Black Affairs, Africa and Development
Africa attracts investors in logistics
A growing number of companies are investing in the logistics sector and succeeding.
Africa’s top economic brains gathered in South Africa this week to discuss how regional integration could boost economic growth in Africa. Professor Mthuli Ncube, the chief economist and vice president of the African Development Bank put his take on what integration should entail succinctly: “Regional integration is about facilitating movement in a region, in a zone, in a country, within a country. It’s about moving people. It’s about moving goods. It’s about connecting people through infrastructure…”
Whether it is roads and railways or ports and airports, Africa’s underdeveloped infrastructure can impede growth and threaten the current huge international trade flows. Yet despite the shortcomings in transportation, a growing number of investors are entering the logistics sector and thriving.
“It might take a while before all operators can use common service guarantees found in developed markets such as ‘just in time’ or ‘door to door’, and mean it. The poor logistics networks means high costs and massive delays,” says shipping and logistics analyst, Davis Maina.
Changing trade patterns
Economists look to ports activity as a measure of how much of the wealth of a nation is passing through. So it is in Africa, where ports traffic is booming, reflecting the large amounts of goods coming from fast-growing Asian economies and the US and Europe.
Trade flow with Asia is growing faster than with the U.S. and EU, as Africa’s economies become more synced with BRICs. In 2000, China, India, Turkey and Brazil were trading close to US$19-billion with Africa. In 2012, trade figures reached US$265-billion, more than 10 times more. During the same period in the early 2000s Europe was trading US$150-billion versus US$250-billion now.
The objective has always been is to reduce the imbalances that position Africa as the consumer, and to grow intra-African trade to a level that can make the continent competitive on the global stage. Traditional sectors such as perishables – flowers, fruits and vegetables – still account for the bulk of exports, but the potential to expand the spectrum is enormous. According to Davis, this largely depends on political will and the muscle of negotiators at relevant global trade platforms.
“Whether an equal footing can be achieved remains to be seen, but what is definite is that Africa is going to attract huge trade volumes going forward. So, it is not surprising that a lot of investment activity is going on in logistics, as companies move to set up networks to handle the emerging opportunities,” says Davis.
The latest report on the logistics sector in sub-Saharan Africa (SSA) by market research group, Transport Intelligence (Ti) is optimistic about the region’s investment potential. The Sub-Saharan Logistics 2012 puts forward several reasons why the region should be on the radar of investors, as follows;
Expanding middle class consumer – many countries have an increasingly rich middle class, which has boosted the demand and sale of consumer goods. The goods are mostly imported from China, Europe and the U.S. Global manufacturers are taking the market seriously and enhancing or building their marketing and distribution channels.
Rising manufacturing activity– South Africa, the biggest economy in SSA, has a large manufacturing sector comprising of pharmaceutical, chemical and automotive industries. This provides opportunities for inbound logistics services. Ethiopia is also quickly developing its light manufacturing sector, with international companies setting up there due to its affordability.
Growing perishables – the perishables sector is important to many African countries, for example, Kenya and South Africa, which import significant amount of fruits and vegetables, primarily to Europe.
Technology hubs – various governments are planning hubs for ICT. Multinational companies are investing on a larger scale, and the mobile phone boom continues the positive trajectory.
Exploiting extractives – the extractives sector will continue to be busy and provide a range of opportunities for logistics companies including transporting mined commodities by road or rail, handling commodities at port terminals, supplying spare parts and delivering heavy and out-of-gauge mine equipment and machinery.
The Ti report notes that the challenges of doing business are still high. While South Africa offers a more mature and developed market, this has not quite been replicated in many other countries. Weak transport infrastructure, lack of quality service providers, a disparate population, corruption and insecurity are some of the issues that slow realisation of the sector’s full potential.
To benefit from the existing opportunities, potential investors and logistics companies need to have a positive approach, according to Ti’s business development director, Mike Nordmann, quoted in a press release on the company’s website.
Of the major global third-party logistics operators (3PLs) that operate in Africa, only a few have set up hubs on the continent while others cite high risks as deterrents.
“Many international logistics providers have either ignored Africa or served it at arm’s length through partners or agents. This approach is increasingly difficult to sustain. Global clients need logistics providers that are willing and able to develop supply chains across the continent,” says Mike.
Kenya-based Freight Forwarders is one of the leading logistics providers in East Africa. Managing director, Hanif Somji, believes the market is improving, the result of the improvements in port and corridor efficiency in East Africa over the last few years.
“In Mombasa where our company is based, cargo dwell time averages six to five days. The East African Community is committed to improving infrastructure through transport corridor initiatives. But there are lingering problems at border posts,” he says.
The business was established in 1973 on the back of warehousing and trucking. Freight Forwarders has actively expanded in the last 30 years, in search of more lucrative business revenue.
“Mining, oil and gas and aid sectors are important for us, as is cargo for infrastructure projects in Kenya, Tanzania, Uganda and DRC,” Hanif says.
He sees the role of established logistics companies in Africa important for foreign 3PLs and particularly those with no colonial and historical links to Africa. “The arms-length approach won’t work especially now that business is being conducted on a global scale. People need to be in Africa.”
The emerging mining, oil and gas sectors present the greatest opportunity for transport and logistics, according to investment analyst, Kurt Davis Jr.
“Across Africa, particularly Central and East Africa, transporting resources and energy can pose grave challenges. I sadly see deals in mining and heavy industrial (such as cement) sector that fall apart because transporting material inputs or moving potential exports is extremely costly or impossible absent significant infrastructural upgrades and expenditures,” says Kurt.
The sector has seen a flurry of investment activity in the recent past. A few private equity deals were completed, which prompted investment analysts at Africa Asset to declare the sector as ‘one to watch’. Established players are also injecting funds to capture business in new markets.
Pan African private equity firm Jacana Partners recently announced it had invested in DSM Corridor Group (DCG), a bulk cargo handling business in Tanzania, together with Soros Economic Development Fund. The investment would finance DCG’s storage capacity with respect to volumes and range of commodities, allowing it to take advantage of the opportunities arising out of East Africa’s mining, agribusiness and construction sectors.
Dutch-fund manager XSML also made an investment in the region, acquiring an undisclosed stake in DRC transport company Alpha Transport. Alpha, which offers long-distance transport services and equipment leasing for mining and construction firms, plans to use XSML’s funds to expand and modernise its fleet of 30 trucks, anticipating growing business from the mining sector. One of the main export routes for refined minerals is from DRC through Zambia to Johannesburg.
In September, Africa Oilfield Logistics invested US$4-million to acquire a 49% stake in Ardan Risk & Support Services, an oilfields and logistics company with operations in Kenya, Ethiopia and Mauritius.
French logistics company, Bolloré Africa, is one of the largest port operators in Africa. The company has spent more than two decades investing in Africa’s transport sector and building trade corridors across 45 countries. Its expertise lies in port operations, stevedoring (handling of cargo), warehousing and distribution.
With the huge amount of trade coming from China and other fast-growing economies, Bolloré believes there is huge potential in Africa and plans to capitalise on this by expanding its business in Nigeria, South Africa, Algeria and Egypt – the continent’s four biggest GDP contributors.
Bolloré controls 1% market share for transport and logistics in the four countries. The group recently clinched a deal to operate the port of Tin Can in Nigeria, and is reportedly planning to invest 500-million euros in the Somaliland port of Berbera, which is an important lane for landlocked Ethiopia, according to a report by AFP.
International companies have not found it easy to develop business in Africa. Hennie Heymans, the MD of DHL Express South Africa says it can be a complex process if not managed properly.
“The physical infrastructure itself is the biggest issue, which drives up costs considerably. We see the challenge as an opportunity. Creating the infrastructure and accessibility that is required to reach the 80-90% of the population that live outside of urban centres would unlock immense opportunities.
DHL has been in Africa for 34 years and has operations in 51 countries. The company believes SSA and the U.S. will see increased trade growth, as countries take advantage of preferential trade agreements and state-led policy change to increase trade and investment with the U.S.
According to the shipment figures of the express company, smaller economies such as Somalia, South Sudan and Guinea-Bissau are the ones recording incredible increases in imports from the U.S., while Comoros, Eritrea, South Sudan and Liberia are seeing significant demand from for exports to the U.S. These will be key focus markets for the company going forward, and in other countries like Nigeria and Tanzania where it sees huge expansion opportunities.
Improvements in logistics will continue across Africa, going by the high number of new infrastructure projects that account for transport and logistics.
EXPERT INSIGHT by Ayisi Makatiani, partner at private equity firm, Fanisi Capital
The logistics sector in East Africa has found another new avenue for growth in the extractives sector. It is safe to say that the logistics space is going to get much more interesting.
Poor performance of the logistics sector in Africa is due to limited use of ICT and the gaps in critical skills set required to prosper in the sector, namely marketing, customer relations and strategy. Most of the companies use manual processing, leading to lost shipments, delays and damages, which leads to loss of revenue. Companies that can automate their processes have an opportunity to become market leaders.
Private equity and venture capital funds can step in to improve the performance of a business in these areas. Putting proper systems in place, getting the right people in management, setting the strategic horizon of the company and adding value.
Good opportunities are rare, so scouting for deals is a full time job. From my viewpoint, a good deal has certain characteristics. A strong entrepreneur is at the cornerstone of a good company. The company may not be necessarily doing well, but it is vital to have a person who is willing to do what it takes to make the company a success story.
Venture capital is relatively new concept in the region. People in the region have traditionally relied on bank financing and are reluctant to engage with a fund that is interested in taking an equity stake in their business. According to research, only 0.58% of the funding needs in Kenya are fulfilled by private equity and venture capital funds. The way to land good deals is to keep on engaging with different players in the market and across the value chains in the sectors of interest. The aim is to break the ice and warm entrepreneurs to equity financing by demonstrating to them the value addition that a fund like can bring. We aim to show them that we are more aligned with their goals of growing the company than a traditional bank, because we have ‘skin in the game’.
Although the pipeline of investable companies is growing in Africa, there are a few challenges, which are mainly related to timing and valuation. The continent is taking off, but the political situation in many of the countries is still seen as unstable, causing high country risk premiums, hence a lower valuation by an investor. The entrepreneurs on the other hand may be convinced of the value of their company. The misalignment of these two views results in a collapse of the deal.
Logistics is a major focus for us, alongside retail and consumer-facing sectors. Therefore, we have confidence that the sector holds huge potential. However, there are still challenges doing business that impede investment by funds, and not only in the logistics sector. Becoming an equity partner in a business needs in depth understanding of the dynamics of the country the company operates.
Even though the shroud over Africa is lifting, many investors are still weary due to the uncertainty about the economic and political situations on the continent. The cost of doing business is also high, and not just financially, but in regulatory regimes, for example, it takes over a month to set up a business in Kenya. All the different licenses involved are a hindrance to doing business, and corruption at harbours. The good news is that there seems to be genuine commitment by all stakeholders to address these issues.