The writings of an intense journalist

Wednesday, 16 February 2011

MOBILE TELECOMS: Why Africa is Experiencing Growth

By Adetokunbo Abiola
Though Africa remains at the very frontier of emerging markets, the expansion of its mobile telecoms industry sometimes surpasses growth elsewhere. A report from the London Business School stated that over the last five years Africa has seen faster growth in mobile telephone subscription than anywhere else in the world. The continent's mobile phone use during the period increased at the rate of 65% annually, about twice the global average. Africa is reported to be the first continent to have more mobile phone users than fixed line subscribers. The continent is rated as the fastest growing mobile telephone market, faster than in the economies of India and China.

Much of the boom in the industry is driven by a burgeoning domestic market, the largest outside India and China. Although a modest middle class made up of government workers or others tied to the ruling elite has been present on the continent, it expanded in recent years with private sector employers. This growing segment of the African population is upwardly mobile, low-to-middle income consumers. The new class could number as many as 300 million, out of a total population of 1 billion, according to development expert, Vijay Majahan, author of the 2009 book Africa Rising. It includes secretaries, computer gurus, teachers, journalists, lawyers and others who by virtue of education, geography or luck have benefited from economic growth of 6% annually in such countries as Ghana, Uganda and Kenya and around 8% in Rwanda. According to Bloomberg Business week, the household spending of this class and others in Africa totaled $860 billion in 2008, more than that of India or Russia. What's more, Africa's consumer markets in the last few years grew two to three times faster than those in Organization for Economic Cooperation and Development (OECD) countries.

The growth in Africa's telecoms industry can be attributed to other forces: trade liberalisation, strengthening the rule-of-law, improved legal and support institutions, better governance, improved transparency, better transport and economic reforms. At least 17 countries have broad-based privitisation programmes in place. Some 25 countries in Sub-Saharan Africa transferred all or part of their telecoms ownership from the state to the private sector. Countries that privatise such as Ghana, Mozambique and Uganda attracted significant foreign direct investment, allowing profits to be repatriated freely or offering tax incentive and similar inducements to foreign investors. Often changes are deliberate and domestic. Inflation has been cut by half to 11% since 2001. "Most importantly, we've seen regulatory changes and this begins to open up a door to long-term investment," said Obiageli Ezekwesili, Vice President, African Region, World Bank.

Despite Africa’s reputation for sit-tight leaders, pointless wars and corruption, a substantial chunk of the continent is experiencing change. Many countries embraced democracy, freedom of speech and political reforms. Spurred by their citizens, African governments, like in China and India , deregulated the telecoms sector and developed infrastructure – gone are the days of central planning and public sector-driven growth strategies. The political situation reflects a free flow of information and a parallel rise in expectations. During Kenya ’s recent political crisis, members of the middle class, who were losing money, reportedly pressured the country’s warring leaders into a compromise. Change has translated into boom for the telecoms sector.

Urbanisation has increased at the same time, making Africa a potential source of substantial consumption and production in the years ahead. Today 40% of Africans live in cities, a portion that is close to China and continuing to expand. This segment of the population accounts for 80% of the total GDP, according to UN Centre for Human Settlements. Apart from this, the continent already has 52 cities with population greater than 1 million - equal to Western Europe - and is projected to add 32 by 2030. One in five of the planet's young people will live in it by 2040, and it will have the world's largest working-age population. Already, the continent boasts of the world's highest rate of urbanisation, which jump-starts development and growth through industrialisation and economies of scale. McKinsey and Company estimates that over the last 20 years three-quarters of the continent's increase in GDP per capita came from expanding workforce and higher productivity. As in countries such as China, India, Brazil and Mexico, urbanisation created jobs and increased demand for telecoms goods and services.

Not surprising is that urbanisation is also lifting income and fuelling consumption. According to Bloomberg, the number of households with discretionary income has grown and is projected to expand by 50% over the next 10 years, reaching 128 million. While few African households have the kind of disposable income found in Asia and the West, they are driving up demand for goods and services, particularly mobile telecommunication products. For instance, while households in developed countries devote only 3 % of their income to telecoms use, those in some African countries such as Namibia, Ethiopia and Zambia devote as much as 10% . Though unemployment is high and something needs to be done, the surge in private consumption of telecoms products seems likely to continue.

According to a study by a World Bank program, the Africa Infrastructure Diagnostic, improvements in African mobile telecoms infrastructure have led to growth. Nowhere is this relationship between infrastructure and potential growth more apparent than in the multimillion-dollar Glo 1 submarine cable being laid across the West coast of Africa between Nigeria and the UK. Having a length of 9,500 kilometres and a minimum capacity of 640 Gbit per second, the submarine cable is set to rival the South Atlantic cable (SAT-3), which has been enjoying complete monopoly in the West African sub-region. The arrival of the submarine fibre-optic cable will boost bandwidth, cut costs, and stimulate businesses that rely on technology. "Africa has been able to leapfrog from having the most backward system to taking advantage of the latest technologies," said Vanessa Gray of the International Telecommunications Union.

Many experts believe growth is also driven in part by the fact few Africans own computers or can access the internet. So mobile phones are applied to tasks such as health research, cash transfer, weather forecasting, commodity price monitoring and others. Often users themselves conceive such adaptation of the intended functions to meet everyday needs.

Safaricom, Kenya's biggest telecoms company, is one of the firms cashing in on Africa's mobile telecoms boom. Incorporated in 1997, it had only 20,000 subscribers when its chief executive Michael Joseph arrived in 2000. By Nov 2010 when Joseph left the company, its subscribers base grew to 20 million in a country of 40 million. Its peers are now Pan-African giants such as Orascom and MTN. Its 2008 initial public offering became the biggest flotation on an East African stock market, and surpassing it may take some doing. It posted $262 million in profits at the end of its financial year in March 2010, attracting investors into the Kenyan economy.

Econet Wireless is another company that cashed in on the remarkable growth of the mobile telecoms industry in Africa. Founded by Strive Masiyiwa, it began operations as a cell phone provider in 1998 in Zimbabwe. It soon expanded its operations into Botswana by establishing Mascom Wireless, which is one of the spectacular success stories of the African telecoms sector and currently enjoys a market share of over 70%. Econet Wireless then put together a consortium that later dominated MTN in the Nigerian market before winding up its operation. Econet Wireless has expanded into such countries as Lesotho, the United Kingdom, Kenya, Burundi, New Zealand and several other countries.

As a result of all this, Africa's mobile telecoms growth story cannot be easily overlooked. The continent's telecoms revenue increased at a compound annual growth rate of 40% in the last few years, achieving the highest profit margin in the industry worldwide. Swedish-based world's leading supplier in telecommunication, Ericsson, benefited with sales soaring up to 400 million Euro this year alone, its highest ever sales. With recovery in Western economies still looking fragile, Africa continues to be the destination of choice for firms seeking expansion and growth, as countries such as China, India, Japan make forays. Telecommunication firms signed up more than 400 million subscribers since 2000 - more than the total United States population. For example, Nigeria added over 22 million mobile subscribers in 2008. Though the level of penetration in Africa went up from 0.8% in 1998 to 33% in 2008, ample room exists for more foreign direct investment.

While many experts believe Africa, with its expansive base of consumers, may very well be on the verge of becoming the next India and China in the telecoms industry, challenges remain. Alison Gillward, Director, Research ICT Agency (RIA) said: "The extension of networks and services in recent years have been 'sub optimal'" Other problems include inadequate governance arrangement, corruption, absence of institutional capacity and some regulatory incompetence. To be sure, there remains serious problems and risks to growth to any individual country, but if recent trends continue, Africa will play an increasingly important role in the telecoms industry. Like China, India and Brazil, countries getting all the headlines for their prowess in the telecoms sector, Africa has the potential for more growth in an industry that aims to bring the continent's widely dispersed people in closer contact with one another.

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