Business and Finance

Investment Opportunities in East Africa

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While attending the previously concluded 1st Ugandan convention in the UK, I engaged one of the attendees in an investment conversation regarding big opportunities back home. He seemed very skeptical of the success of any investment in East Africa, especially in Uganda, citing political instability as reported by some media houses. Well my answer was “…… do you think I would have spent my hard earned  money on an air ticket in the summer and travel over four thousand miles just to spend a day in this meeting without expecting any investment opportunities?”I am more than convinced that East Africa is a mine of wealth not fully tapped because of its expansion to include Rwanda, Burundi and soon the newly formed southern Sudan. 

Private equity firms are setting up shop in East Africa, attracted by a growing young and urban population, but also by better political stability and sounder macroeconomic management”, the manager of one fund said. Regional integration by at least five East Africa nations, natural gas production in Tanzania, an oil find in Uganda and the hydro-electric potential in Ethiopia were also beckoning. In the last two years, there’s been a lot more activity. We are beginning to see a number of international or pan-African players take a real interest in East Africa, and it’s not a coincidence as there are a lot of positive trends in East Africa.”

Six years ago, there were only two players in the private equity industry in Nairobi, but African Venture Capital Association now lists 26 private equity venture capital fund managers investing in East Africa.

The firm launched a $100 million Catalyst Fund I in January for opportunities in Kenya, Uganda, Tanzania, Rwanda, Democratic Republic of Congo, Ethiopia and Zambia with a core focus on the consumer, services and industrial sectors. The fund has a life of five years and Catalyst will offload by either listing or trading its stake to any interested parties. It has a target of a 20-25 percent return.

There is an increasing trade interest — multinationals, Indian, South African, West African corporates all looking for acquisitions in financial services, communications and other sectors, which provides further confidence about exit by private equity investors. It is a positive thing which is making it a much more attractive proposition, because 20% of the fund were raised locally from high net worth individuals, pension schemes and insurers.

Let us put aside the latest newspaper headlines today and let’s go back 15 years ago. Has the political environment improved or has it regressed in the last 15 years? The changes are actually fundamental and irreversible in my view. One cannot help but be generally bullish on the long term prospects for the region. The facts speak volumes.

I am more optimistic of mutual business benefits for all East Africans because of the improved relations among the member states. 

Focus on Uganda and Rwanda

Rwanda is the second largest destination of Ugandan exports after Southern Sudan.  Uganda has maintained a significant volume of exports to the country, including salt, sulphur, lime, and cement, animal, vegetable fats and oils, iron and steel.

Statistics from the Uganda Export Promotion Board show that Uganda’s earnings from exports to Rwanda have steadily increased over the years. The board’s Officer in Charge of Regional Trade, Othieno Odoi, said exports to Rwanda earned Uganda US$ 136 million in 2009, US$ 150 million in 2010 and about US$ 160 million in 2011 so far.

Uganda is one of the major exporters to Rwanda which spends about US$ 1,000 million on imports each year. Investments by Rwandans in Uganda are also growing with lots of focus in real estate. The Uganda Investment Authority reported that in the 19 years between 1992 and 2011, up to US$ 20 billion worth of Rwandan projects have been licensed in Uganda, in sectors including manufacturing, finance, real estate, transport, and others. Even more significant is the human traffic. According to the Ugandan Ambassador to Rwanda, Richard Kabonero, Uganda received about 120,000 Rwandese visitors in 2010 alone, a high number from one country, considering that Uganda does not get more than 700,000 visitors a year. Reports say that Uganda is favorite destination of Rwandese nationals, as they spend more time here than any other tourists.

Rwanda nationals also constitute a substantial portion of students in Uganda. As the Francophone country struggles with its transition to Anglophone, most Rwandese prefer to take their children to English-speaking schools – commonly in Uganda. Thousands of Ugandans are employed in Rwanda in both professions and trade and they don’t need work permits to work in Rwanda. The Rwandan High Commissioner to Uganda, Frank Mugambagye, estimates the number at 5,000. “Rwanda has Ugandan professionals in education, traders in business and entrepreneurs in small scale industries,” Mugambagye said.

Experts argue that these realities tipped the see-saw of relations between the two neighbor countries in favour of friendship.

Expected benefits

However, an even bigger imperative was the high potential of expected mutual benefits as country leverages its strategic strengths. The first is food. Rwanda, whose economy is about 35% agricultural, with a fast-growing population and limited land, needs to import most of its agriculture products. Uganda, whose potential for agricultural production leaves a lot of room for exploitation, can find a ready market in its South Western neighbor.

Uganda’s oil

As in most contemporary discussions about Uganda’s strengths, oil had something to do with it. Uganda will soon be producing oil. Rwanda, which imports its oil at great cost and inconvenience, expects to save itself much trouble and cost by switching to Uganda’s supply. Mugambagye said Rwanda was looking forward to easier and probably cheaper oil options.

“We are optimistic we will greatly benefit from Uganda’s oil just like some of the districts in Uganda have benefited from Rwanda’s gas,” he said.

Rwanda is estimated to import up to 6,000 barrels of oil (crude and refined) per day and would constitute a sizeable market for Uganda’s oil.

The benefits are not one-way.

Cross-border trade

Among the issues in the MOU, according to Kanumba, is improving market infrastructure at border posts to facilitate cross-border trade and removal of Non-Tariff Barriers like road blocks and weighbridges.

One measure already in effect is the extension of border operation hours at Cyanika and Kagitumba/Mirama Hill from 8 to 16 hours and 12 to 16 hours respectively.

In view of border complications, the two countries also recently agreed to share the considerable tourism income from mountain gorillas which move back and forth across the common borders.

Benefits for EAC; Experts say the biggest beneficiary in the new ties is the nascent East African region, whose success in forging complex relationships like common currency, integrated infrastructure and harmonized economic policies will depend on the mutual trust and goodwill between its member states.

Rwanda’s growing international popularity is winning the country friends and influence far and wide and it would be foolish of Uganda to continue to alienate it. However, Uganda also has its strengths as the “gateway into East and Central African market.”

“An investor in Uganda wants to be sure that the finished goods will find unhindered access in all the surrounding markets,” UIA’s statement said.

It added that cross-border companies in the service industry, like Kenya Commercial Bank, Crane Bank, Mukwani Industries, Serena Hotels, Nakumatt, MTN, Ecobank, Bakhresa and others, are not content in one country, but prefer to spread their services to cover an entire region.

Moving to the banking sector, which is one of the fastest growing sectors, especially in Uganda with the discovery of oil. The moratorium on new banks was lifted in July 2007. 

During the18 months that followed the lifting of the moratorium, 8 new commercial banks were licensed. These included Kenya Commercial Bank, Equity Bank and Fina Bank, all from Kenya. Global Trust Bank and United Bank for Africa trace their roots from Nigeria. 

Ecobank is headquartered in Togo and Housing Finance Bank is an indigenous operation. Three other banks, ABC Bank (Kenya), Access Bank from Nigeria and CRDB Bank from Tanzania, have publicly declared their intention to start banking operations in Uganda.

By April 2011, the number of commercial banks had increased to 23. The bank branches in the country numbered over 400. The banking sector employed over 8,700 people. Total commercial bank assets in the country were valued at US$4.78 billion (UGX:11 trillion). (Official Exchange Rate in December 2010 was US$1=UGX:2,300).

Rwanda formally joined the East African Development Bank in July 2008. 

Isaac Kajubi Mikisa

Relationship Manager-FPi

email:isaac@fpiuganda.com

www.fpiuganda.com

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