEG – do play the long-game. Our interest is to grow together with our clients and develop a long-term relationship, as opposed to other investors that have more a short-term horizon. In times of volatile capital markets, DEG provides stability.

With this focus on facilitating long-term growth, how does DEG ensure that its investments are sustainable?

First, we work with professional and successful entrepreneurs and support our clients to be economically sustainable. We do so by being in close and frequent contact with our clients and where we discuss the implementation of current or future measures to improve their business and increase the positive impact of the company. Furthermore, and more formally, we have a yearly update of our sustainability rating that tracks the progress. What makes us very happy is that many clients are enthusiastic about sharing their positive development milestones with us. On our homepage, we provide several evaluation studies that illustrate our development effectiveness rating and the process behind it with actual clients. 

An awareness of sustainability is, as you have suggested, essential to ensuring that Africa achieves the macro-economic transformation needed to support future growth and prosperity. How do you measure your impact and how do you strike a balance between positive development impacts and profitable investments?

“Companies that focus on increasing their development impact also increase their financial returns.”

We assess all our investments with regard to their development impact. We strongly believe that economically viable projects can – and should – have a positive development impact. This view is also implemented in DEG’s strategic goals. Our main focus is exploring how, by working successfully together, we can jointly increase the development impact of the company. Which measures would be helpful and could be implemented? From our experience, companies that focus on increasing their development impact also increase their financial returns. The two goals are not opposed to each other but complimentary. Take the classical case of implementing international norms: while many see only the cost at first sight, they realise that complying to international norms opens up new markets and business opportunities that in the end more justify the costs. It is very important to us that our clients share this view and see the value-added here.

To hear more from Franziska, join us at The Annual Debate 2019.

Africa's shifting FDI landscape by Nurmara

Total foreign direct investment (FDI) into Africa reached $40bn in 2018, up 6% on the previous year. This remains well below levels seen before the commodities slump, which exceeded $60bn in 2015.

Between 2016 and 2017 investment fell by 21%, driven by a slowdown in key oil-exporting economies like Nigeria and Angola, as well as South Africa.

The steep decline reflects a lack of diversification in FDI to the continent, which is dominated by the natural resource sector and a few key markets.  

In 2018 Egypt ($7.9bn), South Africa ($7.1bn), Ghana ($3.3bn), Ethiopia ($3.1bn) and Nigeria ($2.2bn) accounted for more than half of total FDI. 

The good news is that investment could grow at a higher pace in 2019, driven by stabilizing commodity prices and progress towards implementing the African Continental Free Trade Area.

Emerging Investors

Another silver lining is Africa’s shifting FDI profile. While the US and UK - two traditional source markets - were the two biggest investors in 2017, new contenders like China are catching up.

Beijing’s FDI stock more than doubled to $40bn from 2011 - 2016, while investment levels from the US remained the same at $57bn. China is also investing in more diverse sectors as its engagement moves beyond a focus on natural resources. Technology in particular is seeing a surge, with big names like Huawei, Alibaba and Xiaomi rolling out new strategies.

This is just part of surging interest from an increasingly diverse set of suitors. The likes of India, Russia, Japan and Turkey are all in the midst of ramping up FDI to Africa.

More recently there has also been a surge in investment from the Middle East, led by the UAE, Saudi Arabia, and Qatar into everything from port infrastructure, to oil and gas and the hospitality sector.

Assuming Africa can whether the effects of a dimming global outlook, and the escalating US-China trade war, there is cause for cautious optimism.

Scaling for Impact: Where next for tech in Africa? by Nurmara

Jumia, the Africa-focused e-commerce startup, listed on the New York Stock Exchange this month, becoming the continent’s first big stage tech IPO.

It’s a major milestone for the company, and a good example of Africa’s burgeoning tech industry. On the back of the mobile revolution and better connectivity the continent is going beyond mobile money into the mainstream of investing.

The continent’s startups raised a total of $1.163bn in 2018, a 101% increase on the previous year, according to venture capital firm Partech Ventures.

This includes big names like private equity giant TPG, which made headlines last May with its $47.5m investment into Kenyan fintech startup Cellulant. Even Facebook’s Mark Zuckerberg has invested, backing software developer training startup Andela.

They are just part of a growing stream of investments into everything from e-commerce to drone delivery services.

Africa’s technology potential is not in doubt, but realizing it will take much work.

In global terms investment levels are minuscule, with Africa accounting for just 0.39% of total venture capital funding last year. Indian tech startups raised almost ten times as much.

Just three countries - Kenya, South Africa and Nigeria - accounted for 78% of all fundraising in 2018. Investment is also going into a limited number of sectors, with fintech alone accounting for 50% of funding.

Few startups achieve scale, hamstrung by tough business environments and practical constraints like poor infrastructure.

This year’s Annual Debate will address the challenge of harnessing Africa’s technology potential as one of its core topics. The event brings together leading experts to consider the risks and opportunities of investing in tech in Africa, and where the industry goes next.

What does sustainable industrialisation look like in Africa?

According to the UN General Assembly we are in the Third Industrial Development Decade for Africa (IDDA III). But Africa’s share of global manufacturing is smaller now than it was in 1980. Unlike the Asian Tigers, Africa’s economic growth has not been based on industrialisation. Future growth, however, may need to be if it is to be sustainable and create employment opportunities for a booming population.

A recent study by the UN’s Economic Commission for Africa shows that when African countries trade with themselves they exchange more manufactured and processed goods. In 2014 manufactured goods made up a mere 14.8% of exports leaving the continent compared 41.9% of regional exports. It is no wonder then that the Kenyan FMCG giant, Bidco Africa’s, strategy has been to ‘grab, grow and sustain market share in African markets’. An approach that has earned the company a place on BCG’s list of 75 African companies pioneering regional integration.   

But, as Bidco’s Chairman, Vimal Shah, has emphasised logistics remain a major challenge. With sixteen different free trade zones compared to Europe’s four and North America’s one, Africa is a particularly fragmented market. Industrialisation is not an automatic nor a ‘one size fits all’ process. The Director General of the United Nations Industrial Development Organisation, Li Yong, has pointed to the development of infrastructure and logistical frameworks alongside economic integration as the keys to sustainable industrialisation in Africa.

The continent is moving in the right direction with the African Continental Free Trade Agreement reaching the 22 signatories needed for ratification this week. This move towards regional integration has been underway for some time and Bidco’s expansion has relied on the Common Market for Eastern and Southern Africa (COMESA), which gives it access to markets stretching from Tunisia to Zimbabwe. Investment in infrastructure is on the rise with governments and Development Finance Institutions committing capital to major projects. Ethiopia’s commitment to building $2.5 billion railway line connecting Addis Abba and Djibouti and DEG’s $85 million investment in Mubadale Infrastructure Partners this month are testament to this.  

This is not the first time that industrialisation has been hailed as the key to unlocking Africa’s potential and many challenges remain. But, if the private sector’s desire to expand through regional trade can align with the political will to facilitate economic integration, this could be a key moment in Africa’s industrial development story.

Franziska Hollmann from DEG will be at The Annual Debate 2019 to bring to discuss investment and trade opportunities in Africa.  

‘Affordable, reliable, sustainable and modern energy for all’: private equity powering SDG 7

Last week Denham Capital announced a new natural gas-fired power project that will provide 4.5TWh of secure, affordable energy to Nigerians. Themis, an Africa-focused power company backed by Denham, will partner with Kingline to develop a 550MW natural gas-fired power plant in Ondo State, Nigeria. This landmark project is scheduled to proceed to financial close in Q2 2020 and become fully operational in 2022.

Despite being Africa’s most populous country, Nigeria currently only has 4,000MW of operational capacity, which does not even cover a third of its 15,000MW demand. It is no surprise then that the country has one of the lowest energy consumption rates per capita in the world, at only 100kWh. When compared to South Africa’s 5,000kWh and the USA’s 12,987kWh, the gravity of Nigeria’s energy crisis is undeniable.

With African governments across the continent focusing on ensuring access to ‘affordable, reliable, sustainable and modern energy’ in line with Sustainable Development Goal 7, private investment in this sector is of paramount importance. To take advantage of the liberalisation of the power sector in Africa, Denham Capital launched a new Africa Power Investment Platform last year in partnership with Themis. The platform has an initial target of $250 million of equity investments in natural gas and renewable power generation across the continent.

Many African governments, including Nigeria, have turned to privatisation as a means of solving the acute challenge of financing large-scale energy provision. This has opened a space for private equity firms to provide the much needed capital to industry-leading projects with the scope to have a real impact on access to power in Africa. This is Scott Mackin’s ambition for Denham. The firm launched its first Annual Impact Report in 2018 and Mackin has noted that having ‘already built up a strong track record in Africa … we are poised to become leaders in this space’.

Africa’s growth story has come into question in recent years with longer investment horizons and pure growth investments under-performing ambitious forecasts linked to regional or demographic growth. What will the big future opportunities in Africa be? Will projects such as Denham Capital’s new natural gas-fired power plant drive future investments for the continent?

Join us at The Annual Debate to hear from Scott Mackin and others on the future of private equity in Africa.

Mind the gap: delivering sustainable growth for Sub-Saharan Africa

 ‘Revenue mobilisation is key for securing the resources needed to achieve SDGs’. This was the message Abebe Selassie, Director of the African Department at the IMF, delivered to African leaders at the 7th African Fiscal Forum in Nairobi last month.

If the SDGs are to become a reality in Africa over the next decade, the financing gap across the continent will need to be addressed. For the IMF, robust macro-economic growth is the place to start. IMF Africa’s Regional Economic Outlook projects higher growth rates on the horizon as oil-exporting countries like Angola and Nigeria recover from the 2014 commodity price shock and more diversified economies maintain their strong growth. GDP growth for the whole region is now expected to rise from 3.1% in 2018 to 3.8% in 2019 with continued acceleration thereafter.

But, as Mr. Selassie and the IMF have pointed out, unhealthy balance sheets could put this recovery at risk. Government borrowing has been on the rise across the region, partly to finance large-scale infrastructure and public works projects. Worryingly, four countries (Cabo Verde, Eritrea, Mozambique and Republic of Congo) now have a debt to GDP ratio of over 100% and the regional average has nearly doubled over the last 10 years. While infrastructure development is essential and large public projects can kick-start job-creation, financing will now need to move to a more sustainable basis.

What will happen to Africa’s growth if the continent falls into another debt crisis? What are the financing solutions for the economies of tomorrow? Will job-driven sustainable growth unlock the demographic dividend or will rising debt and under-investment spell disaster for Africa’s youth?   

There are no simple answers to these questions, but one thing is clear: stakeholders across the public and private sectors have their role to play and cooperation will be needed. To hear more from Abebe Selassie and other thought-leaders on the big questions facing African business development click here to book your place at The Annual Debate 2019.