Financial ExpertSpeak: Africa must build its own savings to drive its own destiny
Dr Gachao Kiuna, CEO of TransCentury, a Kenya-based infrastructure mammoth, noted that Mauritius has made tremendous strides in infrastructure that can be replicated successfully outside of the island economy. (Image: Company)
Dr Gachao Kiuna, CEO of TransCentury, a Kenya-based infrastructure mammoth with three operating divisions across 14 countries in East, Central and Southern Africa, spoke to AfricaMoney on the sidelines of the ABAX forum held recently in Mauritius. Our financial expert noted that Mauritius has made tremendous strides in infrastructure that can be replicated successfully outside of the island economy. He also highlighted that Domestic Direct Investment is critical for Africa to steadily build it’s own savings and drive it’s own destiny without having to fully rely on external funding.
Edited excerpts from an exclusive interview:
You head Kenya’s most iconic investment firm that is listed on the Nairobi Stock Exchange. Can you tell us what is the secret of your company`s success?
Growth and transformation are part of the DNA of TransCentury and are a key driver of its success. TransCentury started as a small Investment Club with no formal management, transitioned into a private Investment Company and later broke out to be a Publicly listed Infrastructure Company. All of this has required a solid vision and ability to manage the challenges that come with growing and transforming organisations.
What has been the biggest challenge that TransCentury has faced during the past years, in view of, first, the global economic crisis, and secondly, the slow recovery from it?
Africa has been growing off a very low base. Worse still, there is a lot of suppressed growth due to years of poor economic stewardship and macro-economic volatility. The global economic crisis did not stem from Africa, but was wide-reaching enough to pose both risks and opportunities for the continent. In the case of TransCentury, with tightening availability of capital being the biggest challenge that the company has faced, we are trying to see through some of its ambitious projects in an environment where lenders are less bullish to support large projects. Although Foreign Direct Investment (FDI) remains a challenge for Africa, the emergence of Domestic Direct Investment (DDI) is critical but requires Africa to steadily build it’s own savings and drive it’s own destiny without fully relying on external funding.
In June 2014, TransCentury announced that it is going to invest a substantial sum in a 35-megawatts geothermal power plant consortium in Menengai. What is the reason behind entering the power generation sector in Africa?
Power is central to any economy in the world. Without power, Africa cannot achieve its ambitions and economies will continue to suffer. The challenge for closing the gap that exists in the power sector is enormous and requires the participation of private investors in collaboration with governments. The 35 MW Geothermal project is a perfect example of that, whereby the Government of Kenya has taken on the drilling risk to discover steam, and private investors such as TransCentury are deploying capital and expertise to develop power plants using the steam. The power plant is perfect for Kenya as, first, it has the lowest levelised cost (i.e. capital plus operating costs per unit of power) of power in the country; secondly, it is close to Nairobi which is the main load centre; thirdly, it has a high availability of power (98% load factor) and finally, it has limited fuel risk as it does not rely on importation of fossil fuel, also improving security of supply and balance of payments for the country in the process.
Africa is the world’s youngest continent and is expected to have the biggest labor force in the world by 2040. According to you, how can the African economy benefit from this labor force and use it to its full potential?
Africa must industrialise and develop manufacturing for its own use and exports. This is the only way to make use of the large labour force. Today, Africa has very limited number of manufacturing jobs and in fact is exporting jobs via its reliance on imports vs. local value addition. To be globally competitive, Africa must build its domestic market first in order to build expertise and scale. This will require vision and collaboration between Government and Industry and a drive away from cheap imports and raw material exports towards value addition. If Africa does this, it has every opportunity to create a new industrial hub as labour prices in more developed emerging market economies continue to escalate.
According to you, what are the major risks that investors may face when doing business in Africa?
A lot is made of political risk in Africa. In reality, this issue is more perceived than true. It is a risk and has been more significant in the past but today the larger risks which are far greater are embedded in, first, the financing risk – and, in particular, long term funding – where very limited commercial capital is available and funding tends to be costly and delayed; and secondly, execution risk, as many operators lack experience operating in Africa and often underestimate the challenge of getting things done in an environment where much is still being developed.
Even though Africa is rising, we can still see that investors are reluctant to invest in the African continent. According to you what are the reasons for this unwillingness on the part of investors to take the plunge and invest in the region?
Investors struggle to appreciate that unlike in developed markets, there are limited options of both entry and exit of investments. Often, investors are looking for entry and exit mechanisms that match what they are used to in developed markets that don’t exist in Africa. To invest in Africa, you need a fresh mindset vs. benchmarking against what are the norms in other parts of the World. This requires some time to understand and take the leap of faith.
The Mauritian government is intensifying its efforts to provide support to investors to tap into the African continent. In your opinion, what are some key investments opportunities in Africa that Mauritius can help investors to home in on?
The two most obvious opportunities are agriculture and infrastructure. These are the two most untapped opportunities where Africa has a big structural problem. They have the highest potential to drive GDP growth, job creation and exports, and by definition, are areas where one can build very scalable businesses which also have a natural competitive advantage, given Africa’s demographics and climate. In agriculture in particular, Mauritius has both the capital and the know-how to play an important part. On infrastructure, Mauritius has also made tremendous strides that can be replicated successfully outside of the island economy, with even better returns in more populated countries with even better returns and utility.
Finally, according to you, what should be done in order to push Mauritius to the next level in its quest to become the financial hub for Africa?
Capital in Africa is not well organised. This has a big impact on savings and long term growth. Development of domestic capital providers such as pension funds, insurance companies, banks, capital markets and so on, continues to be critical for Africa’s development. Mauritius has a big opportunity to play a central role in organizing such capital flows for investment in Africa, and not just Mauritius alone, through its strong financial institutions, stock exchange and role as a hub for capital flows into the continent. More homegrown Mauritian institutions must start looking to participate in investment outside Mauritius and not just facilitate it.