Tuesday, 24 January 2012

Telecoms flies south for the Spring as investment falls across Africa

New investments in African telecoms infrastructure fell 42% in 2011, from $17.6Bn in 2010 to $10.2Bn in 2011. While at face value this seems like a profoundly negative thing for the continent, the story is actually still mostly positive for its population. In total, the average African citizen benefited from just under $29 of new infrastructure since January 2010, often coming from a very low base. Many countries, such as Zimbabwe, Mozambique and Malawi experienced quantum leaps in backhaul and access network connectivity, taking them from laggards to leaders and closing the gap to traditionally leading countries like Kenya and Ghana. There are also a number of mitigating factors that should be taken into account when looking at the raw numbers.

First amongst these are the effects of the Arab Spring uprisings, which began in the early part of 2011 and rumbled on throughout the year. Egypt and Morocco suffered worst in telecoms infrastructure terms - shown below - receiving only nominal new investments in 2011 and experiencing slowdowns in deployment of programmes announced in previous years. My estimate is that if it weren’t for the Arab Spring, an additional $2.2Bn would have been invested both in the countries in question and by vehicles such as LAP Green, the formerly state-owned Libyan investment vehicle, which is now owned by a UK-based investment consortium. It should be noted that the peaceful separation of Sudan and South Sudan in 2011 led to an upsurge in investment in both countries, who sit close to the top of the table in investment uplift.

Secondly was the South African World Cup, which led to massive investment by local operators to provide additional capacity for the influx of tourists, but moreover, to sustain national pride and international standing. My view is that the World Cup led to operators and other telecoms companies bringing forward $1.2Bn of network upgrades and has left a lasting legacy in South Africa in the form of a deep, effective HSPA+ network and the basis for LTE – the spectrum for which is due to be auctioned in 2012.

Third was the largest acquisition ever made in African telecoms – the $10.7Bn take-over of Zain by India’s Bharti Airtel. Although I don’t count the acquisition in my analysis per-se (for starters, Zain was based in Kuwait), appeasement of local governments by the buyer led to roughly $1Bn of upgrades being brought forward and announced with great fanfare in 2010.

Fourth is something less well known. In March of 2010, the Ethiopian Government announced a massive $2Bn programme to build a backbone network for the country, which is presently starved of good telecoms services by the monopolistic position of the state-owned incumbent. This was a one off investment that, because there is no competition in access, did not spur commercial investment in the rest of the infrastructure required to provide consumers with the services they need to compete in the fast-growing African tech and online market.

There is a lesson in this for African governments considering similar national infrastructure programmes. Unfashionable or unpalatable as it may seem, the money to connect Africa has largely come from private sources. In areas where this is not the case, development has been slow or stagnant. Kenya, in particular should pay close attention to this as it embarks on a state-run, monopoly LTE network. Although Kenya is well served by infrastructure in comparison to its neighbours, the last 2 years have marked a fall in new builds, to a level below surrounding countries and far below its regional competitors. The private sector in the main and Safaricom in particular made Kenya into the digital savannah. It would be a shame if that head start went to waste.

My appeal for market capitalism aside, taking out the out of sync’ investments, leads to an adjusted baseline of $12.2Bn, against 2011 could be judged if not a resounding success, but a decent progression, considering the turmoil in the global markets that surround it.

Structurally, the end point of investments has shifted south, benefiting Central African countries, which have hitherto been under-invested. In fact, Central Africa was the only region of the continent to show absolute growth in investments, if from a low base. The principal reason for this is investors seeking new areas of growth outside hyper-competitive markets, plus the undoubted impact of cable landings on the surrounding coasts, seeking routes across the stem of the Continent. This southwards shift - shown below - will be something I’ll keep a close eye on in 2012.

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