The logic of capitalising from regional economic integration in Africa

The success of one nation depends on the success of its neighbours. It happened in Asia, now we are seeing this in the Eastern African region. The Eastern African region is a region with robust growth leading to a ‘New Normal’ for Africa. Integration has provided stability. The region and the countries within it have a vision and are working towards it. Rwanda and Kenya for instance have set targets for 2020 and 2030 that have already led to much progress. Manufacturing is expanding, services sector is growing and oil and natural gas exploration have begun and the region is building a web of innovation which is a powerful tool to enhance competitiveness. Essentially it is becoming the going region in the world.When thinking of Africa, one thinks resources. That is not unlinked to what is happening on the ground. From Mozambique, Tanzania to Kenya, new oil discoveries are being made. To have an idea of the magnitude of these new discoveries, the one made around the Lake Albert Basin into the Lake Turkana area is similar to the size of the North Sea Graben system. In Lake Kivu gas is being extracted, and exploration for oil is under consideration. Indeed resources are a major strength of the Eastern African region. Peace and stability within the region has reduced the risk associated with such investment. Vertical and horizontal linkages required for such exploration will quite likely create new industries, momentum and prospects.Indeed regional integration has brought about new prospects of investment. The UK Private Equity (PE) backed and Nairobi listed Equity Bank Group, which was initially a Kenya focused financial group now has subsidiaries in Kenya, Uganda, South Sudan, Rwanda and Tanzania. The Equity Bank story is even more inspiring considering the fact that the bank had been declared technically insolvent in 1993. By 2012, Equity Bank had more than 8 million customers making it one of the largest customer base in Africa. From its Kenya home, the group has thrived across the EAC (East African Community) and stands to benefit handsomely from the increase trade arising between member countries.This increase in trade is due to the enlargement of the market place. The middle class, the driver of market demand, has expanded by 7% since 2000 to reach around 325 Million people. When a company produces in Rwanda, it is not targeting only the 10 million in the Rwandan market, but instead has an outreach to hundreds of million in the diverse regional groupings. Africa alone has a USD 1.8 Trillion economy and 1 billion people. Hence there is much scope for manufacturing by the region for the region and beyond. New mills are being set up in Rwanda to reach the Congolese and Burundian markets. Biscuit made in Uganda and Kenya is in shops around the region. Cement manufactured in Tanzania is being delivered across the borders to Burundi or Zambia.A regional strategy creates gains not only from internal trade and investment but also from policy coordination to create mutual benefits to productivity in all countries through specialization and capturing externalities and spill over effects across borders. From the Customs Union, policies on elimination of non-tariff barriers, public private partnerships or special economic zones are being adopted. This momentum has created a powerful lever for speeding up the process of economic upgrading at the national level as well as a way to promote interest and investment in the region by the international community.In the realm of Public Private Partnership (PPP), an exciting collaboration in the region is in the Railways sector. On average only 8% of goods is transported by rail compared to 92% by road, which considerably increases the cost of transport in the EAC. Existing rail systems are over a century old. The Rift Valley Railways (RVR), a 240 Million USD project to rehabilitate the existing rail network from Kenya to Uganda has the potential to significantly increase freight transport, with expanded capacity and faster trains. Freight carried is expected to double to 3.3 million tons per annum and marginal costs expected to drop by 30%. The Dar-es-Salaam- Isaka- Kigali railway, currently being studied, could be the next big thing in PPP. RVR is a transnational PPP with Egyptian PE investors. A Brazilian company is already taking care of the technical aspects and management. RVR is symbolic of the new trends in the region. Development is happening through non-traditional sources of funding and from many other developing and emerging nations.Better regional transportation and logistics will consolidate the supply chain and empower farmers; allow their produce to reach the global markets; enable inputs to reach factories in the region at lower cost and more efficiently. The importance of good logistics can be illustrated through the example of the Kenyan company Export Trading Group (ETG). The company is backed by US Carlyle group and South African PE investors. It operates across the region, procures and distributes nearly 1.4 million metric tons of 25 different commodities including maize, pulses, wheat, rice, cashew nuts, soya, fertilizer, sugar, coffee and tea. Most of the produce is procured from smallholder farmers. Individually, these farmers have limited opportunity to even access neighbouring economies. ETG capitalizes on its regional footprint and access to international markets, to consolidate hundreds of thousands of farmers into a supply chain. Each improvement in the regional landscape of transport and logistics could only improve the endgame for these farm holders.The facilitation of business is related to better financial settlement systems. The Regional Payment and Settlement System (REPPS) is a cross-border multilateral netting payment system for countries in eastern and southern Africa. In effect REPPS represents a huge saving for businesses. Fees are now a flat rate of 0.25 per cent compared to standard banking fees as high as 5 per cent and money are received at latest by the next day. The real innovation is that regional commercial banks can now deal directly with one another, without having to go through corresponding banks in Europe or the US.This is quickly becoming the “New Normal” in Africa – be it for payment settlements, railway routes or for simply trading agricultural product. Tea from Burundi, DR Congo, Ethiopia, Kenya, Madagascar, Mozambique and Zambia are sold through the Mombasa exchange in Kenya, rather than in Europe. As the exchange continues on the modernization process, new opportunities are arising. Various countries have well stocked securities exchange, but individually, they are too small to cater for the fast growth of companies in the region in need of greater liquidity. Currently, large local companies go outside Africa for raising funds. The London Stock Exchange has 98 Africa-focused companies listed, and African companies having raised over $5.7 Billion since 2008. Apart from Jo’burg, Lagos and Nairobi are providing alternative funding grounds. Liquidity unfortunately continues to be a sore issue despite spectacular growth in terms of performance. With average daily volumes of USD 77.8 million in Lagos, and USD 21.7 million in Nairobi, the new set of large pan-African champions will require building and merging into larger and more integrated African exchanges to ensure the creation of the “New Normal” in Africa at the Stock Exchange level.Regional integration is a pivotal for building more Pan-African champions, especially in the thriving and youthful East African corridor. Large global sources of capital are eyeing Africa and will privilege companies and investment opportunities with depth and scale. PE investors are leading the charge at that level, and as they successfully attract larger pools of institutional funds (outside of the traditional Development Finance Institutions or DFIs), the priority is likely to be finding larger footprint and scalable businesses with outmoded business processes, or underperforming management. Local policy framework favouring regional integration will only facilitate the rise and expansion of such candidates, and consequently the arrival of more Foreign Direct Investments (FDIs). The nations at the forefront of attractive investment act reforms, multilateral agreements and business environment will capture the chance of being the preferred conduit for more FDIs destined to the region. In the end, in this era of global markets, a well-coordinated regional strategy in East Africa clearly benefits all neighbours. Michael Porter’s work had spelled the theory…. it’s now the turn of the East African region to fast track the practice in the Continent.

Insight

The logic of capitalising from regional economic integration in Africa