Economic Impact of Investing in Telecommunications Industry

Abstract

The economic impact of the investment in the telecommunications industry in sub-Saharan Africa has astounded and exceeded the projections of emergent service providers in a continent that has come to be associated with bad news and regressive growth over the past four decades. A direct result of the reforms that are being implemented by various governments in the region, the growth in the industry were led by African entrepreneurs The growth in the industry has positively impacted other sectors in the economies of the region. Mobile telephony and internet have been the driving force in the growth of the industry, registering growth rate that has been judged the highest in the world and opening the region for more investment and development.

Sub-Saharan Africa has for long lagged behind other regions of the world in all aspects of human development. So much turmoil and human deprivation had been associated with the region that when positive growth data in the telecommunications industry started rolling out from under the ruins of the economies of the region, investment analysts were surprised at the pace of growth in the industry. A growth rate that saw the increase of region’s teledensity jump from a dismal of 0.4 per 100 inhabitants in 1994 to current figures of about 6-2 per 100 in 2004.

 The economic impact of investments in the telecommunications industry demonstrated how the implementation of good government policies can effectively transform the economic fortunes of developing nations. The pivotal roles played by home-grown African investors in rebuilding the industry also showed that given the enabling environment, Africans can change the economic fortune of their continent.

Direct foreign investors from advanced countries were shown to have been discriminatory, predatory and ineffectual in their efforts to bring real development to sub-Saharan Africa over the years. Available evidence supported the oft held view that very little DFI flowed to the region when compared to the flow to other developing regions of the world; and that of this little inflow, the majority went to investments in the extractive industries of mineral-dependent nations of the region.

The enthronement of well conceived policies was identified as the panacea for continued investment and the sustainable development of the telecommunications industry in sub-Saharan Africa, as well as the ability to meet the enormous growth forecasts for the industry.

Mobile telephony, which accounted for over 75 percent of the record growth, has been identified by analysts as the future of the industry in sub-Saharan Africa, alongside the Internet and business in telecommunication technology equipment and support services.

Sub- Saharan Africa

The Geography and People

       A geographical map of Africa, showing the ecological break that defines the sub-Saharan area

            Courtesy – Wikipedia, the free encyclopedia

The term Sub-Saharan Africa (SSA) has been used over the years to denote that region of Africa situated beyond the southern tip of the Sahara desert, as distinct from the northern part of the continent. The region comprises of 47 independent nations with a combined population of approximately 726 million people. It stretches from the southern edges of the Sahara desert to the Atlantic coastline on its south western part, and to the Indian Ocean coastline on the south eastern part.

The cultural, political, social, economic and developmental realities of the different constituent states of the region are as diverse as the myriad number of language and tribal groups welded into countries within the territory by the executive fiats of erstwhile colonial administrations, defining new national boundaries.  “The new boundaries cut through some 190 culture groups […]and enclosed hundreds of diverse and independent groups, with no common history, culture, language or religion” (Meredith, 2005, p.1). The only apparent common thread that ran through the nations of Sub-Saharan Africa was probably the DNA string that defined the inhabitants as members of the Negroid race.

Socio-Political Realities and Development

The political and social characteristics and realities of sub-Saharan Africa were, in the main part, a creation and reflection of European colonial administration and domination as decreed by the Berlin Congress of European leaders in 1884-5, which sought to regulate European colonization and trade in Africa (Wikipedia, December 31, 2006).  Hence any analysis of sub-Saharan Africa for the purposes of investment or any other such activity has to first look at its colonial-made political maps in order to make a meaningful characterization of the polity.

However the best we can do for the purposes of this paper is to analyse the constituent nations of sub-Saharan Africa under the geo-political blocks of Central, East, West and Southern Africa, including the 6 adjoining island nations that make up the rest of the sub continent. Nevertheless, this classification may still not present the characteristics of homogeneity that may be needed to make sweeping economic generalizations across the entire sub-Saharan region. For instance the much more advanced Republic of South Africa can be more easily compared to European nations than to Mozambique or Angola, its Portuguese-speaking neighbours. In the same manner, oil producing and heavily populated Nigeria, which uses English as its official language, has little in common with Benin republic, its smaller, less endowed, French-speaking neighbour.

The Central African block, which has probably been the most restless part of sub-Saharan Africa, comprises of: Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, Gabon, Democratic Republic of Congo, Central African Republic, Rwanda, and Burundi. A greater number of these countries have been beset by various forms of inter-ethnic and international wars, pogroms and social upheavals over the past forty years. For instance, there have been repeated inter-ethnic wars and genocides in Burundi and Rwanda, respectively, the most notorious of which was the Rwanda genocides of the mid nineties. Democratic Republic of Congo has been embroiled in political upheavals and civil war for the past two decades, the same is true of Chad. Republic of Congo and Central African Republic have also had there own fair share of civil and political strife.

The East African block, comprising of Kenya, Uganda, Djibouti, Eritrea, Ethiopia, Somali, Sudan, Comoros, Seychelles and Madagascar, has not fared any better as regards political and civil stability. Of the ten countries in the region only Kenya, Djibouti, and the island nations of Seychelles, Comoros and Madagascar have escaped the turmoil of war and major civil disturbances since becoming independent nations. Civil wars are currently being waged within Somalia and Sudan.

Southern Africa, made up of Angola, Botswana, Lesotho, Malawi, Mozambique, Namibia, South Africa, Swaziland, Zambia, Zimbabwe, Tanzania and Mauritius, is the only part of sub-Saharan Africa that has enjoyed relative political stability for close to a decade, that is, since the end of the Angolan civil war and the collapse of apartheid in South Africa.

With the exception of Cote D’Ivoire, which is still enmeshed in civil war, Liberia and Sierra Leone, West Africa, comprising of Benin, Burkina Fasso, Guinea, Gabon, The Gambia, Ghana, Guinea, Guinea Bissau, Mali, Mauritania, Niger, Senegal Togo and Nigeria has also enjoyed some relative peace for the past three decades.

SUB-SAHARAN AFRICA

The political map of sub-Saharan Africa, showing the regional blocks and national boundaries.

Courtesy – Africa Policy Information Center

The Socio-Economic Realities of sub-Saharan Africa

With its grim colonial heritage, troubled political situation, civil wars and less than competent leadership, the nations of sub-Saharan Africa had consistently posted dismal economic outlooks over the years. In its survey of development indicators in the African continent, the World Bank (2005) observed that, “With nearly 700 million people in 47 countries, Sub-Saharan Africa continues to present the world with its most formidable development challenge. Africa is home to 34 of the world’s 48 poorest countries. The average income, excluding the Republic of South Africa, is only US$342 per person.” The same publication stated that, “Gross national income (GNI) per head averaged $506 in Sub-Saharan Africa, ranging from under $100 per head in Burundi to over $7000 in the Seychelles.”

In its own assessment of the dire economic situation in sub-Saharan Africa Wikepedia (December 24, 2006) attributed the cause to the subsisting “suffering from the legacy of colonial conquest and occupation, neocolonialism, inter ethnic conflicts, and political strife.” Evaluating the economic and growth trends in the region, the United Nations Population Fund (UNFPA, nd) reported that “while 2003, 2004 and early 2005 have seen improvements in economic growth levels and in governance, the challenges facing sub-Saharan Africa as it strives to meet its development objectives remain the most daunting facing any region in the world.” Such SSA countries as Somalia, Democratic Republic of Congo, Liberia and Sierra Leone have scarcely run any centrally organized economy for a decade or more.

Public infrastructures – road networks, telecommunications and power generation facilities, and social services were severely devastated in many SSA countries by wars, poor management and poor finances. Countries like Angola, Mozambique, Uganda, Liberia, Sierra Leone and Rwanda are only just beginning to rebuild these vital facilities, in most instances with donor funds.

Silver Lining in the Horizon?

With so much horrid information emerging from SSA countries, the question confronting most investors is whether the region had gone beyond the point of redemption.

Probably not? Though the foregoing scenario painted a very dismal picture of economic activities in sub-Saharan Africa, the reality is that the prevailing situation has unwittingly created enormous investment opportunities in the region. Some recent analyses of the situation seem to support this line of thinking by reporting a resurgence of economic growth in a number of countries in the region by way of rebuilding the region’s battered infrastructures and the uncapping its trapped resources.

Commenting on the rebuilding efforts in Angola after two decades of devastating civil war, the Economist magazine (June 22, 2006) reported that, “Last year (2005) Angola’s economy grew by an estimated 15.5%, the fastest on the continent. But the rest of Africa has also been doing well: a recent report by the Organisation for Economic Co-operation and Development (OECD) estimates that Africa’s economy grew by almost 5% last year, and is expected to do even better this year and next.” The magazine and other commentators attribute the resurgent growth to the increased world demand and higher price for energy products and minerals. This increased demand has been variously attributed to the voracious appetites for energy by two of the world’s emerging economic power houses – China and India. A lot more investment from these countries and donor countries have been pouring into Africa and fuelling growth in many important sectors. The Economist (ditto) further identified the best performers to be “Mozambique, Rwanda and Uganda, which notched up growth rates of 12%, 9.7% and 6.2% respectively in 2002, without the aid of oil revenue.”

These signs of growth have shown that sub-Saharan Africa may not be all bad news after all, but rather an investment destination waiting to explode. And one industry where this investment explosion has been resounding in the region is telecommunications.

The Telecommunications Industry in Sub-Saharan Africa

The telecommunication industry was among those sectors of SSA economy, which were hit the hardest by the catastrophic political and social crises that confronted the region after political independence. Although not much of a strong telecommunications base was bequeathed the emergent SSA countries by their erstwhile colonial rulers, much of that bequeathal went up in the smoke of wars and civil disturbances, while investment dried up from the governments which controlled the services.

Main Telephone Lines (Public Switched Telephone Network)

What existed as the telecommunication infrastructures in most of SSA countries were networks put in place by the colonial powers for their narrow administrative conveniences. This meant that only administrative and commercially important locations where covered with the most basic telecommunications infrastructure while larger swats of territories were left out of the network.

International telephone circuits were equally determined by the location of the home governments of the colonial administrators. For instance all British ruled colonies had their international telephone traffic routed through London while the French dominions had theirs routed through Paris. In practical terms this meant that for two neighbouring sub-Saharan countries like Nigeria and Cameroon to communicate with each other via the international telephone circuits, their originating calls had to be routed through the London and Paris international circuits before being re-routed back to the two African neighbours, who happen to have been British and French ruled, respectively.

As earlier noted, the post colonial wars and political crises that hit the majority of sub-Saharan African countries dealt a terrible blow on the rudimentary telecommunication infrastructure left in place by the departing colonial powers. Lines were destroyed over large territories, exchanges could not be effectively maintained on account of the paucity of funds and lack of trained manpower. Telephone services became the exclusive preserve of city dwellers and the rich. A Nigerian Minister of Communication was quoted to have once informed his country men that “telephone services were not for every Dick, Tom and Harry” (Nnebe, 2004).

The negative growth of the telecommunication industry as documented by a report of the International Telecommunications Union (ITU) (1996), stated that there was “little change in the telecommunications picture for the continent, particularly in Sub-Saharan Africa. While the number of telephone lines has increased in absolute terms, basic access to telecommunications services has not generally improved.” In fact the ITU survey painted a most dismal picture of the state of telecommunications services in sub-Saharan Africa, with the exception of South Africa. Telephone penetration was reported at 0.5% in some SSA countries, lagging far behind other developing nations in Asia and Latin America. Gebreab, (as cited by Netel@Africa, accessed from the internet, December 24,2006) revealed that fixed line services in Africa were characterized by low penetration arising from (1) lack of investment, (2) investment inefficiencies, (3) inadequate private sector involvement, (4) foreign exchange scarcity, (5) poor management incentives and (6) insufficient regional development. For instance in a large populous country like Nigeria, whose estimated 130 million inhabitants account for over 17% of the population of sub-Saharan Africa, it was reported that in 2001 “Nigeria was grappling with a disappointing total of about 500,000 dysfunctional (main) telephone lines, while mobile telephones was a status   symbol for its 20,000 privileged owners.” (Nnebe. ditto)

With the probable exception of South Africa, very few other sub-Saharan African countries were able to muster the resources needed to install any credible national telecommunications backbone, complete with modern Public Switched Telephone Networks (PSTN), Integrated Services Digital Networks (ISDN) or a Digital Access Index (DAI). The public switches and exchanges were dependent on obsolete low-capacity analogue telephone exchanges, at a time the rest of the world had gone digital and way ahead of what obtained in sub-Saharan Africa. Data carriage by most of the existing lines was highly limited, while getting access to the international gateway was very limited, thus severely limiting the use of the Internet. In those few countries where mobile telephones were introduced in the early nineties, the mobile exchanges also depended on obsolete and expensive analogue technologies, thereby restricting the acquisition of the new lines to the very rich few in the society.

In effect the larger stream of the population living in the rural and semi-urban areas, and the poor who constituted the majority of the urban dwelling mass was left out of telephone access or other means of telecommunication.

Government involvement and monopoly of the telecommunication industry on its own posed major obstacles to private sector involvement in the industry, leaving the industry in the hands of highly inefficient and corrupt public workers. Efforts at modernization were consistently stifled by bureaucratic bottlenecks, corruption and under-funding. It was not until the late 90s that the industry had a breath of fresh life and things began to change.

Mobile Telephony

In the ‘90s when many sub-Saharan African countries embarked on IMF-induced restructuring of their economies, the privatization of such public monopolies as the telecommunications industry was top on the list of industries to be reformed. South Africa was one of the first countries to implement the full privatization of its telecommunications industry, and when service providers from that country extended their forage into the heart of the sub continent, they were overwhelmed by the poor state of the available telecommunications infrastructure.

Faced with the lack of adequate infrastructural and technical foundation for reliable public switched telephone networks, most of the new investors opted for satellite based mobile telephony. And thus the GSM revolution was borne in sub-Saharan Africa, driven in the most part by the South African based service providers. The picture has never been the same ever since.

In Nigeria, the mobile cellular subscriber base jumped from 20,000 in August 2001 to over a million lines within six months. Five years later, August 2006, according to industry statistics released by the Nigerian Communications Commission (2006), Nigeria now has more than 27 million subscribers on the mobile networks of the four providers of mobile telephone services in the country.

Industry statistics: Mobile telephone growth in Nigeria, Dec. 2001 –Aug. 2006. Courtesy NCC, Nigeria.

As is the case with Nigeria, so has it been for most other sub-Saharan African countries, the mobile revolution is here. “The mobile telecommunication sector has to qualify as one of Africa’s success stories. In 2003 alone, over 13 million new mobile subscribers were added on the continent, a figure equivalent to the total number of telephone (fixed and mobile) subscribers in 1995” (ITU, 2004). The report judged SSA to be the fastest growing mobile telephone market in the world, increasing the teledensity in Africa to 6.2 per 100 in five years, up from 0.4 in 1994. The growth is yet to cool down, as the ratio of mobile users to fixed line subscribers in sub-Saharan Africa (SSA) stood at 4:1 in 2003 – the highest ratio of mobile to fixed line subscribers in the world. According to ITU, SSA also accounted for the largest prepaid market mobile telephone market in the world today (ditto).

Main telephone lines per 100 inhabitants within Africa and compared to other countries
Note: SSA; = Sub-Saharan Africa region. North = North African region. South = South Africa. Source: ITU World Telecommunication Indicators Database

Internet Services

Though the rate of internet penetration in SSA is nowhere comparable to the astronomical growth of mobile telephony, it has equally been impressive. Starting from almost zero access in the early 90s, and faced by huge technological challenges posed by inefficient landlines, the growth in internet access in SSA was able to match what obtained in other developing countries. ITU estimates that, “At the end of 2003 there were 14 million users of Internet in Africa, up from 4.5 million users in 2000.”

Faced with the deplorable state of fixed lines for the much needed carriage of data, internet traffic had to, at first, trudge through painfully slow analogue dial up connections with severely limited capacity to carry data streams. Line of sight radio transmission was later introduced as a viable alternative to the limitations posed by fixed telephone lines, but this too had its shortcomings. A more expensive recourse to the deployment of VSAT technology was eventually embarked upon by many internet subscribers in order to increase bandwidth and reliability.

Much like it happened in the mobile telephony industry, the internet industry in SSA spawned its own crop of new local entrepreneurs, professionals and clientele base. The new entrepreneurs were in the form of Internet Service Providers (ISPs), who controlled the more expensive end of the market that required the deployment of expensive satellite communication equipment to handle bulk bandwidth which they sold to downstream operators. The downstream operators, in turn, set up cybercafés which retailed internet by the minutes to their teaming clients. Besides retail of internet services to enable such data transfer services as e-mails and web surfing, the internet entrepreneurs have gone further to integrate the retail of voice services to their clients through VOIP.

Banks and other higher end users obtained the appropriate licenses to install their own VSAT or microwave dish equipment to operate private networks to handle secure data, while wider use of the technology is being gradually implemented by government agencies, health services and businesses.

The Contributions of Mobile Telephony and Internet to Economic Development in SSA Countries

“Information and communications technologies in recent years have been recognized as effective tools for promoting economic growth and sustainable development” (Chen, 2004). And nowhere has this contribution of information and communication technology to economic development been more effectively demonstrated than in sub-Saharan Africa.

The unprecedented growth in mobile telephone and internet use in the region in the past six years has undoubtedly created more positive economic and developmental impact on the region than did donor funds and loans in three decades.

Mobile telephony and Internet use in sub-Saharan Africa have equally opened up a new vista of economic activities that have impacted the region positively in numerous ways.

Communication and information dissemination

For the first time since attaining self rule, many citizens of sub-Saharan Africa were given the tool to exercise their inalienable right to communicate with one another without let or hinder. It has now become possible for them communicate with one another at the click of the send button on a mobile phone or an internet page, irrespective of distance or international boundaries. Accordingly, the technological reality brought about by mobile phones and the internet in SSA has endowed the region with the greatest the tools of development – the ability to transmit, receive and share timely information over great distances. 

Entrepreneurial development

The greatest beauty of the astronomical development and growth of mobile telephony and the internet in SSA is that much of it was done by SSA entrepreneurs and investors, working out of Johannesburg, Lagos or Cairo. Little assistance came from the traditional donor nations. This must have encouraged downstream local entrepreneurs, sub contractors and support service providers to open up shops overnight, providing such economic services as dealership in mobile handsets, operation of telecenters and cybercafés, technical repair services, etc. The multiplier effect of these economic activities has led to more development in SSA and the reduction of the prevailing poverty level.

Employment creation

Numerous new jobs and skills were created in the wake of the implementation of the new order as new service providers swarmed over the landscape engaging both skilled and unskilled manpower, sub contractors and other support service providers. Except for the more technically specialized aspects of the technologies deployed, the service providers were able to employ trainable hands in most aspects of the technology. Thus a new crop of trained personnel – telecommunications technicians, engineers and internet content developers – was born to support the needs of the industry. Other technical support businesses equally emerged to offer services in mounting telecommunication towers and providing energy at the numerous cell sites that were installed by the service providers.

Enhancement of Regulatory Expertise

The need to regulate the operations and services of service providers in a clime previously dominated by state monopolies prompted the creation of regulatory bodies by host governments to carry out the very important duty of allocating and managing frequencies, as well as setting standards and enforcing laws and regulations that would enable harmonious operations between competing service providers. This also opened new avenues of human resource and technological development.

Public Revenue

Revenues accruing to the governments from the licensing of service operators and taxation on operators’ income provided additional sources of income for many governments. The ITU estimated that in 2003 over $4 billion was realized by the respective governments during the licensing rounds. With annual revenue from operations running into billions of dollars, the host governments have equally been reaping sizeable tax revenue from the new service providers.

Commerce and Banking

Mobile phones and the internet have been of immense benefit to commerce and banking in SSA. The banking industry has been able to embark on internet-aided virtual banking services through the linkage of their remote branches and offices; mobile phones have also enabled remote banking services through the use of the Short Message Service (SMS). The stock exchanges and other financials institutions have also added values to their services by embracing internet tools, while commercial outfits in retail, money, and hospitality businesses have joined the plastic money revolution of the more advanced countries.

A Tool for Regional Integration

The aspirations for regional integration among sub Saharan Africa countries has been enabled by the advent of mobile phones and the internet, making it possible for neighbouring countries to communicate with each other without routing calls through international circuits that are located in London or Paris. Plans are also afoot by SSA Countries to develop a Regional African Satellite Communications Organisation (RASCOM) project that aims to provide satellite communication, and effective linkage between Sub-Saharan Africa telecommunication networks with those of the other continents. The chances of the successful implementation of various other regional development and integration plans in sub-Saharan Africa have now been become possible.

Others

Though many challenges still face the region, any follower of economic developments in SSA, would readily agree that the post year 2000 sub-Saharan Africa is much different from what it was in the 90s and earlier, on account of the developments in the  telecommunications industry. Other areas where mobile telephony and the internet have brought so much positive changes and development in the economic landscape of the region include: E-government; Education and research and Healthcare delivery

Impediments and Limiting Factors to the Growth of Telecommunications in SSA

Growth of the telecommunication industry in SSA has undoubtedly faced different types of obstacles; some technological, others institutional or manmade. But the most important of these obstacles and impediments which have confronted the development of the industry in the past and apparently in the future are: 

Political/social instability

Much as post independence political and social instability in SSA brought about the collapse of the limited telecommunication infrastructure left in place by the colonial administrators, the possible re-emergence. For instance, Liberia and Cote D’Ivoire are typical examples of formerly strong and stable SSA economies which unexpectedly degenerated into civil wars and concomitant large scale destruction of public infrastructure and lives. This factor still remains a major impediment to the continuing growth of the telecommunication industry in sub-Sahara African countries.

Bureaucracy and bad leadership

Bad leadership has long been identified, with good reasons, as a major cause of under development in SSA. For example the ineptitude of the emergent local administrators and technocrats, who supplanted the colonial administrators in most of the SSA countries contributed largely to the collapse of public infrastructure inherited from colonial administrations. There were clear instances of equipment break-down resulting from lack of proper maintenance and over capacity utilization. There were reports, too, of corrupt officials diverting funds that were meant for capacity expansion; or of old and dilapidated equipment being installed in the guise of brand new equipment. The continuing control of telecommunication services by the private sector may well be the best chance of ensuring that the factor of inept political or bureaucratic leadership does not obstruct the growth of the industry.

Inadequate of public infrastructure

Such public support infrastructure as electric power needed to run installation were in most places unavailable or insufficient to give the ‘24/7’ round the clock support needed for telecommunications installations. This was one of the major problems which faced most of the mobile telephone operators in SSA. Most have had to generate their own power from diesel powered generators to stay in operation. The percentage of SSA that is fed by reliable grid electricity is still very low. This could result in higher cost of equipment deployment, operations and maintenance.

Inadequate telecommunications backbone

Most SSA countries lacked the telecoms infrastructural backbone needed to support high telecommunications traffic and interconnection between carriers. Most of the existing telephone exchanges ran on obsolete analogue technologies, which had compatibility problems with 2G and 3G telecommunications technologies that were being deployed by the new carriers. This problem confronted most of the new service providers, and forced them to invest additional funds in order to create their own backbone from the scratch

Public policy and regulation 

Many countries in SSA were ill-attuned to working in a deregulated environment necessary to support the operations of private sector operators. The enabling public policies were not in place in some countries, or were inadequate where they existed. Some regulatory bodies did not have the right personnel or equipment to render the all-important duty of regulating the operations of service providers in a deregulated environment.

Technological development

The turnover of technology in the telecommunications and ICT industry of today is quite rapid; a leading technology of today may very well become obsolete the next day. There is also the fact that design and operational mode of most of these emerging technologies are dictated by the needs of consumers in the developed countries, rather than those of the SSA countries. Accordingly, the adaptability of these technologies to conditions in the SSA countries posed peculiar problems, and some of the equipment have been known to break down because of their sensitivity to unaccustomed environmental conditions and power fluctuations.

Limited internet bandwidth

Internet bandwidth allocated to the SSA countries by satellite owners have been known to be far much lesser than what is allocated to the use of smaller developed countries. This has created severe limitations on the availability and use of broadband internet access in  SSA countries.

Trained manpower

The ready availability of trained manpower can also pose challenges to service providers, considering the newness of the technologies available for mobile telephony and internet access. The additional burden of training new employees may be the only available option for service providers.

Adequate Funding

Available evidence has shown that the major international money managers and venture capitalists exhibit a high level of reluctance in investing or backing investors heading to SSA countries. They are known to pay disproportionate interest to the extractive industries to the neglect of the other sectors. This was clearly seen in the fact that most of the service providers that took the gamble in the telecommunications industry in sub-Saharan Africa were home grown – from South Africa or North African nations, and few from Asia. There were scantly any investors from the developed nations, and investment capital attracted premium rates and heavier security and insurance requirements.

Barriers to Growth in the Telecommunications Industry

Government Policy Issues

The political and social upheavals of the past and the present economic rebirth of sub-Saharan Africa have clearly shown the effect government policy could have on the developmental prospects of nations. Trying to underscore this important correlation between government policy and by extension leadership a survey of sub-Saharan Africa’s developmental efforts concluded that “only one African country, Botswana, has been consistently well governed since independence. Not coincidentally, average incomes in Botswana have grown faster than anywhere else in the world in the past 35 years, from bare subsistence to over $3,000 a year” (Economist Magazine, January 15, 2004). In the same manner, the much touted achievements in the telecommunication industry in SSA were only made possible because governments agreed change their policies by agreeing to divestment and privatization of the industry. “These problems of poor policy and weak governance have, in turn, been traced to ingrained anti-colonial and nationalist sentiments, which have allowed obsolete policy thinking to persist longer in Africa than elsewhere” (Moss et al. 2004, as cited in UNCTAD Report 2005, p 31).

Though the IFC recognized in several of its reports that there were growing commitments by Africa’s leaders to put in place conditions needed for private-sector-led growth and development, as has been evidenced in the telecommunications sector, there is still every need for them to consolidate the paradigm shift from public to private-sector-led investment initiatives. The reforms that have been made to pave way for private participation need to be institutionalized in the ethos of public policy and governance in sub-Saharan Africa in order to engender sustainable development in all sectors of the economy. The achievements made in the adjustment of the thinking of policy makers in favour of private sector involvement and ownership of former public monopolies, have to be complemented by the enactment and sustenance of investment-friendly policies.

Though quite a number of inconsistencies and policy summersaults had characterized the economic reforms and privatization drive in many sub-Saharan African countries in the past, these are steadily giving way to more structured reforms in the following areas:

• Business formation services, ownership structure and operational regulations;
• Financial regulations governing the repatriation of profits;
• Port and import documentation reforms;
• Tax, legal and immigration reforms, etc.

The policy direction to be maintained by SSA countries in order to sustain the positive development in the telecommunications and other sectors can best be summarized by the suggestions made in an UNCTAD paper on Rethinking the Role of Foreign Direct Investment, (UNCTAD, 2005):

Sustaining the achievements made in the telecommunication and other reformed sectors in sub-Saharan Africa will require policy makers to have full knowledge of the policy instruments that have worked in the past and review them to assess their relevance to current conditions. These include restrictions on entry, differential taxation, barriers to hostile takeovers, performance requirements linked to exports and local purchasers (local content requirements), ownership ceilings, employment requirements, and so forth. However, these instruments cannot be used successfully in isolation, and policy makers will require a more holistic approach to how they best link up to and complement other policies in support of development targets and tailored to local conditions.

Benefits and Drawbacks of Foreign Direct Investment (DFI) to Host Countries in SSA

Several controversies exist regarding the benefits, the costs, the flow and the direction flow of direct foreign investment into SSA. Some argue that most DFI target the extractive industries to the detriment of the other sectors, while others point to a discriminatory pattern in the flow of FDI in favour of South Africa and North Africa, which have better affinity with the western nations that control the world finances, to the detriment of core SSA countries of Central, East and West Africa.

However, irrespective of on which side contending commentators stand, it is incontestable that FDI has its plus and minus sides, it is equally a well established fact that FDI flow to SSA is grossly less than what goes to other developing regions of the world. There have been further arguments to link the direction of flow of FDI with the reform agendas and accomplishments of recipient nations in implementing political and economic reforms. But according to the UNCTAD , “Despite the efforts of African governments to comply with this policy advice, (accelerating the pace of liberalization, deregulation and privatization), the record of the past two decades with respect to reducing poverty and attracting FDI has been disappointing at best”  (UNCTAD Report, 2004). It is evident that foreign investors have been staying away from African, except for the extractive industries, and “a casual comparism with FDI flow to other developing regions shows that Africa receives a very low share of total global flows and flows to developing countries, and both have been on a steady downward trend for three decades. The continent now accounts for just 2-3% of global flows, down from a peak of 6% in the mid 1970s” (ditto UNCTAD)

Regarding the benefits that have accrued to host countries of DFI , James Petras (Counter Punch, 2005) refuted the claims that DFI creates new enterprises or stimulates research and development of local technological know-how, arguing rather that “Most DFI is directed toward buying privatized and profitable existing markets and selling or renting technology designed and developed at the home office” He accused multinationals in the same publication of charging subsidiaries in SSA excess royalty fees, service and management cost, to artificially or fraudulently lower profits and taxes to local host governments. His other accusations were that foreign investors were only continuing the colonial legacies of treating the developing countries as repositories of raw materials, while they condone frauds and engage in tax evasion and money laundering.

Commenting in the same vein, Liz Stuart, (The Guardian, August 11 2003) argued that multinationals operating in developing countries have been known to water down their corporate responsibility expectations by indulging in acts that have been detrimental to local environment, with the hope that host governments would be reluctant to enforce existing punitive laws for fears of dissuading further foreign investment. Typical examples of this type of irresponsible corporate behaviour have been noted in the Niger delta region of Nigeria, where oil exploring giants have been accused of wantonly destroying the environment and livelihood of local inhabitants, similar accusations have been leveled against foreign investors in the copper mines of Zambia.

Other demerits of DFI in host countries (Petras, 2005) include:

• Increasing the debt trap, by way of foreign investors’ dubiously incurring debts and hoisting them on host countries thereby further jeopardizing their growth and effectiveness.
• Sourcing of funds from local banks and pensions funds in host countries rather than actual inflow funds from the home countries of investors.
• Foreign investors ever driven by the quest for more profit share little commitment with the developmental pains of host countries as they are ever willing to wind down their operations once the expected profits failed to materialize.

What then have been the good effects of DFI in host countries and where have foreign funds been invested in SSA?

Commenting on the benefits that have accrued to Africa since the ‘70s by way of DFI, the Africa Private Sector Group of the World Bank reported, that “Since 1970, Africa has lost market share and has not significantly diversified […] and in the same period its share of global economy has declined to about 2% of world trade.”

In another report that sought to track the destination of the little foreign capital that trickles into SSA, the UNCTAD (2004) reported that, “The 24 countries in Africa classified by the World Bank as oil and mineral dependent have on average accounted for close to three quarters of annual FDI flow over the past two decades.”  The same UNCTAD Report revealed that rather than attract direct funds from outside Africa for the other sectors of the economy, much of those investments have come from within Africa itself as it revealed that “South Africa was the largest investor into the rest of the continent over the period 1990-2000, with investments averaging about $1.4 billion yearly, or a total of about $12.5 billion over the decade.” For example the investment pattern and the much touted phenomenal growth recorded in the telecommunications industry in SSA over the past decade can be directly traced to Southern African investors like MTN, Vodacom and Celltel and Econet Wireless. Except for equipment vendors and manufacturers, there had been very little involvement by foreign investors from the Western world in the current investment activities in SSA telecommunications industry..

Conclusion

The positive growth recorded in the telecommunications industry in sub-Saharan Africa has demonstrated that, contrary to previously held views, the region is responsive to properly targeted economic development initiatives. What is required  on the part of potential investors is the type of commitment exhibited by the various telecoms service providers and investors who defied all odds to invest in the region. One other key to the success of investors in the telecommunications industry in sub-Saharan Africa is that investors think and act differently when they realise, as did the South African-based service providers who led the investment drive in the industry, that they are corporate and individual citizens of the region. Earlier foreign investors in SSA have on the other had approached the issue of investment in SSA with the mindset of colonialists interested only in the spoils of investment. And not the excess baggage that went with it.

The decade-old rebirth telecommunications industry in sub-Saharan Africa is yet at its infancy, and still presents enormous opportunities to serious investors. The ITU (2004) estimated that the demand for telephone services in Africa will hover between 143-200 million subscribers by the close of the decade. Apart from the immense investment potentials presented by these estimates regarding future roll-out of telephone services, trade in telecommunications technology and services present equally tremendous opportunities.

Though, the telecommunications industry in sub-Saharan Africa was jump-started with such top of the line technologies as GSM, CDMA, 2G and 3G technology platforms, the region still has a lot of technological black holes that would require plugging in order to sustain the industry.

It is obvious that mobile telephony will dominate the African telecommunications market for a long time in the future suggesting that much of future the development in the sector would be in this area. Such developments would also determine the nature of technology to drive the burgeoning Internet service market in the region. This means that potential investors should be looking at affordable technologies that would enable the carriage of broadband internet traffic over mobile platforms in order to cash in on the expected explosion of internet service in SSA as commercial services, public administration, social services, health and education services go on line.

Finally concerted efforts have to be made to strengthen governance and leadership institutions in sub-Saharan Africa, considering the important role they play in policy matters and the stability of the polity. This is because any wrong choice of policy options or degeneration into warfare or social disorder in sub-Saharan African could obliterate all the achievements recorded in the telecommunications industry over the past decade.

References

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Maps:

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Africa Policy Information Center. Thinking Regionally Africa Map. Retrieved December 23, 2006 from http://www.africaaction.org/bp/regmap.htm