Untapped Investment Opportunities in Africa
The raggedy cargo truck drives onto the ferry which immediately sinks deeply into the water, only seemingly buoyed by the grace of mother nature. The truck appears misplaced on the ferry, but locals assure me that this is the cheapest and quickest route to the final destination. “This is Africa” is often an overused phrase, but this truck is a microcosm of the continent’s transport and logistical challenges (and subsequent investment opportunities).
It is an often overlooked fact, but only about 30% of African roads are paved, and 50% remain in “poor condition,” according to the United Nations Economic Commission for Africa. It is this reality that makes shipping cement from Shanghai to the shores of Djibouti about 60% cheaper than shipping from Ethiopia’s capital Addis Ababa to neighboring Djibouti by road. This statistic does not indicate better things for ports. The same UN report estimates that Africa’s ports productivity is mere 30% of the international norm. This is logistics in Africa. But why?
Trade With Africa is Booming
Sub-Saharan African trade volumes are expected to quadruple by 2030, according to a Frost & Sullivan report, increasing from 102.6 million tons in 2009 to 384.6 million tons by 2030. Intra-regional trade volumes, according to the same report, will grow just under 345% in the same period. In 2010, however, Africa’s intra-trade only accounted for about 10% of its total trade, according to a report by the Brookings Africa Growth Initiative, compared to 17% in developing Asia and 60% in the European Union. Simply put, Africa exports relatively cheaper unprocessed (and often raw) materials to the world’s developed economies, and largely imports more expensive finished goods from the same countries.
The effects of these numbers cannot be ignored. A recent survey by ECA International placed Angola’s capital Luanda as Africa’s most expensive city (yet again) and 2nd most expensive for expatriates globally. It would be unfair to ignore the effect of currency appreciation in Angola due to a commodity boom, but the lack of internally processed goods and transport are the greater culprits in the equation, similarly pushing other African cities – Juba (4), Brazzaville (13) and Libreville (17) – up the list of expensive cities. The consumer is not the only one suffering.
It takes nearly double the amount of days and more than 10 times the price to move a 40ft container from Kenya’s second largest city, Mombasa, to Rwanda’s capital Kigali, than it is to move the same container from Shanghai to Mombasa, according to a local shipper in Kigali. An observer to our discussion says that may be an exaggeration, but not by much. These transport costs and delays – irrespective of the debate of how ‘extreme’ the numbers may be – perplex the most financed and prepared business manager. Shipping costs that average $1,974 per container are high compared to the median estimate of $732 for Asian countries, according to the consultancy firm KPMG. Lead times are more than double in sub-Saharan Africa at 30 days, compared to 13 days in developed nations.
Moving agriculture products from Ghana’s capital Accra to Burkina Faso’s capital Ouagadougou is a messy constellation of customs and bad roads that sees transports costs range from 3 to 4 times that seen in Europe. Conflict in Mali only further enriched those transporting products from Dakar in Senegal, to Bamako in Mali in 2012, with some producers in Senegal claiming transport costs jumped as high as 50 to 60 percent. In Tanzania, according to a local trader, outsourced transport costs can add 15% to the price of meat and, in certain instances, north of 20% to certain home and personal care products.
Log truck in Central Africa Republic (CAR) / Photo credit: JG Collomb, World Resources Institute
Central Africa generally sees the worse effects from transport costs. Impassable roads and dilapidated transport facilities disconnect countries such as the Democratic of the Congo (DRC). The goods traded with the DRC on its eastern coast by Burundi traders can, at times, bear little resemblance to goods traded in Kinshasa from neighboring Angola and the Republic of the Congo.
It is hard to numerically calculate the drastic effects that logistics can have on African business. The experiences of Anglo-Australian mining company Rio Tinto in Mozambique may be our best example. A recent $3 billion write-down by Rio Tinto on its purchase in the Moatize basin in Tete province was due to its inability to overcome logistical challenges. The company scrapped two previous shipping schemes, including the Zambezi project, and has been relegated to sharing the 580km Sena railway – a very aged, single-track line from the Portuguese colonial era – with other mining companies and passenger trains.
This year mining companies paid an estimated $49 per ton to ship by rail in Mozambique. This price accounts for: 1 – the floods that put the Sena rail offline earlier this year, 2 -he mandatory 3% royalty to the government (irrespective of profits), and 3 – the bump in freight charges associated with the country’s Beira port’s inability to accommodate large freight ships which could lower overall costs.
The all-in logistics costs component of a Free on Board (FOB) per ton coal price needs to be below $35 per ton, according to Henrique Pinheiro of Ariy Consulting and Advisory, which would indicate most companies are, at the very least, struggling this year. Still, the Mozambique state-owned railway company Portos e Caminhos de Ferro de Moçambique (CFM) stands to earn north of US$60 million from coal shipping on the line. Brazilian mining company Vale’s best response to low capacity and high prices at Beira is its investment in the longer 912km Nacala line to the Nacala which will be able to accommodate 18 million tons per year (nearly more than 5 times the amount shipped by CFM this year).
A Boom in Investment
The Nacala line is one in a myriad of investments in transport and logistics across the continent. A near $37 billon is being invested in current road infrastructure projects in sub-Saharan Africa, while more than $57 billion is being invested in current rail infrastructure projects, including a recently approved 525km rail line connecting a new port at Macuse on the coast of the central province of Zambezia in Mozambique to the Moatize coal basin.
Logistics spending in Africa by manufacturers and retails will increase, according a report by British researchers Analytiqa, from $128.5 billion in 2012 to $157.3 billion in 2016. They further predict that the size of the outsourced logistics market will expand by 38.4% in that same period.
Africa is home to several of world’s fastest growing economies thus the numbers are not hard to imagine. Competition accordingly continues to skyrocket and push investors to more untapped parts of the continent. Bolloré Africa, one of the largest port operators in Africa, recently secured a deal to invest over $680 million to upgrade the port of Berbera, which could be key to transforming trade for landlocked Ethiopia.
Berbera port, Somaliland / Photo credit: Brian Dell (CLICK IMAGE FOR VIDEO)
Anxious French and Portuguese investors await anxiously as Société Nationale des Chemins de Fer du Congo (SNCC) and Caminhos de Ferro de Benguela (CFB) continue to comb through the details of a deal to boost the Lobito corridor, which will connect the Congo, the world’s eighth largest producer of copper, to the rehabilitated Benguela railway line and port. Rio Tinto plans to invest up to $1.5 billion in transport infrastructure through 2018. And private equity giant Carlyle Group appears close to securing a deal to boost transport capacity in the Mozambique and Tanzania logistics corridor.
Still, the sector is starved for cash. New infrastructure funds come and go with the wind, says the Managing Director of a major African advisory firm, because many fail to raise the capital. The African Development Bank, under the auspice of Donald Kaberuka, has made infrastructure deficiencies, including transport, a leading issue in its labors in Africa. The Bank and its partners in African and non-African national governments should change help the Director’s perspective and the many who agree with him. While a new push for capital in this sector will greatly benefit the continent, challenges persist beyond financial constraints.
High custom fees and periodical bribe demands undercut African logistics. The port in Durban, South Africa – sub-Saharan Africa’s busiest port – charges double the global average to dock a ship, ensuring its place as the most expensive major port in the world. The costs due to business delays further aggravate the situation. Delays can be up to 3 times as long in sub-Saharan Africa compared with other global regions. A spat earlier last year between Ethiopia and Djibouti over custom fees delayed certain goods beyond 4 months at the port, frustrating local producers and reducing potential revenues up to 20% for certain companies. Greater capacity and private investment cannot change this factor.
The continent requires increased government efforts in boosting economies of scale and lowering production costs in order to realize growth potential. Certain countries, including Rwanda and Mauritius, are examples of best efforts in Africa with their decreased costs and vastly improved road networks over the last five years. Despite the national achievements in these and other countries, the intra-trade links remain relatively underdeveloped.
Mauritius port / Photo credit: iblmaritime.com
The transfer of goods, technology and knowledge still flounder on the continent as leaders struggle to find ways to share. Tower and network sharing bewildered the African mobile industry (and still does in specific pockets on the continent). But large economic gains and spill-over benefits have drastically changed the perspective of telecom operators and government officials on the continent. A similar transition is very much possible for the logistics sector. Developing specific corridors and special economic zones has proved successful in Ethiopia and Mozambique. Tanzania is also seeing great benefits under these schemes.
Logistics is a Sexy Buzzword in Africa
The continent provides some low-hanging fruit in terms of investment. Bringing transport in-house was easiest way to reduce costs and boost revenue, says Chief Operating Officer of Afri Tea in Tanzania, Surajit Sarma, and it reduced business delays and concerns. All new cement companies in Ethiopia are employing a similar model to both lower cost to the end consumer and boost revenue. Slow government processes and efforts literally force mining companies to finance their own transport infrastructure, as seen in West Africa. This model is drastically changing.
An increasing number of governments are displaying the capability to change the transport landscape and the business environment. Railway projects and airport upgrades in Ethiopia, Uganda and Kenya embody the rapid change in East African corridor. Their governments are pioneering renewed efforts to boost infrastructure sharing and cooperation and general open dialogue. The results are growingly silencing dissenters and buoying local confidence in the ability of African governments to grapple with market deficiencies and gaps in the economy. Increasing efforts in West and Central Africa should further boost confidence and, more importantly, results.
The mobile revolution taught us how connecting Africa can be a game changer to its growth. Savvy, agile and increasingly educated entrepreneurs utilized mobile expansion to forge a lioness economic boom. Transport will have the same effect. Today a more advanced and larger group of entrepreneurs, if anything, could lead transport to possibly having a more significant impact than mobile phones. .