Africans still pay far more for telecommunications than western countries as a proportion of their overall income. In Kenya, the darling of African telecom expansion, where many incomes still fall below the World Bank’s poverty baseline of $2.50 per day, it is no different. “Currently poverty stands at 40-42%, which is far cry from the 56 percent in 2000, but still very high, yet the country is approaching 30 million mobile users,” says one East African telecom investor, “as a result, telecom investment in Kenya is still viewed as a potential gold mine.”
Mobile phone charges are higher in Kenya because many customers use pre-paid cards rather than sign-up for monthly contracts which include large packets of minutes at certain price levels, which then lowers the effective cost per minute. Average broadband download speeds have grown to about 4,478 kbps in 2012 — up from 671 kbps in 2009 — but costs have remained high. As a result, only 2 percent of Kenyans subscribe to broadband services, according to the Communications Commission of Kenya. It is this story line that has private investors “flocking to Kenya in droves” says a local Kenyan mobile developer. The story, he adds, is already great but with far more opportunity for improvement and growth at great gains to the early movers.
Earlier this year, Microsoft, in collaboration with Kenya’s Ministry of Information and Communications and Indigo Telecom, announced a pilot project to deliver low-cost wireless broadband access to previously under-served communities in Kenya. The pilot project is part of Microsoft’s 4Afrika Initiative focused on facilitating broadband and technology access across the continent.
East Africa Capital Partners (EACP), a private equity firm based in Nairobi, manages the Africa Technology Media and Telecoms (ATMT) Fund which is focused on investing in African companies operating in the information and communications technology (ICT) sector. As part of the ATMT Fund, EACP has also established Small and Medium Enterprise (SME) Ventures which aims to invest in those same early-growth companies that Microsoft hopes to reach with its 4Afrika Initiative. Additionally, Kenya’s top telecommunications operator Safaricom announced late last year that it plans to invest $95 million over the next four years laying additional fiber-optic cable.
These investments highlight the growing confidence within Kenya. By 2020, experts predict that Kenya could have mobile penetration rates beyond 100 percent (similar to South Africa). Experts also add that this growth will drastically boost internet usage via mobile phones. What all the growth and investment in Kenya means for non-mobile internet usage is unknown. But this lack of certainty is overshadowed by the confidence and excitement expressed by local investors. “Mobile, mobile, and mobile. They need towers, towers, and towers and internet access because fast internet is just as important as simply having a mobile phone connection,” says Believe, a South African waiting to catch his flight to Johannesburg.
Kenya Was Not the First and Will Not Be the Last
Kenya is not the first country to see this type of focus on telecom investment. Helios Towers Africa Limited (HTA) established itself as reputable and highly capable independent tower operator in Africa since its infancy days in 2009 when Helios Investment Partners and several other investors committed $350 million to the newly formed company. Then, HTA was just looking to construct 360 mobile phone towers in Nigeria. Today, HTA owns over 3,500 towers with operations in countries such as Ghana, the Democratic Republic of Congo (DRC) and Tanzania.
IHS Holding, invested in by Emerging Capital Partners (ECP), recently acquired MTN’s 827 service towers in Cote d’Ivoire and Cameron, bringing the total towers it owns and manages to over 4,000 across Africa. Millenium Telecom, a 4G mobile WiMAX operator in the embattled Central African Republic, recently received an equity injection from XSML, manager of the Central Africa SME Fund.
This type of investment will only grow in the face of the success in Kenya, obvious consumer demand in other countries, and the changing market dynamics. Late last year, IHS Holdings Chief Commercial Officer Rob Gelderloos revealed as much as 50 percent of the mobile operator-owned base stations in Africa could be sold to independent tower operators in the next few years as a result of the growing pressure on balance sheets from tightening margins and tariffs. Michael Okine, director at Helios Towers Ghana, a subsidiary of HTA, told attendees at the 7th Annual Connecting Rural Communities Africa Forum 2012 Conference in Freetown, Sierra Leone that the telecom towers in Africa may have to double over the next five years unless infrastructure sharing changes.
Despite all this momentum and accompanying investment, the network capacity in Africa is still low and cannot handle the demand from a rapidly growing consumer base. Declining prices by operators to bring more Africans online only exaggerates the bottleneck. In Ethiopia, declining mobile service prices has led to major growth in mobile phone usage which has placed pressure on the country’s infrastructure. “We [investors] are waiting for the opportunity to invest in towers in Ethiopia’s booming economy,” says a vice president from an African private equity firm looking at telecoms.
In Mozambique, experts believe that the telecommunications market could be worth $1.8 billion by 2015, more than triple the estimated value in 2010. Experts also caution such predictions because Mozambique, as an example of the challenging African telecom market, still must overcome high levels of poverty and illiteracy in order for subscribers to fully utilize telecom services and consequently generate such revenue. Local officials have expressed complete optimism nevertheless due to the booming economy and all its ancillary benefits. “I know people with less than one-third of what I make and they buy the latest cell phone,” says one former employee at Mcell in Mozambique. The Samsung Galaxy and then the iPhone are highly sought-after by his customers. Consumption, he says, is high regardless of income.
In Togo and Benin, there is much talk over the lurking presence of French mobile operator Orange, whose owners are looking to expand their successful operations beyond neighboring Senegal and Mali, and into these former French colonies among. Tunisia and Libya, two countries at the center of the Arab revolution, are also drawing attention from investors. “For years, Tunisia and Libya suffered under repressive regimes and missed out on the world’s internet revolution and mobile revolution to some extent,” says Houssem Hasem, a former Tunisian resident now based in Paris, “hopefully, that is changing and I can return to a different Tunisia.”
All these numbers and predictions underline the optimism. The influx of fiber optic cables to Africa since 2009 has more than quadrupled data speeds and cut prices more than 50 percent in some countries. Still, as telecom investors look for the right mix of population size (i.e., Tanzania, Ethiopia, DRC, etc.), political stability (i.e., Ghana, Nigeria), and operational ease (including government openness, tariffs, etc.), true realization of Africa’s telecom potential may solely depend on tower sharing among operators and cross-border cooperation amongst governments. The private investors who find the right synthesis of market dynamics, government cooperation and strategic implementation will find Africa’s telecom market to be a virtual gold mine.
