Listen to the podcast:
Africa today contributes some 1.5% to world trade and attracts little global investment. Still, the continent’s future is hardly as dark as that scenario might suggest. Africa has a growing middle class; governments that are enacting laws to stem corruption, and public and private institutions that are investing heavily in infrastructure. According to Elkanah Odembo, Kenya’s ambassador to the U.S., in another decade the continent will grow into a market of one billion consumers. He notes that companies that seize these opportunities today will reap dividends in the future. Chinese firms, for example, have recognized this potential and are investing in infrastructure projects all over Africa.
Odembo visited the University of Pennsylvania recently for meetings arranged by the U.S.A.-Kenya Chamber of Commerce and spoke with Knowledge@Wharton about the potential rewards and risks of investing in Africa, including Vision 2030, Kenya’s plan to become a middle income nation in the next 20 years.
The following are edited extracts from the conversation.
Knowledge@Wharton: What business opportunities does Africa offer and why do so many companies overlook them?
Elkanah Odembo: At the moment, we contribute very little, about 1.5%, to global trade. For that reason, to most investors and business people, Africa doesn’t appear to be particularly active in terms of business and trade. But the fact is that in the future all roads will lead to this continent because of some things that are happening: A rising middle class, developing African governments, and heavy investment in infrastructure. The continent also has commodities, which the world economy values and requires to keep growing. We hope that with all the resources that we have and know are precious to the world, the world will begin to turn its head toward Africa. We want to make sure that we are ready to do business with the rest of the world and grow from 1.5% to 10% in the near future, because we have a lot to offer. The fact is that those on the continent who are investing are doing very well.
Knowledge@Wharton: If you were to look into Africa from the perspective of somebody outside the continent, what are the most promising regions in terms of investment?
Odembo: In terms of investment, I would, of course, favor East Africa because that’s where Kenya is located. But you also must appreciate the fact that the continent is beginning to think collectively, looking at Africa as an investment destination and a trading bloc. As such, we have segmented the continent into regional economic blocs. By and large, the regional economic blocs are beginning to do very well. Some are fairly young. The East African bloc, with a population of about 150 million — that’s Kenya, Uganda, Tanzania, Rwanda and Burundi — offers a significant opportunity because we have a customs protocol, which has increased trade between the countries significantly. A few months ago, the five countries signed a free trade protocol, which now enables us to move goods, services and people across our boundaries without any hitches. We are investing heavily in infrastructure, with major roads coming from the ports on the Indian Ocean going all the way to southern Sudan, Ethiopia, Rwanda and Burundi and to eastern Democratic Republic of the Congo.
The Southern African Development Community (SADC) is also doing equally well in terms of building regional infrastructure, increasing trade and opening up the region. If you are doing business in one country, you have access to the rest of the region as well.
By setting up shop and doing business with Kenya, you do not just have the possibility of [accessing] the East African community … but you also have the population of all of eastern and southern Africa, some 18 countries, with a population of 400 million.
Knowledge@Wharton: What are the principal risks of doing business in Africa that international investors should be aware of and how can they protect themselves?
Odembo: Whenever businesspeople venture outside their comfort zone, and their familiar environment, they will face an element of risk. The kinds of risks that businesses and investors have had to deal with on the African continent are related to the civil wars that we have seen come and go. We have had risks related to unreliable judiciary processes, [involving] issues pertaining to business contracts and so forth [and] the court procedures taking too long. But if you look at the continent in the last few years, there are fewer civil wars compared to 10 years ago, when at any given time, there were about 10 countries at war. The mindset [of some foreigners] about the continent is often that, if there’s war in one country, there’s war all over the continent. That’s just a geography lesson [about Africa's] 53 countries.
If you look at what has happened in the last few years in terms of improved governance, many countries are becoming more democratic. They’re having elections more regularly. The typical tensions that would result in risk have been minimized to a great extent — wars around the time of elections, civil wars between different communities, fighting between one community and another over natural resources — we’ve overcome those challenges to a great extent. The continent is looking ahead to being a place where there’s a certain amount of predictability. In the past, unpredictability was another risk.
Africa now has all the ingredients to minimize the risks that people feared before. One way to establish that is for a prospective investor to talk to companies already doing business on the continent. They would be able to tell you about changes that have taken place over the last five or 10 years, and how much we, as countries and as regions, have managed to minimize risks to investors. We appreciate now that we’ve been left behind and we must do what is necessary to create an enabling environment for private-sector business and investment, both local and foreign direct investment.
Knowledge@Wharton: How do you view China’s investment strategy in Africa? What does it mean for investors from other parts of the world?
Odembo: I don’t know if I can talk about the Chinese investment strategy because I’m not privy to [it], but I can discuss what I have observed. When the Chinese first appeared as investors on the continent about 10 years ago, a lot of African countries were very uneasy about the manner in which they were setting up businesses and the types of investments they were making. The Chinese have become much more sophisticated in the last 10 years. They now have a strategy. It appears to revolve around what they have studied extremely well on the continent. They know the demographics: There is a rising middle class on the continent; there’s a very dynamic, young population; and the continent is becoming increasingly urbanized. Therefore, there is a market and purchasing power on the continent. One part of the Chinese strategy is based on the fact that they are reading Africa very well in terms of where we are now and where we are likely to go to in the next few years.
The Chinese also appreciate the riches that the continent has. Most other countries have known the riches that exist here. Some northern countries from North America and Europe have already extracted the valuable minerals and metals that they needed to develop their industries. The Chinese have figured out that over the next 10 years or so, some of the most valuable commodities that the global economy requires are on this continent.
The Chinese are positioning themselves to do business with African countries, and have figured out that in another 10 years, the continent will have a population of one billion people. That’s a very sizable market for selling your products, not to mention the human resource capabilities for producing goods that you might want to export to your own country. Again, I’m not sure what the strategy is, but I can imagine that they’re seeing it putting them in a very good position in terms of who will benefit the most.
Knowledge@Wharton: What implications will this have for investors from other parts of the world?
Odembo: It’s a challenge. Investors will have to compete with somebody who already has a foot in the door, investing heavily in developing infrastructure, which is where African governments will tell you is where the greatest need has been — infrastructure, infrastructure, infrastructure. In the next 10 years or so, if this infrastructure has been developed, Africa is going to be able to trade within itself quite significantly. We’ve learned this during the global recession, when our commodities didn’t have a ready market because our traditional markets were experiencing the crisis. We turned inward and started trading with each other.
Because of the potential for trading within the continent with a developed infrastructure, people investing in infrastructure will stand to benefit very significantly because they will know the infrastructure very well. Part of being a good business person and investor is knowing how the infrastructure is set up and how things move from point A to point B.
Knowledge@Wharton: Turning now to Kenya, what is Vision 2030 and what opportunities does it offer international investors?
Odembo: Vision 2030 is Kenya’s goal of making the country a middle-income country by the year 2030. This is a plan we developed over the last three or four years. We have traditionally planned in five-year cycles, which correspond with each government in place. It occurred to us that this isn’t making sense. If we are going to get out of the poverty we are in, we need to project beyond just five years. We embarked on a national planning process involving stakeholders across the board — government and non-government, and the private sector was very central, because our government made a commitment to make the private sector the engine of growth.
We also appreciate that if there’s going to be a movement from poverty to becoming a middle income country, wealth will have to be created, employment will have to be created and the economy will have to grow, and the private sector has a key role to play. The strategic thinking and planning process stretched over a period of about a year and a half.
Vision 2030 is Kenya’s vision of what a developed, middle-income Kenya would look like. We have identified a number of pillars for getting us to become a middle-income country. There’s a very strong economic pillar, [in which] the private sector very central. A good part of it was developed in partnership with a number of foreign experts as well. It is about how to position the economy, manage macroeconomics and get the economy to grow at least 10% consistently over a period of time.
We have a pillar that looks at all social aspects: Food production, food security, health care, education, shelter, water and sanitation. It is very important that infrastructure development is a part of this. Then there’s the political pillar, which is equally important because, as you asked earlier about risks that investors fear when it comes to investing in the continent, the fact is that political instability has cost us a lot. In the last 50 years of independence, the political instability that we’ve seen is to a large extent very politically motivated. That’s now being managed.
Kenya promulgated a new constitution on August 27, which provides a framework for governance. Within that political pillar, governance was big. We’re looking at corruption, for example — one of the variables not conducive to good business and investment. We can’t run away from that.
With the constitution, certain structures and institutions will enable a complete overhaul of the judiciary over the next 12 months, because we appreciate that some of the problems with regard to prosecution, for example, and due processes in the courts were a result of [a lack of an] accountable and effective judiciary.
Knowledge@Wharton: Will the new constitution help increase business transparency? It is a matter of tremendous concern to international investors that there should be transparency.
Odembo: Absolutely. The first group of people in Kenya to react to the promulgation of the new constitution was the business community. That says something. They came out and congratulated Kenyans for this very historic achievement. They spoke about why they felt this was very important and reiterated that there had been too many things in the environment that made businesses and investors uncomfortable. A big part of it has to do with unpredictability and corruption. In the new constitution, there’s even a chapter on leadership and integrity — what we expect of our leaders. New structures and institutions have been created to [encourage] the private sector. There is a round table involving business leaders and the prime minister’s office [to enable] regular contact between the government and the private sector so concerns are continuously being communicated to the government. That wasn’t the case before.
In many African countries, governments did what governments did and the private sector was busy doing what they were doing, producing goods and services. That has now changed….
For example, with Vision 2030, there is a national economic and social committee that has ministers and some key industry and private sector leaders. This is the oversight body monitoring and ensuring that our efforts for Vision 2030 and becoming a middle-income country stays on track. A lot of business people have a certain level of comfort with what the government is doing and the kind of environment that has been created — their doors are now open. Private-sector people no longer feel like adversaries…. I’m seeing that happening in a number of other African countries. As leadership changes, you’re even having leaders and heads of government who have a business background and appreciate the business community and will do what is needed and necessary to provide an enabling environment for the business community.
Knowledge@Wharton: You referred earlier to the social pillar. To what degree do you see micro finance and social enterprise programs being set up in Kenya and have you seen any perceptible impact on poverty as a result?
Odembo: Absolutely. Micro enterprise and credit programs are mushrooming everywhere. In Kenya, we have certainly seen an impact. For the longest time, a lot of businesses and financial institutions shied away from what they perceived as the poor, the unbankable, because it was perceived that there wasn’t much business to do with that group. Because that is such a large proportion of the continent, this phenomenon we now call micro finance and enterprise was really started, interestingly, in the non-profit sector. The sector quickly appreciated that the very poor people that they were working with also needed access to credit.
The first micro credit institutions is Grameen Bank model. Even that started as a non-profit organization with the appreciation that we need to get money and credit into the hands of the poor, that the poor, when they have access to credit, are able to do incredible things to improve their lot. The commercial banks and all sorts of other micro finance institutions have come in subsequently, such that you now have a fairly significant micro finance sector. We need to make sure we maintain the focus on the poor and enabling them. It’s not just about credit. Because what [non-profits] are able to do very well that traditional commercial banks were not able to do is invest also in building the capacity of the people.
It’s one thing to make credit available. It’s another thing to make sure that the credit is going to be applied properly, that people have good business plans and projections, and that they actually are making money. The prospects are tremendous. We need to see more. I don’t think we can get enough micro finance and micro enterprise programs on the continent. The continent must go in that direction because it is the way we will be able to grow the economy, from the bottom.
Knowledge@Wharton: I believe that Africa and Kenya are at the forefront of using mobile telephones for mobile banking.
Odembo: That’s a part of liberalizing the economy. Just 10 years ago, only 300,000 or so Kenyans had access to a telephone. When we liberalized the telecommunications sector to the point where we now have some four or five mobile telephone companies, we’ve gone from 300,000 Kenyans having access to a telephone to close to 20 million. The innovations within that sub-sector are incredible. That is where one of the leading mobile services providers, Safaricom, has invented a money transfer system using the mobile telephone.
Studies at the Institute for Development Studies at the University of Nairobi — which are not yet conclusive — are saying that the facility to transfer money that Safaricom provides to Kenyans may have contributed more to national development than any other investment that the government has made since independence [in 1963]. Just the ability to transfer money from the people who have the money to the people who do not — most of whom are a rural, poor population who, of course, didn’t have banking. Sending money from point A to point B was once such a chore. Money would get lost, all sorts of things would happen. Those were disincentives for people working in towns, who needed to send money back home to support their parents and siblings.
But now with 20 million handsets in the hands of Kenyans — and a significant number of these people being young and middle class with some disposable income — the ability to take money out of the urban centers into the rural peripheries of the country is changing the economies of traditionally poor [households]. And the sky’s the limit….
When the telephone companies began transferring more money than all the banks put together using a mobile telephone, the banks quickly realized that rather than compete and put all sorts of obstacles in the way of these money transfers using telephones, they said, “Let’s join them and see if we can find opportunities for partnerships.”
Some of the large commercial banks are going into partnerships with mobile telephone companies to do other innovative things so that people can now bank using their telephones. Again, the sky’s the limit when it comes to these innovations, and young people, all of them well educated, are bringing about all these innovations.
Knowledge@Wharton: If you had a chance to address, say, a room full of Fortune 500 CEOs and tell them why they should invest in Africa, and why in Kenya, what would you say?
Odembo: The number one reason would be if you want a place where your investment will bring good returns, in a sustainable manner over a long period of time, and you’re willing to wait — and you do not want to make a quick dollar or a quick euro and repatriate the profits. If you’re in it for the long haul, with the mindset that you want to make a profit, as a foreign investor but also to support the development of the continent, then your timeframe must also be long term. None of that in and out quickly. You might make your money, but you want to be in it for the long haul and do it in a sustainable manner. And if you want a loyal partner and a loyal customer base, then the continent is the place to go, because of the riches and the commodities, growing middle class, and infrastructure we are investing in will make it possible for you….
Now why Kenya? An investment in Kenya is an investment in the entire continent. Within four hours of Nairobi, you can fly to 24 capitals on the continent. That ought to be an incentive for any business person, looking at the size of the market when it’s predicted that in five years, 10 years at the most, we will have a population of one billion. If that isn’t market enough, I don’t know what is. All the ingredients are in place for Africa to be where a serious investor should be.