Archives for category: Investment

Ernst & Young’s recent “Africa Attractiveness Survey” (pdf) shows that 2012 was a rather disappointing year for foreign direct investment in Africa. But digging more into the data leaves some space for optimism. Some excerpts from the report (click to enlarge):

Ernst & Young "Africa Attractiveness Report"

Ernst & Young “Africa Attractiveness Survey”

 At face value, 2012 was a disappointing year, in that it reversed the year-on-year growth we experienced in 2011, and somewhat dampened our expectations of steady growth in FDI projects. Having said that, we do need to put these trends in perspective:

  • Globally, greenfield projects were down by over 15% year on year in 2012, so the background is one of decline across the board.
  • In this context, Africa’s proportional share of global greenfield projects actually grew, continuing a trend that has seen this share grow, in the course of a decade, from 3.5% of the global total in 2003 to 5.6% in 2012.
  • It is also worth noting that the 764 new greenfield projects this year is still higher than the 678 in 2010, and significantly higher than anything that preceded the peak of 2008.

The geographical origin of FDIs in Africa is experiencing major changes:

Investment from developed markets in particular was disappointing.  Although FDI projects from the UK grew, those from the US and France, the other two leading developed market investors in Africa, were considerably down. In contrast, greenfield investments from emerging markets into Africa grew once again in 2012, continuing the trend of the past three years. In the period since 2007, this category of investment from emerging markets into Africa has grown at a healthy compound rate of over 20.7%, in comparison to investment from developed markets, which has grown at only 8.4%.

Intra-African investment has been particularly impressive over this period since 2007, growing at a 32.5% compound rate. (…) This underlines a broader trend of growing confidence and optimism among Africans themselves about the continent’s progress and future.

Other figures in the report show that -as we’ve often said in this blog- manufacturing in Africa has stagnated over the last decade. However several countries could reach a middle income status by 2025

Source: Ernst & Young

Source: Ernst & Young

Source: Ernst & Young

Source: Ernst & Young

Some figures:

Kenya applies the EAC Customs Union’s Common External Tariff (CET), which includes three tariff bands: zero duty for raw materials and inputs; 10 percent for processed or manufactured inputs; and 25 percent for finished products. “Sensitive” products and commodities, comprising 58 tariff lines, have applied ad valorem rates above 25 percent.  This includes a 60 percent rate for most milk products, 50 percent for corn and corn flour, 75 percent for rice, 35 percent for wheat, and 60 percent for wheat flour. For some products and commodities, the tariffs vary across the five EAC member states.

The report touches a number of other issues, including non-tariff barriers, custom procedures at the Port of Mombasa, intellectual property right protection and many other things. An interesting bit on counterfeiting:

According to a survey released by the Kenya Association of Manufacturers (KAM) in April 2012, the Kenyan economy is losing at least $433 million annually due to counterfeiting. The study estimated that the GOK is losing approximately $72 million in potential tax revenue, and that some Kenyan companies could be losing as much as 65 percent to 70 percent of their regional market share due to counterfeiting.

Kenya’s EPZs have served as a conduit for counterfeit and sub-standard goods. These products enter the EPZ ostensibly as sub-assembly or raw materials, but are actually finished products. These counterfeit and sub-standard goods also end up in the Kenyan marketplace without responsible parties paying the necessary taxes. Counterfeit batteries have been particularly problematic.

More here

Paul Kinuthia (on the right) – Photo Credit: Business Daily

Paul Kinuthia started a small cosmetics business in the Kariobangi Light Industries (in Nairobi) 20 years ago with a start-up capital of 3000 KSh (less than 40 USD). He sold it to L’Oreal last week for over KSh 3 billion (about USD 35 million). Here’s the story on Forbes and on Business Daily.

Of course extreme success stories like Paul Kinuthia’s do not happen on a daily basis in Kariobangi. But, as I’ve said before, there is large diversity and growth potential in places like Kariobangi, although we like to call them “informal economy” or “survival clusters”. An excerpt from the Forbes article:

Kinuthia has a remarkable story. In 1995, he started off manufacturing shampoos and conditioners from a makeshift apartment in Nairobi with start-up capital of Ksh 3,000 ($40). He made these products manually using plastic drums and a huge mixing stick and heating oils, delivering his products by handcart to local salons and hairdressers. In the beginning, commercial banks refused to fund his venture while mainstream salons, beauty parlours and large retail outlets refused to stock his product because it was too native.

As the demand for his products grew, Kinuthia moved the business into bigger premises in downtown Nairobi and expanded his product range to include hair gels and pomades. While the bigger, sophisticated salons and supermarkets snubbed his products, they were very popular with street side local hairdressers because of their availability and significantly lower prices in comparison to the products on the shelves of the big retail outlets. As the products became more popular with local hairdressers, Kinuthia ploughed back his profits into moving into an even bigger place, financing growth, increasing his production capacity and extending his product range. In 1996, he incorporated a limited liability company and went on to produce body lotions and hair treatments. The new company set up better operational strategies, laying emphasis on quality and improving its packaging. By the late 90s, the company’s products were commercially available across Kenya’s mainstream retail and wholesale chains and were already commanding a sizable market share. By 2001, the company was already exporting its products to neighbouring TanzaniaUganda and Rwanda.

But despite the huge success of his business, Paul Kinuthia maintained one common characteristic of Kariobangi entrepreneurs – he doesn’t like questions from strangers. When Forbes called him for an interview, his secretary kindly relplied “Mr Kinuthia is not available”. I know the feeling very well.

More here

Uhuru and Ruto wrote in the Jubilee Manifesto that they plan to establish a development Bank to “prop up the private players”. Although nobody is talking about it, and although we have no idea if that will happen anytime soon, this could be a huge deal for the future of Kenya. What is a development bank? And is it a good or a bad idea for Kenya?

A traditional definition of a development bank is one which is a national or regional financial institution designed to provide medium-and long-term capital for productive investment, often accompanied by technical assistance, in less-developed areas. Development banks fill a gap left by undeveloped capital markets and the reluctance of commercial banks to offer long-term financing. [full “primer on development banking” here]

We have to keep in mind is that UhuRuto provided no details about how a development bank fits into their grand scheme for economic development in Kenya. For example, we don’t know if the objective is to promote small businesses (like the informal sector or SMEs), whether they want to finance large infrastructural projects, agriculture or large manufacturing industries.  However, the sure thing is that whenever the plan is to increase the government role in the economy, you attract both huge praise and criticism:  that’s the difference between the “industrial policy view” and the “political view”

According to the industrial policy view, development banks do more than just lending to build large infrastructure projects. They also lend to companies that would not undertake projects if it was not for the availability of long-term, subsidized funding of a development bank. Furthermore, development banks may provide firms with capital conditional on operational improvements and performance targets. In such circumstances, we would expect to see the firms who borrow from development banks increasing capital investments and overall profitability after they get a loan.

According to the political view, on the other hand, lending by development banks leads to misallocation of credit for two reasons. First, development banks tend to bailout companies that would otherwise fail (this is the soft-budget constraint hypothesis, e.g. Kornai, 1979). Second, the rent-seeking hypothesis argues that politicians create and maintain state-owned banks not to channel funds to socially efficient uses, but rather to maximize their personal objectives or engage in patronage deals with politically-connected industrialists.

So, whether a development bank is a good idea or not for Kenya entirely depends on your opinion on the current political class: will they be committed-to-development or good-old rent-seekers? For now I want to keep on the optimist side.

Konza Technological City

After Tatu city –a multi-million real-estate project to build a satellite town in the outskirt of Nairobi, the Government of Kenya has planned a new mega-project called Konza Technological City, already dubbed “African’s Silicon Savannah”, which is supposed to become the largest hub for high-tech and ICT firms in Africa.

The government bought a large piece of unused land in Machakos county, about 60 kilometres south of Nairobi, with the plan of investing $200 million in basic infrastructure (sewage, roads, electricity, etc); the rest of the investment should come from the private sector through public-private partnerships. There’s nothing official yet, but it looks like Boeing, Fedex, Huawei, RiM and Samsung are already lining up in the project. The main Kenyan interest is coming from Safaricom, Wananchi Group, the University of Nairobi and Jomo Kenyatta University for Agriculture and Technology among others. According to the promoters of this project, Konza will create 20.000 skilled jobs in the next 3 years, 200.000 by 2030.

Of course there’s great excitement all over Kenya. I was in a restaurant in downtown Nairobi yesterday and I noticed that most tables around me were talking about it. Though, thrill was mixed with a good dose of skepticism  I wondered myself: is this really going to work out?

To some extent, it looks like the government is playing Sim City, a popular video-game where you build cities from scratch. You have a budget, you start building roads, power-plants, water and sewage systems and you assign different areas of your city to industrial plants, commercial activities or residential houses. But the difference is that in Sim City you start with small projects and eventually, if you are successful, you expand them. Konza seems to be the product of a grand-design, a city where everything is pre-planned, and nothing is supposed to evolve through trial-and-error. There will be no space to figure out what works and what doesn’t.  It either goes the way that planners have in mind, or it will just be a great failure.

This reminds of the debate on charter cities. The main difference is that Konza will not be managed by foreign governments, with foreign rules and foreign institutions, so unlike charter cities Konza will not revamp any memories of colonialism. On the other hand, just like charter cities, I’m not sure whether cities with no history can grow out of nothing.

In one of my favorite articles on urban development, Edward Glaeser shows the development of New York since the early 19th century. The city grew thanks to an endless sequence of innovative ideas and entrepreneurialism, none of it happened because of a grand scheme. I recommend reading the whole article, but if you don’t have time, Glaeser basically shows how (1) New York initially developed due to a natural and geographic advantage; (2) it grew when an entrepreneur changed the logistics of trans-Atlantic trade; (3) increased trade helped the development of the sugar refining industry, apparel manufacturing and printing.(4) The economy eventually turned into real estate and the garment industry and  finally, (5) the finance sector boomed.

This is a terrible summary of a great article. But the point is that the development of the city did not follow a straight line. The face of the city and its economy changed completely over a relatively short period of time. Of course Konza is not New York, but I do not think that the dynamics of urban development are so different. Just like New York, Konza will not succeed unless it develops gradually through entrepreneurialism and innovative ideas. A small push from the government will be helpful; having bureaucrats playing a real-life version of Sim City will end up in certain failure.

But let me get back to the restaurant conversations I overheard yesterday. What was the skepticism about?

Criticism of Nairobians did not involve Edward Glaeser, New York or Sim City –It was much more practical. The most common points were rather spot on:

  • Konza city is ultimately a real estate project, not a technology one. The real goal is to increase the value of the land
  • Most businesses interested in the project are not Kenyan, what about the plan to promote local entrepreneurship?
  • Corruption will be all over the project.
  • How do you get thousands of skilled workers and their families to move from Nairobi to Konza? Customers will not move to Konza as well. Logistics will be an issue, especially for smaller businesses.

These are all interesting points, and a lot of food for thought.

Taiwan, year 1983. The plan of the government consisted of 3 simple steps:

  1. Identify an imported product that you want to produce locally.
  2. Use red tape to slowdown the import of that product
  3. Let local firms learn the technology, get good contracts, and start producing that good.

As bad as this story may sound (nobody wants red tape!), the strategy was actually successful:

 In the early 1980s Phillips was making TVs in Taiwan, and importing a certain kind of specialized glass from its factory in Japan. The IDB team [Industrial Development Bureau, a Taiwanese government institution].. identified two or three Taiwan glass makers which in their view had the productive capability to make the jump in product quality needed to produce the specialized glass at a price close to the import price. They discussed the possibilities with the firms. The firms said they would invest in the necessary equipment provided they got a longterm supply agreement with Phillips.

Of course Philips didn’t like the idea.

The IDB officials went to Phillips. The Phillips procurement manager said the company was happy with its present arrangement of importing the glass from its factory in Japan, and declined to change suppliers. Soon Phillips found that its applications to import the glass, previously automatically approved, began to be delayed. Phillips contacted the Minister of Foreign Trade, who apologized profusely, and explained that even he was not always able to get the inefficient trade bureaucracy to work quickly. He promised to investigate. The delays lengthened, and lengthened again. The Minister apologized and said he had done all he could. Eventually Phillips got the message, and entered into discussions with one of the Taiwanese glass makers. The upshot was that Phillips offered a longterm supply contract, and the domestic glass maker invested in upgraded equipment. Before long the Taiwanese glass maker was exporting some of the specialized glass.

 I wrote a blog post about this paper a few months back.  It is by LSE professor Robert Wade. Full article is great and you can find it here (pdf)

From Richard Dowden on African Arguments

Remember Ghana in 2010?  That year the Ghana Statistical Service “improved their national accounts series by incorporating new data sources and better estimation methods, classifications and standards” said the World Bank. That led it to “re-base” the estimates and revise the level of GDP for 2006 upwards by a modest 60 percent. Yes, SIXTY PERCENT richer than we had been told. Overnight it became a middle income country. And Ghana has one of the best bureaucracies in Africa. God knows how they add up the figures elsewhere, but one thing is certain – Africa is a lot richer than the development lobby and aid agencies would have us believe.

I am horrified by the idea that the “development lobby” might benefit from an underestimation of GDP figures, though I see the point. But in the case of Ghana, it was a public statistical agency –one of the best in Africa– which was doing the miscalculation. How can that happen?

It is well known that macroeconomic statistics in the continent are not always reliable, but I expected the problem to be the exact opposite -I thought that governments had an incentive to make things look better than they are. Maybe the problem is just technical. Or maybe (but I hope I am wrong) the incentive structure is upside down and looking attractive to the “development lobby” is more important than looking attractive to the investment community.

Paul Graham, one of my favorite essayists and venture capitalists, shares his experience in start-up investing and the strategy that he calls “Black Swan farming”. The two main lessons:

1)       all the returns are concentrated in a few big winners

2)      the best ideas look initially like bad ideas

the best startup ideas seem at first like bad ideas. I’ve written about this before: if a good idea were obviously good, someone else would already have done it. So the most successful founders tend to work on ideas that few beside them realize are good. Which is not that far from a description of insanity, till you reach the point where you see results.

..History tends to get rewritten by big successes, so that in retrospect it seems obvious they were going to make it big. For that reason one of my most valuable memories is how lame Facebook sounded to me when I first heard about it. A site for college students to waste time? It seemed the perfect bad idea: a site (1) for a niche market (2) with no money (3) to do something that didn’t matter.

Wait, it gets more complicated.

You not only have to solve this hard problem, but you have to do it with no indication of whether you’re succeeding. When you pick a big winner, you won’t know it for two years.

More here

Update: the image (taken from the Christian Science Monitor) is actually not that new. South Sudan is not even on the map! For the pointer, thanks Marc.