Africa’s ICT investment landscape: where to look next?

ICT in Africa is a blooming industry with its own set of unique opportunities and challenges. In the past decade, the growth of Africa’s mobile industry is considered to be one of the continent’s successes in development and technology. Services like M-Pesa have been innovative in developing solutions for an African context, offering mobile banking and money transfers where many remain unbanked. According to a recent report by the African Development Bank (AfDB), ICT in Africa remains an attractive business area.

Seacom's submarine cable

Seacom’s submarine cable

While it is true that most of the investment in this sector has been directed towards mobile and related applications, recently the focus has been on international submarine cables and developing broadband access on the continent.

The mobile industry – growth slowing but investment opportunities remain

AfDB estimates that the continent’s mobile industry contributes US$56 billion to the regional economy, around 3.5% of total GDP. Today the sector is competitive, with most markets now having at least three operators, which drives down prices for consumers and increases penetration.

However, AfDB predicts that this industry will continue to grow, though profitability is declining. One of the reasons for this is due to the expanding coverage to underserved rural areas as operators look to acquire new subscribers at low-income levels.

“The extreme pricing pressure and regulatory risks will affect the investment environment in the future,” stated AfDB’s report. “Poor road infrastructure that makes it expensive to transport equipment to set up mobile towers, and a dependence on diesel generators to power towers in areas where there is insufficient electricity, are factors driving up investment costs in Africa.”

In a recent article published by How we made it in Africa – Mark Jennings, investment principal of the Investec Africa Frontier Private Equity Fund – said that there is still investment potential in this competitive sector, investors just need to look beyond the obvious. He suggested that tower-sharing is a developing business opportunity that will reduce infrastructure costs for operators.

“Investors should take heed of the fact that the mobile voice phone market in sub-Sahara Africa has grown by 61% per annum on average over the last ten years and we see no reason for this growth to end – just to take a different route,” he argued. “Those searching for growth would do well to look in the field of infrastructure outsourcing.”

Internet broadband trying to catch up with mobile sector

While the continent’s mobile penetration was around 65% in 2011, internet penetration was at about 11.5% and remains considerably underdeveloped in comparison.

“However, as submarine cables find their way along Africa’s coastlines, the continent is slowly but steadily emerging from an era characterised by excessively high prices, near zero broadband penetration rates and self-defeating regulatory models,” added the report. “The African bandwidth revolution is nearly here, with all its implications for economic growth, social transformation business models and investment opportunities.”

In Africa, poor geographic reach of the fixed-line networks limits growth. National backbones provide access to rural areas but, according to AfDB, they “remain a major supply bottleneck, and probably the weak link in the emerging African broadband infrastructure value chain”.

Nevertheless there has been some progress in this area. “Angola, Botswana, Ethiopia, Ghana, Rwanda, Burundi, Kenya, Malawi, Madagascar, Uganda, Tanzania, Sudan, and South Africa are among the countries that have launched plans for the development of their national backbone networks over the last two years. Yet, a substantial gap remains in the majority of the countries, particularly those in Central and Western Africa. In contrast, the regional backbone has seen limited private sector interest due to the diversity of regulatory frameworks and unattractiveness of some of the routes due to high sunk costs.”

Fibre backbones have also been growing. In Southern Africa, South Africa acts as a connectivity hub for surrounding countries while in West Africa, Nigeria, Ghana and Senegal act as hubs for the region.

“This is not incidental, as broadband network investments tend to follow regional trade and economic activities, with the goal of connecting profitable urban centres rather than rural and underserved areas,” explained AfDB. “The major regional broadband gap is in West, Central and Eastern Africa.”

So, where to invest next?

While public sector investment in ICT in Africa has improved considerably over the last decade, the private sector continues to be the key driver for investment and has invested close to $50 billion over the last decade. “In 2007, the private sector committed to increase investment in telecommunications from $35 billion to $50 billion by 2012,” highlighted the report.

AfDB suggests that a significant potential opportunity exists for low and middle-income African countries in the IT-enabled services (ITES) sector, which will exploit available broadband infrastructure. According to the report, the ITES sector – which is ICT-based services such as call centres – represents a “$500 billion addressable market, of which only about 20% has been realised”.

“A huge potential exists for African countries that take concerted efforts in building the requisite infrastructure and advanced skills in software engineering, project management, networking and creating an enabling legal and regulatory environment including laws for online transactions. Egypt, Mauritius, Morocco, South Africa and Tunisia have already tapped into the ITES market, the potential exists for increased employment and improved innovation in other countries,” suggested the report.