NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, November 11, 2005

Despite phenomenal growth in the cellphone industry, sub-Saharan Africa still accounts for just 1% of global telecoms investments. Of $220bn invested in telecoms in 2003, under $3bn was in Africa.

The sector has high growth potential, as the majority of Africans still have no access to telecommunications. For investors who know how to assess the risks and rewards, the potential rewards are matched only by diamonds and other mineral resources, Marcelle says.

INVESTMENT analysts need more education about the opportunities in Africa’s telecommunications sector, because potentially profitable projects are not getting the funding they deserve.

Fund managers do not recognise the pent-up demand for telecommunications in the continent nor understand the timeline between making an investment and reaping the return, says Gillian Marcelle, the principal consultant for Technology for Development.

Even local fund managers need educating about the opportunities in neighbouring countries, Marcelle says.

“The financial markets still don’t understand the industry, so entrepreneurs going to them with fundable proposals are being turned down.”

She cites MTN as an example, as the operator struggled for 18 months to conquer Nigeria because investment funds were reluctant to support its venture.

“The financial markets were worried that entering Nigeria was not a wise decision because they didn’t do their homework properly on the potential for the market,” she says.

MTN Nigeria has now become hugely profitable, and the players who measured the risks have reaped the rewards.

Marcelle, a member of the International Telecommunications Union, was addressing a business forum hosted by the research house Forge Ahead last week.

Local capital markets also need to be stimulated so African operators can win local funding for their expansion rather than depend on foreign currency loans. “It’s always better to have a local source of finance so your partner knows and understands where the challenges and opportunities are,” she says.

Local capital also needs to play a greater role because of a change in the way foreign investors are treating Africa. Most European operators are shy of emerging markets and will not invest in Africa. And the World Bank is now funding technology education, rather than infrastructure roll-outs, as it believes that market forces or the privatisation of state assets should stimulate private sector investments.

Yet private investors naturally focus on wealthier areas where they can generate a 25% return on investment, Marcelle says.

That means too little is being spent on supplying basic infrastructure to remote areas, or on rolling out broadband technologies, she says.

“Foreign support is going to take a long time to come. Capital is scarce, so when entrepreneurs are prepared to take risks they don’t have adequate access to capital.”

Local lenders must become more sophisticated so African entrepreneurs are not starved of the funds they need and can negotiate favourable terms for equity and debt financing, she says.

Despite phenomenal growth in the cellphone industry, sub-Saharan Africa still accounts for just 1% of global telecoms investments. Of $220bn invested in telecoms in 2003, under $3bn was in Africa.

The sector has high growth potential, as the majority of Africans still have no access to telecommunications. For investors who know how to assess the risks and rewards, the potential rewards are matched only by diamonds and other mineral resources, Marcelle says.