Unpacking the trends that shaped Africa’s business environment (Part 2)

2018 has been an interesting year for Africa, with various events and trends becoming visible. 2016 saw the effects of the slowdown of China’s economic growth due to its rebalancing of its economy and the end of the commodity price super cycle. 2017 brought some relief. In Africa, 2018 demonstrated a number of continued trends, but also some new events.

The NTU-SBF Centre for African Studies, situated in Singapore, publishes a weekly newsletter. These were studied to pick up on the trends prominent in 2018. Some of these trends are more elaborate than others.

This article comprises three parts. Click to read part 1 and part 3.

Trend 5: Renewable energy

A trend of earlier years in which we saw the further growth and development of the renewable energy sector, has continued in 2018.

A significant number of renewable energy deals were announced during December 2018. Examples include: 1) Kipeto Energy (Kenya, wind farm, 100 MW); 2) Nachtigal Hydro Power Company (Cameroon, hydropower); 3) d.light (off-grid solar); 4) ZOLA Electric (Tanzania, off-grid solar); and 5) Karoshoek Solar One Project (South Africa, 100 MW).

Services that allow customers to pay for solar equipment and service in small instalments, have picked up momentum in the last couple of years, particularly in East Africa. Two firms that supply solar power products with pay-as-you-go products, are San Francisco-based Off-Grid Electric, and UK-based Azuri Technologies.

Another technology that has been developed in the solar energy sector, is SolarNow, providing solar energy, appliances and financing solutions in East Africa. This will make solar more accessible through affordable finance.

West Africa has also embraced solar energy. Ghana’s President Nana Akufo-Addo has pledged to increase the contribution of solar energy to Ghana’s energy mix. Currently, solar energy only contributes 1% to the energy mix, as opposed to 59% from fossil fuels, and 40% from hydro. He wants to accelerate the development of mini-grid solutions in off-grid and island communities for lighting, irrigation and other economic activities.

The development potential of Nigerian mini-grids is valued at up to US$20 billion. The development of off-grid systems, including mini-grids and solar home systems, could save individuals and businesses US$6 billion per year. In addition, by scaling up the mini-grid market to 10,000 sites, the sector can electrify an estimated 14% of the population and generate annual returns of US$3 billion by 2023. As the market expands, costs could fall by 60% by 2020. The government, supported by the World Bank, has launched a 5-year, US$350 million Nigeria Electrification Project to help finance electrification solutions for rural populations.

Recently, Ethiopia signed an MoU with the Gulf Electricity Interconnection Authority and the International Energy Linking Organisation to start a feasibility study of electricity linkage between Ethiopia and the GCC countries. The project aims to enhance energy security and raise the level of reliability and safety of the Gulf electrical systems.

Ethiopia’s huge water capacity can be used in generating electricity, which will be exported from Ethiopia to the GCC countries. Ethiopia has approximately 4.3GW of installed power generation capacity, of which 3,810MW is in the form of hydro installations, 324MW wind, 7MW geothermal and 143MW of diesel.

In Kenya, the Kenya National Electrification Strategy recognised the key role played by mini-grids and stand-alone solar systems to complement the grid densification and extension. Kenya has a target of 35,000 connections through 121 mini-grids and 1.96 million connections as stand-alone solar home systems. From January-June 2018, 519,154 off-grid solar products were sold in Kenya, accounting for 34% of all sales in sub-Saharan Africa. Market penetration of off-grid solar in Kenya has increased ten-fold and is currently estimated at between 25–30%.

Trend 6: Mining

Tanzania wants to take more of the profits from its vast mineral resources by overhauling the fiscal and regulatory regime of its mining sector. It adopted new regulations, which now make it compulsory for foreign-owned mining groups to offer shares to the government and local companies. A contractor, sub-contractor, mining company or other allied entity must maintain a bank account with an indigenous Tanzanian bank and transact business through banks in the country. The insurable mining risks in the country must be insured through an indigenous brokerage firm or an indigenous re-insurance broker. The new rules also require indigenous Tanzanian companies to have at least 5% shareholding in a mining company, in addition to a 16% government free carried interest. There are fines of at least US$5 million for mining companies that fail to implement the new requirements. The regulations also require the government to prioritise indigenous Tanzanian companies in granting mining licences.

Patrice Motsepe, the executive chairperson of mining company African Rainbow Minerals, in 2018 stated that South Africa was reinforcing its position as a competitive mining destination through a positive Mining Charter outcome and widespread consensus on the manner in which the crucial issue of land expropriation is tackled. Motsepe was confident that current Mining Charter discussions under way would ensure South Africa’s position as a competitive global mining destination for investment.

Mozambique planned to sign an agreement with Rosneft and ExxonMobil on gas field exploration in the north of Mozambique by the end of 2018. The plan is to also launch the project on field development in Mozambique with the participation of Rosneft and ExxonMobil. Rosneft and ExxonMobil received three license areas. According to preliminary agreements, the initial drilling period will be four years.

Chinese entities are collaborating to develop oil and gas projects in Ethiopia. The conglomerate, named POLY-GCL, began extracting from the Ogaden Basin in May 2018. Construction of a 550km pipeline pumping gas to the Port of Djibouti is underway, and substantial exportation is set to begin in 2021. Black Rhino Group has already invested US$300 million in the pipeline running from Ethiopia to Djibouti.

Turkey and Sudan have signed a US$100 million oil exploration deal and an agreement allocating 780,500 hectares of Sudanese agricultural land for investment by Turkish companies. The Turkish Petroleum Corporation (TPAO) and Sudan’s Ministry of Petroleum and Gas also signed an oil field development agreement, which would initially lead to an investment of up to US$100 million. As for participation in the oil industry, Sudan has also invited companies from both China and Russia to become involved.

Trend 7: Agriculture

Feeding the people of Africa is another High 5 Priority of the AfDB. Africa is a net importer of US$41 billion of food annually, which is set to grow to US$110 billion annually by 2025 if nothing changes. Africa has the potential to feed the world, and it seems that they cannot feed themselves. Yet agriculture is very important in poverty eradication in Africa.

According to PwC, Africa’s agribusiness sector is confident about its growth prospects in the short to medium term despite widespread economic and political uncertainty. CEOs are looking for diversification within their current commodity value chain before moving into new commodities. CEOs of agribusinesses are positive towards expanding into the rest of Africa, with 40% indicating that they would pursue such opportunities. Angola, Botswana, Ethiopia, Malawi and Namibia were cited as the top five destinations for expansion.

As it is, Africa’s agricultural sector is dominated by 250 million small family farmers, who cultivate small areas with poor farming techniques. However, they produce 80% of the food consumed in Africa, with limited access to inputs, financial services or technology and mainly practicing subsistence farming because of their difficulties in accessing the market. Major challenges include the lack of access to information, best agricultural practices, inputs, mechanisation, market opportunities and financial services.

Governments are encouraging indigenous businesspeople to shift from importing goods to investing in agricultural production, both for local consumption and exports, to reduce pressure on their economies. Some, such as Uganda, are developing the capacity to help local investors get involved in large scale agricultural production.

One initiative to support the smallholder farmers, is the Alliance for a Green Revolution in Africa (Agra), which aims to support 3.5 million small scale farmers to sustainably transform their mode of farming to be commercially viable and profitable.

Various new models are tapping into crowdsourcing and social media, to link up investors, farmers and the markets. These include FarmCrowdy in Nigeria and FarmDrive in Kenya. FarmCrowdy connects investors with farmers and ensures there is a market. All three of the stakeholders, i.e. investor, farmer and FarmCrowdy, share in the returns. FarmDrive gathers information of the smallholder farmers in a format that is acceptable to the banks in Kenya, utilising a switchboard model by connecting suppliers with clients.

Another technology-driven application, is Wefarm, a farmer-to-farmer digital network currently in Kenya and Uganda. Wefarm enables small-scale farmers to connect with one another to solve problems, share ideas, and spread innovation. Through Wefarm, farmers can ask questions on anything related to agriculture.

In addition to the platforms mentioned above, other platforms include eFarmers Nigeria, Hallo Tractor, Alosfarm, Probity Farms, Zowasel and Grow Crops Online. However, Africa’s agriculture technology industry remains underdeveloped with huge potential. By focusing on players upstream and downstream, a lot of value can be unlocked by tapping into the utilities of modern technology.

A few crops are becoming more prominent. While there are the usual examples such as cocoa, cashew nuts, rubber, palm oil, wheat and maize, others are gaining in visibility. Cassava has become a much-talked about product in Africa. Nigeria is the largest producer of cassava in the world, with Ghana, the DRC and Angola making up the other African countries in the top 10 producers in the world. Tanzania and Mozambique have also embarked upon cassava production in a major way.

Floriculture is another such a crop. We have seen Kenya, Ethiopia and Rwanda grow and develop this subsector. While the Netherlands is the normal target market, the USA and China have also been identified as markets with great potential. The sector still faces many challenges that have affected its growth, including logistics, access to chemicals and fertilisers. The expansion of Kenya’s flower markets to China is a delightful development.

Rwanda achieved the highest score on Agricultural Transformation in Africa and emerged as the 2017 Best Performing Country in implementing the 7 commitments of the June 2014 Malabo Declaration. Rwanda is followed by Ethiopia.

Some of the youth in Rwanda have come up with new mental models as far as youth participation is concerned. These include the need for more role models, a make-over to shed its old-fashioned image of hard labour with a hoe, and targeting the whole agriculture value chain. Stepping up the use of mechanised equipment and new technology is another key way to attract young people – and will also improve productivity.

Most recently, it seems that external entities are increasing their exposure to African agriculture. The EU has asked for proposals to be funded through a €10 million fund to unlock the potential of Rwanda’s horticultural and coffee value chains to ensure the supply of safe products to local, regional and international markets.

In South Sudan, the Turkish Cooperation and Coordination Agency (TIKA) donated 30 tonnes of seeds and agricultural equipment to farmers in South Sudan. Despite its rich soil, South Sudan has fallen short of fulfilling its agricultural potential.

Tanzania also presents various business opportunities in the agriculture sector. Coffee, maize, sugarcane and rice farming will be highly lucrative in the next few years. Reports state that the future demand for the four crops will be relatively high in both the domestic and export markets. A development that created cause for concern, is that Tanzania’s cashew nut traders are now staring at huge losses after the government confiscated the produce of those who failed to prove that they are farmers. The government launched the verification exercise to rid the sector of middlemen who have dominated the cashew nut trade for years.

In Uganda, the Agriculture Cluster Development Project intends to boost the commercial production of 5 prioritised crops in 42 districts of Uganda. The crops are maize, beans, cassava, rice, and coffee. The objective is to raise on-farm productivity, production, and marketable volumes of selected agricultural commodities in specified geographical clusters.

In West Africa, we saw the development of the System for Rice Intensification (SRI), which has significant potential to close the rice production gap in West Africa and create rice self-sufficiency. By adopting the SRI method, farmers’ yields increased overall by 56% for irrigated rice and 86% for lowland rain-fed rice.

In Ghana, agriculture is seen as vital to the development of the economy. The diversification of agriculture is part of the vision to develop Ghanaian agriculture and the Ghanaian economy. Ghana loses about US$12 billion annually to Burkina Faso through importing fresh tomatoes. Fortunately, for Ghanaian producers, the application for establishing a tomato processing factory under the government’s “One District, One Factory” policy has been approved.

In Nigeria, agriculture showed limited glimpses of recovery, but almost entirely through efforts of peasants and antiquated processes. The agricultural sector grew by 3.00% (y-o-y) in real terms in the first quarter of 2018, a decrease by 0.38% points from the corresponding period of 2017 and also a decrease by 1.23% points from the preceding quarter. Agriculture is a critical success factor for Nigeria.

A serious development that has received global attention, is that of land expropriation without compensation in South Africa. Its Joint Constitutional Review Committee on 15 November adopted a resolution that Section 25 of the Constitution be amended to allow expropriation of land without compensation. AgriSA, a body representing farmers in South Africa, met with senior ANC officials on 21 August 2018, and the following was promised by the ANC: No land grabs will be allowed; The protection of productive agricultural land will remain a priority; Optimising the use of fallow land in deep rural areas; Property rights will remain a key priority in agrarian development; Government is finalising an audit of state land for transfer to black farmers; and Initiating production on 4,000 farms currently in government possession to unlock commercial value and create farming opportunities.

Trend 8: Regional integration

Regional integration has become a high profile intervention and is seen as the route to economic integration and increasing intra-African trade.

The greatest opportunity for securing its own share of global economic growth and sustaining its economic growth, is Africa’s ability to trade and do business with itself. This requires further regional integration and trade liberalisation. Africa’s fragmented markets have long constrained growth and acted as barriers to trade. World Bank statistics put intra-African trade at just 11% of Africa’s total trade between 2007 and 2011. The implementation of the African Continental Free Trade Area (AfCFTA) will nearly double intra-African trade by early next decade. This will require huge investments in cross-border infrastructure.

The AfCFTA will help Africans meet their needs by trading with each other. Nigeria did not sign the AfCFTA “to allow more time for input from Nigerian stakeholders”, and still has not done so. South Africa initially only signed the Kigali Declaration on the establishment of the African Continental Free Trade Agreement, and signed the agreement itself much later.

The CFTA has the potential to increase intra-African trade by as much as 50%. The CFTA must be ratified by 22 members to come into effect. Currently only 18 countries have ratified the AfCFTA. There is no denying that the CFTA has tremendous potential for African countries. Putting it to bed, however, is going to be a difficult endeavour.

The AfCFTA will make Africa more integrated, united and prosperous. It will unite 1.2 billion people and create a combined GDP of over US$3.4 trillion — under a single continental market for goods and services, including free movement of business people and investments, and expansion of intra-African trade (from 15% to 25% in a decade).

The AU launched its Single African Air Transport Market (SAATM) at the AU summit in Addis Ababa in 2018. This has the potential to ease the integration of African economies, trade and tourism. So far, 23 member states, including Ethiopia, Egypt, Kenya, Nigeria and South Africa, have adopted the SAATM, which came into full operation with immediate effect following its launch. Full liberalisation of the air sector in 12 of Africa’s biggest economies would add US$1.3 billion to their output.

Regional integration is being hampered by trade spats between REC members. Kenya and Tanzania (as members of the EAC) have been at loggerheads for quite a time, with the parties unable to subordinate national interest to regional interest. Trade between the 2 of them constitutes over 45% of the entire trade within the EAC. Their combined GDP accounts for 76% of East Africa’s economy.

Africa’s private sector has also been identified as players that could enhance African integration. The Dangote Group, Globacom, Nigerian Breweries and Jumia have been identified as players that could play a part in this. BCG identified 150 companies (75 Africa-based and 75 MNCs) that are driving towards a more integrated Africa. The African pioneers come from 18 countries, with 32 based in South Africa, 10 in Morocco; Kenya and Nigeria are each home to 6, 4 are from Egypt, and 2 from Côte d’Ivoire, Mauritius, Tanzania, and Tunisia.

The author, Johan Burger, is the director of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. Johan can be reached at [email protected].

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