Home » Connectivity » An Update on Africa, Part 2: Mining, Oil and Gas, and Telecommunications

An Update on Africa, Part 2: Mining, Oil and Gas, and Telecommunications

October 14, 2010


In yesterday’s post, I discussed four of seven economic sectors examined by McKinsey & Company analysts in a report issued earlier this year [“Africa’s path to growth: Sector by sector,” McKinsey Quarterly, June 2010]. Those four sectors were agriculture, banking, consumer goods, and infrastructure. This post will focus on the final three sectors: mining, oil and gas, and telecommunications. Let’s begin with mining [“Mining: Unearthing Africa’s potential,” by Pepukaye Bardouille, Alasdair Hamblin, and Heinz Pley]. Bardouille, Hamblin, and Pley write:

“Africa’s mining sector presents a paradox: although the continent is strongly endowed with mineral resources, mining has not been the consistent engine of economic development that people in many countries have hoped for. Nor, to date, has Africa attracted a share of global mining investment commensurate with its share of global resources. Unlike the output of most economic sectors (though like oil and gas), most minerals are globally traded. Global demand is therefore driven primarily by the needs of developed nations and the pace of growth in a few large developing countries. What’s more, mining areas in Africa compete with those elsewhere for development funding. From a growth perspective, the question facing the sector is thus whether and how Africa can make its full potential contribution to satisfying the world’s ever-growing need for mineral resources and capture wider socioeconomic benefits from their development.”

One caution about relying on extractive industries as a foundation for economic growth is that commodity markets are historically volatile. That makes long-range economic planning difficult. In fact, few economies have ever managed to thrive based solely on the sale of natural resources. Bardouille, Hamblin, and Pley continue:

“Many parts of Africa have long been known to be rich in mineral resources. Eleven of its countries, especially in southern and western Africa, rank among the top ten sources for at least one major mineral. The continent has a majority of the world’s known resources of platinum, chromium, and diamonds, as well as a large share of the world’s bauxite, cobalt, gold, phosphate, and uranium deposits. The development of these resources has faced more significant challenges, however, when compared with the experience of more developed mineral-rich countries, such as Australia or Chile. Even outside well-publicized conflict zones, many African countries have been thought to pose high political and economic risks for investors. Furthermore, infrastructure problems often hinder development: many bulk mineral deposits require multibillion-dollar investments in rail and port facilities to allow ore or semiprocessed minerals to reach their markets. Such investment decisions are not taken lightly, especially for less stable countries where the rule of law and security of tenure are not necessarily guaranteed.”

Corruption has been one of the primary reasons that investors have avoided investing in African businesses. Corrupt African nations pose high political and economic risks for investors. Profits from extractive industries have more often lined the pockets of corrupt officials than the vaults of national treasuries. Emerging market countries like China, India, and Brazil that are trying to secure access to resources at discounted prices have been willing, in recent years, to take the risk. Bardouille, Hamblin, and Pley report, however, that “few projects have been developed to the point of production.” They continue:

“The recent financial and economic crisis has hit the global mining industry hard—and Africa at least as severely as other regions. Commodity prices slumped by 60 to 70 percent in late 2008, although they have since recovered considerably. There is now less appetite for the relatively high risk that usually comes with mining in many African countries. Despite the recent market turbulence, most observers expect demand for major mined commodities to grow strongly in the next 10 to 20 years, to support increased urbanization and infrastructure build-out in China and the emergence of India’s middle class. Africa, given its share of global resources, will surely play a significant part in meeting that demand.”

One of the things that has stopped resource-rich nations from achieving substantial economic progress is the so-called “resource curse.” Despite current optimism about the future, many African countries continue to suffer from the curse [“Resource curse inflames west Africa’s suffering,” by Tom Burgis, Financial Times, 11 August 2010]. Burgis reports:

“It is no coincidence that the kind of horrors that Charles Taylor, the former Liberian president, is accused of perpetrating and mineral riches, such as the diamonds he is accused of plundering, are often found together. West Africa’s soils groan with gold, ores and gems; they yield cocoa and timber in prodigious quantities. They have also been suffused with blood spilt in pursuit of the mineral revenues that are often the only glimmer of wealth in a region beset by poverty. … While the idea of a ‘resource curse’ has its critics, for many analysts the child soldiers, sex slaves and severed limbs of Sierra Leone’s war were the collateral damage of a scramble to control its diamond fields. West Africa has since enjoyed a few years of fragile peace. But violence has plagued Nigeria’s oil province and the fringes of the Sahara under which lie Niger’s uranium stocks. Coups are also coming back into fashion. What troubles many in the region is that the economic system that foments conflict shows little sign of changing. ‘It’s a general pattern in almost all west African countries,’ says David Zounmenou, a west Africa expert at the Institute for Security Studies in South Africa. ‘The economy is structured in such a way that the political elite will do anything to capture the state and control the resources.’ Many of those economic structures have scarcely altered since independence, comprising a small elite composed of vying factions, a negligible middle class and a vast majority in the sprawling informal sector, farming, hawking or just somehow getting by.”

As noted above, corruption can be irresistible to leaders, businessmen, and bureaucrats. Burgis continues:

“In many countries minerals or oil account for 80 per cent or more of government income and an even bigger share of hard currency earnings. For disenchanted sections of the elite or the military, the prize can be irresistible. February’s coup against the authoritarian president of Niger, whose uranium fuels France’s nuclear-powered economy and has attracted the attention of big-spending Chinese groups, added to a resurgent trend in putsches which appears to have tracked the boom in commodity prices. As a recent report by the African Development Bank and the Organization for Economic Co-operation Development noted: ‘Obtaining natural resource rents distracts governments away from more politically demanding forms of taxation.’ Economists warn that the generally low share of income taxes in government revenue undermines the basic contract between rulers and ruled. Because they do not rely on the population for funds, governments feel scant obligation to provide basic services.”

It is never a good thing when rulers feel they are free to ignore the needs of those they are supposed to serve. With so much money involved, rather than answering to the people, “governments are more bound to the handful of foreign mining or oil companies that fill the coffers – often under contracts shrouded in secrecy, allowing corruption to thrive.” Burgis concludes:

“Efforts to increase transparency have made some progress. The Kimberley Process, introduced after advocacy groups such as Global Witness documented the role of ‘blood diamonds’ in Sierra Leone, has seen producers start to certify stones’ provenance. But few countries trapped at the bottom of the commodity chain have proved capable of converting their resource wealth into infrastructure that could engender a more diversified, stable economy. Even Nigeria, a key oil supplier to the US, fails to generate enough electricity to keep the lights on, let alone allow manufacturers to thrive. Until that cycle is broken, the incentive for unrest looks likely to abide. Said Djinnit, the senior United Nations official in the region, says: ‘When you are in the government you have access to power, to wealth; if you are excluded you have no access, you are excluded from wealth. In that sense it’s a struggle for survival at the highest level.'”

The next sector examined by the McKinsey report is oil and gas [“Oil and gas: New sources of growth,” by Occo Roelofsen and Paul Sheng]. Roelofsen and Sheng report:

“African oil and gas have become important components of the world’s hydrocarbon supply–demand balance. By 2015, 13 percent of global oil production will take place in Africa, compared with 9 percent in 1998—a 5 percent compound annual growth rate (CAGR). African oil projects have attracted substantial investment thanks to their cost competitiveness versus those in other regions. What’s more, the oil and gas sector is a foundational element of economic growth for the continent, as 19 African countries are significant producers. It accounts for a significant part of the state’s revenues there and represents a prime mover for employment, domestic power development, and, in many cases, infrastructure development (for instance, schools, hospitals, and roads). The sources of growth in oil and gas are evolving. In the past decade, production increases came primarily from deepwater oil in Angola and Nigeria, along with new sources in countries such as Chad and Sudan, as well as offshore gas in Egypt. Production of deepwater oil will continue to grow (in the Gulf of Guinea, for example), while onshore gas and new-resource development in emerging East African hydrocarbon producers (such as Uganda) are expected to become the other main engines for growth.”

Oil revenue sharing is likely to be at the root of the next major flare-up in Africa when Southern Sudan votes in January to secede from the north. Most of Sudan’s oil reserves are found in the south. Roelofsen and Sheng conclude:

“International oil companies as a group have fared well in Africa, as the licensing of acreage and M&A gave them access to valuable properties. These companies have also moved expeditiously into the new, technically complex frontiers of liquid natural gas, deepwater oil, and underdeveloped countries (Chad, for example). Superior operating capabilities and financial muscle continue to give the internationals a competitive advantage in Africa; however, sustained growth has eluded those that acquired little and mainly operated more mature fields or had operations in countries with geopolitical and security risks.”

The final area examined in the McKinsey report is telecommunications [“Telecommunications: From voice to data,” by Zakir Gaibi, Andrew Maske, and Suraj Moraje]. In yesterday’s post, I noted that mobile phones have encouraged remarkable changes in African economies and I referred to a couple of previous posts that I’ve written on the subject [Mobile Phones in Africa and Mobile Phones and Development]. Gaibi, Maske, and Moraje write:

“Telecommunications has been an important driver of Africa’s economic growth in the last five years. The market is increasingly competitive, and world-class local enterprises are emerging in voice and data services. Telecom revenues have increased at a compound annual growth rate (CAGR) of 40 percent, and the number of subscribers rapidly exceeded 400 million. To meet the increased demand, investment in telecom infrastructure—about $15 billion a year—has also grown massively, with a 33 percent CAGR from 2003 to 2008. But annual growth will slow down to the low double digits—still quite enviable by Western standards—as the traditional urban markets become saturated; penetration in major cities such as Abidjan (Côte d’Ivoire), Lusaka (Zambia), and Libreville (Gabon) is 70 percent or more. Still up for grabs are two key pockets of growth, data and rural voice, with an additional revenue pool of $12 billion to $15 billion by 2012. About 50 percent of the growth in voice will come from rural areas. To capture this opportunity, however, operators and regulators must forge new industry practices. The industry structure should be rationalized, for example, because many markets, even smaller ones, have four or more players. Also needed are new operating models, which might be created by slashing the cost of deploying base stations by 50 percent or more, innovating in distribution and recharging practices, and seeking more individualized pricing models, ideally delivered directly to customers rather than through advertising.”

Gaibi, Maske, and Moraje recognize that mobile phone users in developing countries use technology differently than users in the developed world. They can’t afford expensive monthly plans or fancy phones and users living in areas without electrical power have had to be creative in finding ways to recharge cell phone batteries. Most of these challenges have been solved by those most familiar with them, not by big multinational corporations — that’s a good thing. Gaibi, Maske, and Moraje conclude:

“Data services are the other large growth pocket, of about $5 billion, and that’s not all. Experience in other countries suggests that a 10 percent increase in broadband penetration translates into additional GDP growth of some 0.5 to 1.5 percent. Social welfare improves as well; many small-boat fishermen in Senegal, for example, now use mobile-data services to select the best ports for unloading their catch each morning, increasing sales by 30 percent. Applications such as mobile health care will also provide significant benefits, helping governments to stretch thin resources further. McKinsey’s experience in developing markets indicates that 80 percent of health care issues can be resolved by mobile phone, at a cost per capita that is 90 percent lower than that of traditional health care models.”

One country that strongly believes that IT is the key to the future is Rwanda [“IT leads a nation’s recovery, by Jessica Twentyman, Financial Times, 16 June 2010]. Twentyman begins by reporting how Rwanda is using IT to improve its health care system:

“Huge stacks of paper-based medical reports from local health centers are being input into a computer at Nyamata Hospital, 24 miles south of Kigali, Rwanda’s capital. Dariya Mukamusoni, the hospital’s director, is supervising the process. Data entry creates a lot of work, Dr Mukamusoni grumbles cheerfully. She and her team are obliged to meet strict weekly and monthly deadlines set by the Ministry of Health for its completion. Data quality, meanwhile, is a constant challenge, requiring regular monthly meetings with staff at each of the district’s 11 health centers to ensure that high standards are enforced. Dr Mukamusoni’s complaints about data are typical among managers all over the world. But the results of the Nyamata Hospital team’s efforts are overwhelmingly positive for people living in the Bugesera district that the hospital serves. The reports contain a wealth of valuable information that is helping medical staff tackle some of the district’s most pressing health challenges, from monitoring the health of expectant mothers to ensuring that HIV patients take their antiretroviral drugs correctly, Dr Mukamusoni says. It is part of an ambitious, $32m e-health initiative, launched in September 2009 and supported in part by the Rockefeller Foundation.”

Health care, however, is not the only sector that can benefit from better connectivity. Twentyman continues:

“Beyond the health sector, Rwanda’s President Paul Kagame believes that information and communication technology will provide an answer to many of the development challenges his country faces, as it seeks to recover from 1994’s genocide, during which 800,000 Rwandans were slaughtered in 100 days. Since then, Mr Kagame has overseen an impressive return to economic and political stability, in which ICT has taken center stage. ‘From the start, ICT was a major priority in the reconstruction, because we recognized that information and communications would be vital to delivering better public and private sector services and improving lives generally. The benefits of ICT cut across all sectors, from health and education to agriculture and commerce,’ he explains. ‘But as Rwanda moves forward, it’s vital that we focus on the role of ICT in meeting our long-term goals, not just addressing immediate needs. That means connecting Rwanda to global networks of talent, knowledge and resources for our future prosperity.’ In 2007, Rwanda was named east Africa’s number one ICT nation by the United Nations Conference on Trade and Development. Unctad noted that Rwanda’s ICT sector budget, at 1.6 per cent of gross domestic product, was on a par with rich nations in the Organization of Economic Co-operation and Development and far above the African average. For developing countries, the kind of political will and commitment to technological progress demonstrated in Rwanda is vital if problems of poverty, education, health and social exclusion are to be tackled effectively, says Hamadoun Touré, secretary general of the UN’s International Telecommunication Union (ITU).”

Dr. Touré believes that countries that fail to place a high priority on information technologies are being short-sighted. He says. “Technology can be a vital tool in the proper management and distribution of food, for example. At a national level, more creative thinking is needed, and ideas need to be supported by development agencies and private-sector companies.” Google is betting that IT will play a prominent role in Africa’s future [“In Africa, Google Sows Seeds for Future Growth,” by Will Connors, Wall Street Journal, 15 May 2010]. Connors reports:

“Despite some of the lowest Internet penetration rates in the world, Africa has enticed Google Inc. Lured by the continent’s growth potential, Google aims to convince entrepreneurs, students and aid workers to make use of its search, mapping and mobile-phone technologies. … Despite the expense of Internet service, Google executives say Africa represents one of the fastest growth rates for Internet use in the world. Nigeria already has about 24 million users and South Africa and Kenya aren’t far behind, according to the World Bank and research sites like Internet World Stats. ‘The goal is to get more people online,’ said Estelle Akofio-Sowah, the Google country head in Ghana. … Google wouldn’t disclose how much it has invested in Africa-based operations, and says it doesn’t yet have a revenue target for the continent. The company—which has a physical presence in Senegal, Ghana, Nigeria, Kenya, Uganda and South Africa—says it has around 40 employees working on Africa-focused projects, with some based on the continent and others working from elsewhere.”

In the past, celebrities interested in helping Africa have focused primarily on raising humanitarian aid. One of the most visible celebrity advocates for Africa has been Bob Geldof. I think it is significant that Geldof has now turned his attention to raising investment rather than humanitarian funds for Africa [“Geldof seeks to raise $1bn for African investment plan,” by William Wallis and Martin Arnold, Financial Times, 3 September 2010]. Wallis and Arnold report:

“There are plenty of fund managers who want to be rock stars. Now, there is a rock star who fancies himself as a fund manager. Bob Geldof, the singer and campaigner for aid to Africa, is seeking to raise $1bn from institutional investors for a private equity venture on the continent. The pitch he is making represents a remarkable shift into African business for a man more often associated with his relentless advocacy for debt relief and aid to Africa. Should he launch the fund successfully, it would be among the largest in a wave of new private equity ventures seeking to capitalize on resurgent economic growth on the continent. Among other pledges towards the fund, the African Development Bank has earmarked $50m. The International Finance Corporation, the World Bank’s private sector arm, has offered a similar amount. Mr Geldof also committed an undisclosed amount of his own money. A person familiar with the project said Mr Geldof aimed to use the profile he has built on the continent in the 25 years since he spearheaded the Live Aid appeal for victims of the Ethiopian famine, and high level contacts he has, to raise funds and secure deals. He would not be involved with day-to-day management. The fund would be run by Mark Florman, a former executive at UK buy-out house Doughty Hanson, who has recruited experienced Africans to work on the venture. … The fund, called 8 Miles, intends to make about 20 investments of between $15m and $80m in agribusinesses, financial services and telecommunications.”

The fact that Geldof plans on investing in three of the seven sectors examined by McKinsey & Company analysts underscores the fact that the analysis is on target. As noted in yesterday’s post, “quickening economic growth cannot obscure the continent’s significant problems—among them, high levels of poverty, political instability, poor education, excessive government bureaucracy, and corruption.” Nevertheless, the economic vector for many African states is headed in the right direction.

Related Posts:

Full Logo


One of our team members will reach out shortly and we will help make your business brilliant!