Local production of processed food items that are currently imported. Building materials. Taking advantage of the green economy transition. Exporting products to the southern DRC.

These are just some of the untapped business opportunities in Zambia, according to Tue Nyboe Andersen, managing director of Lusaka-based Kukula Capital. Jaco Maritz spoke to him about these prospects and the investment lessons he has learnt.

Which areas within the agribusiness and food sector are you most enthusiastic about from an investment perspective?

For processed food products, I think the opportunities really lie in niche products with limited competition. As a landlocked country, Zambia has some built-in import barriers; imported products need to be transported over long distances. For example, there is a company called Meraki that produces cakes and supplies them to big retailers like Shoprite. It has grown rapidly with decent margins because its competition is imported products that are way more expensive. Zambia has limited food processing and a lot of items are imported.

The addressable market for food products is not only Zambia, but also the Katanga region in neighbouring Democratic Republic of the Congo (DRC). Zambia pretty much supplies food to the whole of southern DRC because there are hardly any commercial farmers in that area. The market is not just Zambia’s 18 million people but also the Katanga region, which brings the total closer to 30 million.

In terms of primary agriculture, many farmers have diversified from row crops, such as maize, into high-value, niche export crops like macadamia nuts and avocado for the export and domestic markets. Yet, just as Zambia is protected from imports owing to high transport costs, exporters also need to move their products 2,000 km on bad roads to a port in another country. This is a huge drawback compared to a producer near Dar es Salaam or another port along the coast. That said, some export crops are still very viable despite the transport costs. And with the current high wheat and soya prices we have also recently seen strong investment cases in more traditional farming.

Kukula has invested in and exited metal manufacturing company Eagle Metal Fabrication. Tell us which opportunities you recognise in Zambia’s manufacturing sector.

Again, you need to find a specialist product that is expensive to import. The production of mattresses is a good example. Because of their size, mattresses are expensive to import, and it is possible to manufacture cheaper locally. There is a company called Foam King doing this and they even export to the wider region.

Another area that could be interesting is battery manufacturing for the electric vehicle industry. Zambia and neighbouring DRC have plenty of copper, cobalt and lithium, all key materials for batteries.

Kukula also has real estate investments. Which areas of the property industry present the best potential?

Real estate used to be a very profitable sector but in recent years, there has been a glut of both commercial and residential properties in the mid to upper end of the market. The lower end remains a huge space with a lot of demand but it is difficult to make money in this area from an investment perspective.

In the real estate sector, I would say there are probably better opportunities in niche building and construction materials that are expensive to import. With a rapidly growing population, the demand for building materials continues.

Zambia’s new government also has a strong focus on the green economy. Many corporates are adopting net-zero emissions, which creates gaps in areas such as green construction, waste management, energy efficiency and solar plants.

What is your outlook for Zambia’s economy from a macro perspective?

Six months ago, Zambia was hanging on a cliff. The sovereign debt was huge with a complete lack of transparency in terms of government borrowing. The kwacha was sliding and it meant little investor confidence both locally and abroad.

With the new government, this negative spiral has stopped and there is interest from international investors. However, there is still plenty to be fixed. The government must restructure its sovereign debt and is negotiating with the IMF. We expect some kind of IMF package in the first quarter of 2022. It would also involve some fiscal reforms. This would, for instance, enable more cost-reflective electricity tariffs. The national power utility ZESCO would be in a better financial state and able to sign new power purchase agreements with independent electricity producers. Increased renewable energy production would be a key growth driver. Zambia has so much hydro, solar and wind potential. So, on the macro front, some things must be sorted out. Until that happens, there will be some volatility.

Kukula has made several investments in Solwezi, once described as a boom town thanks to new mining activity in the area and its proximity to trading activity at the Zambia–DRC border. Share what you have learnt about investing in such towns.

We started in Solwezi in 2013 on the premise of this booming mining town with its endless opportunities. The reality on the ground was very different. The mines in the area had existing supply chains in place. To convince them to change proved extremely challenging and has taken us years.

The other problem is that if you invest in a place like Solwezi, the mines are not willing to sign an offtake agreement before you invest in a factory. They don’t work like that. You have to spend millions of dollars to set up the company, prove yourself and only then, will they consider procuring from your company. The mines typically also don’t sign long-term contracts. So, yes, on paper there is huge potential in Solwezi and the North-Western Province, but in reality, it is a long-term business case. You need to be patient and have deep pockets to get into the market in a sustainable way.

Besides supplying the mines directly, surely the influx of people to Solwezi and an increase in commercial activity created demand for other products and services like supermarkets, accommodation, etc?

That has partly been the case. We’ve set up a small real estate business there; serviced apartments and a small shopping centre. But you have the challenge that it is far away and it is tough to find good managers in the area. If you are an entrepreneur in Solwezi, operating the business yourself, it probably makes sense. But if you are an investor and you need to appoint a team to operate the business, then it is a bit more tricky.

You’ve highlighted the potential to supply products to southern DRC from Zambia. How would you advise businesspeople go about this?

There is a lot of informal trade finding its way across the border but for more structured exports, it is a headache to get products into the country. What works best is if you have a partnership with a Congolese entity that buys the products from Zambia. Trying to operate in the DRC from Zambia is not easy. So there are some challenges but there is a huge opportunity in the DRC.

Tell us about some of the investment lessons you have learnt.

One of the lessons we’ve learnt the hard way relates to title deeds. Don’t spend a penny before you have the title deed of your land. We were a bit naive about the process because there is a way of obtaining land from the chiefs and a process of getting that land onto the title deed. Many investors have been burnt with this.

In general, I would advise investing in something scalable. In the beginning, we made the mistake of investing in more mainstream businesses with much competition. It doesn’t really work if you are just one of many. Niche businesses with a unique offering have the potential for better margins. Zambia is still a young market and there are plenty of these niche areas.

Our investments that have performed well were scalable. For example, DotCom Zambia offers payment solutions to both the government and the private sector, and has been doing really well. From a venture capital perspective, you will struggle to exit investments in businesses that are not scalable.