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Upwardly mobile: The prospects for the African telephone industry

Date 25/06/2002

Blakeney Management Ltd

The economic background

The African economic environment has changed radically since the end of the Cold War. During the Cold War, the perceived strategic importance of individual African countries allowed African governments to conduct their financial affairs without regard for the consequences, in the knowledge that one or the other of the Cold War blocs would ultimately underwrite their economies.

Figure 1: World GDP growth 1997-2002

Since the end of the Cold War, African governments have been as subject as the rest of the world to the global trend towards democracy and accountability, and towards privatisation of state assets. Most importantly, Africa emerged from the Cold War as the weakest region of the world economically. The reality with which African governments have been faced in the post-Cold War world is that they cannot access foreign credit without the approval of the IMF and the World Bank. These institutions have insisted on the liberalisation of African economies and the rollback of government involvement as a condition for their support. The results of these moves in Africa have been similar to those in the former communist world. After an initial shock of adjustment, the economies are now beginning to show rapid growth, albeit from a very low base. Africa's position as a primary producer means that short-term economic growth rates are affected by swings in commodity prices, but the pattern of emerging growth is unmistakable.

A particular feature of African growth shown by Figure 1 above is its lack of volatility when compared with other emerging regions of the world. Africa was relatively unaffected by the 'emerging market crises' of 1994-95 and 1997-98 which resulted in sharp contractions in many of the faster-growing economies.

African telephony in the post-colonial era

During the post-liberation, Cold War era of 1960 to 1990 African telecommunications were without exception in the hands of state-run telecommunications monopolies, some of which operated with foreign technical partners. Before this, in the last period of the colonial era, African telecommunications were undeveloped but no more so than in much of the third world.

Between 1960 and 1990, the African TMT industry was starved of investment capital. During the early part of this period, there was a flow of investment capital into the continent and many Africa economies had positive trade balances as a result of the high level of commodity prices. The capital available was allocated by governments on an inefficient basis with little thought for return on investment. A significant part of the capital inflow was stolen by people in authority. The majority of the rest was allocated to social spending or to large and usually unsuitable infrastructure and basic industry projects. Telecommunications were a very low priority. There were three possible reasons for this: telecommunication development had no direct social benefit; telecommunications were not seen to produce export or hard currency revenues; and the growth of freely available telecommunications was seen as a threat to authoritarian political regimes. During the latter half of the 1960--1990 period the flow of investment capital into Africa began to dry up and commodity prices weakened. Telecommunications remained a low priority for the reasons stated previously and received even less investment.

This situation continued until the advent of the cellular era in the late 1990s. A further factor crimped the growth of telecommunications. African governments, increasingly starved of revenue from traditional aid sources and from the receipts of exports of primary products, looked to the national PTTs as convenient cash cows and providers of patronage. As a result, communications pricing was amongst the highest in the world, particularly for long-distance traffic.

Before the boom -- African TMT in 1998

Table 1 shows the state of African TMT in 1998 before the growth of cellular and the internet began to transform African telecommunications. The table compares nine sub-Saharan countries and two North African countries with three comparators: Thailand, as an example of an Asian developing country, South Africa, as an example of what is possible in Africa with good management and access to investment capital, and Western Europe, as an example of first world development levels.

Table 1: African TMT in 1998

[click for full text]

The table shows that in 1998:

  • Fixed-line penetration in sub-Sahara was less than a tenth of the South African level, while North Africa still lagged South Africa and Thailand by a wide margin.
  • The waiting time for installation of a fixed line in many large African countries was virtually infinite.
  • While local calls were subsidised to keep them in line with world levels, the cost of international calls was the highest in the world and was a multiple of the levels seen in the developed world.
  • Average revenues per line (ARPUs) were exceptionally high.
  • Cellular phone penetration was still at almost immeasurable levels.
  • PC availability and internet usage in sub-Sahara were running at a level of about 5% of Thailand and 1% of South Africa.

The cellular revolution

In the mid to late 1990s cellular telephony was introduced to Africa. It proved to be particularly suited to the continent in contrast to the copper-wire, circuit-switched technology of the fixed-line era. Fixed lines are difficult to lay and establish in areas which lack infrastructure; they are expensive to operate; and they need high-cost maintenance from skilled engineers. All three of these factors make fixed lines unsuitable for Africa apart from a few pockets such as South Africa, Mauritius and Reunion. Cellular technologies, on the other hand, are cheap, rapidly deployable, scalable, easy to maintain and to operate. These characteristics make them ideally suited for Africa, a continent where cost and maintenance considerations are critical.

A further factor has underlain the extraordinary growth of cellular in Africa: the development of the pre-paid business model. Establishing credit is difficult in Africa; a telephone system dependent on billing users after use would have strictly limited non-business application. Signing up subscribers on a pre-paid basis both eliminates the credit risk and gives the provider a float of interest-free capital. Virtually all the non-business growth in cellular in Africa has been attributable to the pre-paid subscription model.

African TMT differs from TMT in the more developed world in one important respect. In the first world, cellular phones, e-mail and access to the internet are a useful additional method of communication. First world businesses and individuals can function well without them thanks to the ready availability of alternatives in the form of universal fixed-line availability and smoothly functioning postal and fax services. This is not the case in Africa. Lack of access to functioning alternatives means that the cellular phone and the internet have become the default method of communication in Africa. Businesses ranging from multinationals to market traders cannot function effectively without them. In this sense Africa is leaping a technological generation. No-one will ever give Africans universal access to fixed-line telephony and many of the applications of fixed-line in the developed world for uses such as internet access will be performed by cellular technology and its derivatives in Africa.

Policy developments

Whilst public telephone networks (PTNs) have always been seen as having 'value' by African governments, mobile telephony was all but ignored. Without exception, African governments viewed mobile telephony as an irrelevance whose high cost and 'exotic' technology would prevent its popular application. As a result the earlier cellular licences were awarded for free in the mid 1990s. It is noteworthy that the first sub-Saharan licence was not allocated in one of the more developed African countries such as Botswana or Zimbabwe but to Telecel in the DR Congo, or Zaire as it then was. In Zimbabwe, the Mugabe government attempted to block the award of a licence to Mr Masiyiwa's Econet. It would have been relatively easy at that time to halt Mr Masiyiwa by charging a high price for the licence. Instead the government fought Mr Masiyiwa in the Zimbabwe courts and lost, with the result that Econet was awarded by the Supreme Court a licence of particularly wide scope at no cost.

Since that time African telecommunications has gone through a similar cycle to the rest of the world in terms of licensing costs. Governments soon became aware of the high prices being fetched in auctions in such countries as the United Kingdom. Transactions in the 1998--2001 period have been conducted by a number of methods -- such as sale for a fixed price, beauty parades and open auctions to the highest bidders -- but generally reflected the authorities desire to derive maximise financial and economic benefits from the licensing process. This process culminated in a number of high-priced awards. The most hotly contested bid was the Nigerian licence. Five bidders entered the auction; the three winners paid USD285m each. One of the winning groups forfeited their deposit after being disqualified for late payment, thus increasing the licence value of the two remaining winners -- MTN Nigeria and Econet Wireless Nigeria. In a subsequent secondary round of financing it is thought that a higher value was put on the EWN licence. The highest award of 2001 was in Algeria where Orascom Telecom, the Egyptian company, paid USD737m for the sole licence being awarded. They outbid the next highest bidder by over USD300m.

The trends noted elsewhere in the world have also affected Africa. A number of recent licence bids and privatisations of PTTs have been cancelled because bidders were unwilling to pay high enough prices. It appears that African governments and their advisers are still looking at the high values of early 2001 and have not yet reacted to the secondary market reality of 2002. As examples of this the award of Telkom Kenya to an Eskom/Econet consortium was cancelled. The winners of the recent Nitel (the government national operator) privatisation in Nigeria have been unable so far to raise the USD1.3bn required for a 51% interest under the terms of their winning bid, and the underbidders have now declared that they have no interest in re-bidding at any price. Meanwhile the sale of Telecel, the pan-African operator, by Orascom, its 80% owner, in an attempt to raise finance to cover the cost of their Algerian bid which was scheduled to close before the end of 2001, is still continuing while Orascom's investment bankers search for a buyer who will attach a positive value to the company.

African TMT -- the next five years

Licence prices and the secondary market prices of telecommunications companies active in Africa have declined as sharply as they have in the rest of the world, as the examples at the end of the last section make clear. There are few publicly quoted African operators: Telecel is part of Orascom, MSI Cellular is a private company, and only the Zimbabwe portion of the Econet Group is quoted and that on the Harare exchange. Other African operators are subsidiaries of large global groups such as Vodafone and France Telecom and comprise but a small part of their parents' operations. Orascom and its affiliate Mobinil, the Egyptian cellular company, are publicly quoted: Orascom has declined from a high of EGP68 to a current price of EGP13, Mobinil from EGP184 to EGP32.

While African entry prices have moved in tandem with the rest of the world, the prospects for the African TMT industry remain very different as the following sections make clear. The global TMT boom of the 1995--2000 period has ended. Most first world, and many developing world, countries are approaching saturation point in TMT applications under present technologies. Growth rates have slowed to conventional single figure 'utility rates'; the resumption of growth is predicated on the increasingly delayed take-up of new technologies such as '3G'; the fiercely competitive environment has resulted in a sharp fall in profitability which is in turn putting balance sheets under severe strain. The key determinant in this change in fortunes has been the slowing of subscriber growth.

Forecasts of subscriber growth are the critical variant in determining the outlook for telecommunication companies. Such forecasts derive from comparing existing penetration or 'tele-density' with potential tele-density. To arrive at such a forecast it is necessary to estimate the size of the addressable market. Low tele-density does not in itself indicate market potential. Addressable market analysis attempts to measure potential demand for telecommunications services by taking account of national income, income distribution, population demographics and tastes. Comparison of the addressable or potential market with current tele-densities gives an indication of the extent to which actual demand at a given level of income is under-supplied or saturated in each market.

Table 2 gives an indication of how undeveloped the African cellular market remains five years after the beginning of the cellular 'revolution' in Africa.

Table 2: Cellular tele-density

Region 2000 2001 2002 2003 2004 2005
Western Europe 63% 76% 83% 88% 91% 93%
North America 39% 46% 52% 57% 62% 66%
Latin America and Caribbean 12% 16% 19% 22% 24% 26%
World 12% 15% 17% 18% 20% 21%
Asia 7% 8% 9% 10% 11% 12%
Eastern Europe 7% 9% 11% 13% 14% 16%
Africa 1% 2% 2% 3% 3% 4%

It was not until the year 2000 that tele-density in Africa crossed the one phone per hundred people mark, one-seventh the level in Asia and Eastern Europe, the next least developed areas. It is this exceptionally low level of penetration that gives Africa its unique growth potential at a time when growth in the rest of the world is slowing. It is noteworthy that even following the five years of extremely rapid growth that are forecast for Africa in this paper, the level of cellular tele-density in 2005, at 4%, will still be only just over half the 2000 level in the next two least developed areas and less than one fifth of the world average in 2005.

Simplistic extrapolations of first world experience to the African TMT market can result in an under-estimate of potential market size. Affordability is a key determinant and initial costs to the consumer are the biggest hurdle to using telecommunications services. These comprise the cost of handsets, activation fees, and credit-worthiness for conventional post-paid contracts. Three modifying factors in the African context which the addressable market forecast contained in this paper takes into account are: the near universality of pre-paid contracts in the African consumer market; the emergence of a huge second-hand market in Africa for handsets that have been recycled out of Europe and the Far East, thus enabling handsets to be offered at a more affordable USD30--USD60 level (and also removing the need for operator-supplied handset subsidies, thus improving operators' profitability and cash flow); and the existence of large 'grey' or informal economies in most African countries with the result that official income statistics significantly under-report actual spending power.

Table 3 shows an estimate of the addressable cellular market in Africa broken down by country. The forecasting methods noted in the previous paragraph have been used to make these estimates. The estimated potential or addressable market in 2000 for cellular phones in sub-Saharan Africa, excluding South Africa, under present economic conditions was 58.6 million. Of this potential demand only 3 million had been satisfied, leaving a further 55.6 million yet to be provided for a saturation rate of 5%.

Table 3: Africa -- Cellular saturation 2000

Country Addressable market (m) Residual market (m) Saturation level 2000
South Africa 16.8 6.2 62.9%
Reunion 0.5 0.3 48.7%
Seychelles 0.1 0.0 43.3%
Cote d'Ivoire 1.3 0.8 38.3%
Botswana 0.6 0.4 28.8%
Mauritius 0.5 0.4 24.3%
Maldives 0.0 0.0 22.9%
Zimbabwe 1.3 1.0 22.8%
Gabon 0.6 0.4 22.0%
Senegal 1.0 0.8 20.5%
Namibia 0.4 0.3 19.6%
Swaziland 0.2 0.2 11.6%
Lesotho 0.2 0.2 10.6%
Kenya 2.7 2.5 7.8%
Ghana 1.8 1.7 7.4%
Malawi 0.7 0.7 6.8%
Tanzania 2.7 2.5 6.7%
Togo 0.4 0.4 6.6%
Uganda 2.0 1.8 6.5%
Gambia 0.1 0.1 5.5%
Madagascar 1.2 1.2 5.0%
Zambia 0.9 0.9 5.0%
Guinea 1.1 1.0 4.3%
Sierra Leone 0.3 0.3 3.9%
Rwanda 0.5 0.5 3.5%
Mauritania 0.2 0.2 3.1%
Burkina Faso 0.9 0.9 2.9%
Braz. Congo 0.4 0.4 2.6%
Benin 0.5 0.5 1.9%
Angola 1.5 1.4 1.8%
C. Af. Rep. 0.3 0.3 1.7%
Mozambique 1.5 1.5 1.6%
Mali 0.9 0.9 0.9%
Sudan 3.5 3.4 0.7%
Niger 0.7 0.7 0.6%
Ethiopia 3.9 3.9 0.5%
Cameroon 1.8 1.8 0.4%
Djibouti 0.1 0.1 0.4%
D R Congo 3.8 3.7 0.3%
Burundi 0.4 0.4 0.2%
Nigeria 15.1 15.1 0.2%
Chad 0.5 0.5 0.0%
Comoros 0.1 0.1 0.0%
Eritrea 0.3 0.3 0.0%
Guinea-Bissau 0.1 0.1 0.0%
Liberia 0.2 0.2 0.0%
Sao Tome 0.0 0.0 0.0%
Somalia 0.6 0.6 0.0%
Eq. Guinea 0.1 0.1 0.0%
(ex-S Africa) 58.6 55.6 5.1%

Source: ITU data; BM forecasts

In Table 3 those countries with an unsaturated market of over 1 million subscribers are shown in bold. Table 4 shows these countries in order of market potential. As can be seen, Nigeria is in a class of its own.

Table 4: Market potential -- 2000

  Residual market (m) Saturation
Nigeria 15.1 0.2%
Ethiopia 3.9 0.5%
D R Congo 3.7 0.3%
Sudan 3.4 0.7%
Kenya 2.5 7.8%
Tanzania 2.5 6.7%
Uganda 1.8 6.5%
Cameroon 1.8 0.4%
Ghana 1.7 7.4%
Mozambique 1.5 1.6%
Angola 1.4 1.8%
Madagascar 1.2 5.0%
Zimbabwe 1.0 22.8%
Guinea 1.0 4.3%

What the preceding tables make clear is that, whereas most of the developed world and much of the developing world is approaching saturation in the sense that a large part of the addressable market in these countries has been satisfied, the same is not true of Africa. Table 5 shows saturation estimates for different global markets.

Table 5: Cellular saturation levels -- 2000

Region Saturation level
W Europe 64%
South Africa 63%
Oceania 44%
N America 39%
World 39%
Asia 38%
Latin America 27%
M East & N Africa 25%
Eastern Europe 22%
Sub-Saharan Africa 5%

African saturation, at 5%, is of a different order of magnitude to the rest of the world. 95% of the addressable African market is yet to be signed up. It should be remembered that the figures in the tables above are not a crude extrapolation of tele-density levels, defined as the percentage of total population that is without a cellular phone, but an estimate of the percentage of the addressable market that has been saturated -- thus the tables take full account of the difference in income levels between Africa and the rest of the world.

African cellular -- growth and profitability

Table 6 presents estimates of cellular subscriber growth in the 2000--2005 period. It can be seen that growth in the most saturated markets of Western Europe and North America has already slowed to close to a single-figure level.

Africa, by contrast, is forecast to grow at a compound annual rate of 36% p.a. over this period, significantly more than double the world average and almost double the rate of the next fastest growing region of Latin America.

Many of the companies operating in Africa (and elsewhere) are private; their profitability figures are not publicly available. Blakeney Management has a close relationship with the managements of cellular companies operating in Africa. The estimates in tables 7 and 8 below are 'educated guesses' made by Blakeney Management as to the profitability levels achieved by efficient operators in a representative selection of countries named below. They should not be taken as actual figures achieved by any of the companies operating in those markets. It should also be stressed that ARPUs and profitability levels can vary widely from operator to operator. For instance, most analysts believe, without having access to the confidential figures, that Telecel's ARPUs and EBITDA margins are significantly below those of its competitors as a result of Telecel having been starved of investment capital by its parent Orascom.

Table 7: Representative ARPU levels

Above USD40 USD35-USD39 USD30-USD34 Below USD30
S Leone Gabon Uganda S Africa
Zambia DR Congo Rwanda  
Malawi Nigeria Swaziland  
Congo B Cameroon W Europe  

Source: BM estimates

Table 8: Representative EBITDA margins

Above 40% 35%-39% 30%-34% 25%-29% 20%-24% Below 20%
Uganda Cameroon S Africa Zambia   Malawi
Congo B Rwanda   W Europe    
Gabon Zimbabwe        
S Leone          
DR Congo          

Source: BM estimates

Average revenue per user (ARPU) is the monthly spend per user per month. It is dependent on variables such as minutes of usage (MoU) and pricing of air-time. It is a key number in the telecoms industry as it has a direct bearing upon the level of profitability of a telecom operator. ARPU has a direct relationship with the life-cycle development stage within the industry. For example, in the cellular market, early adoption stage users typically spend over USD60, as is the case with Sierra Leone in the table above, although such users usually account for no more than 10% of the addressable market. The mass market, which comprises the middle 50%-60% of the market, usually drags ARPU down to about USD40 while later marginal entrants have a lower ARPU, as is happening today in Europe and South Africa where only marginal users are becoming new subscribers. Current levels of ARPU in Africa are consistent with early-stage adoption of telephones. On the other hand, fixed-line ARPU shows reduced variance over time as usage is more consistent as the services become available.

It should be noted, though, that Africa is unlikely to follow the experience curve of more developed countries, with the result that ARPU levels are not expected to fall as rapidly as has been the case elsewhere in the world. There are three chief reasons for this:

  • The universal shortage of lines in Africa results in line utilisation being more intense than elsewhere; it is not unusual in African villages for local 'fax' shops to offer paid access to a cellphone with the result that the phone is in almost constant use during business hours.
  • A number of users will often pool together to acquire a cellphone on a 'club' basis, thus resulting in considerably higher use than if the phone were individually owned.
  • The lack of available fixed lines means that cellular lines are usually used as the main and only telephone connection, with the result that all telephone traffic is channelled through the cellphone rather than optional additional traffic as is the case in the developed world.

As can be seen from table 8, profitability as measured by EBITDA margins is high in Africa with a margin of above 40% being commonly achieved. Another feature of the industry in Africa is the relatively short amount of time taken to achieve these high levels of profitability, sometimes within the first few months of operation. Dr Ibrahim, the founder and Chairman of MSI Cellular, points out that he never goes into a new market unless he can be confident of achieving operating profitability within six months of starting operations. The reasons for the high level of profitability has been noted earlier. The speed with which these margins are achieved can be attributed to similar causes: pent-up demand for telephone service of any kind is exceptionally high, given the absence of alternatives, and initial ARPUs start and remain high as the cellphone is very often the subscriber's first and only line. Furthermore, operators are not required to subsidise handsets, a major cost to OECD operators. Due to the high pent-up demand, other costs such as advertising are low. Extensive use of the pre-paid model ensures positive cash-flow from the outset. Equally important, 'churn', the bugbear of first world operators, is hardly a factor in Africa.

Blakeney Management Limited does not guarantee the accuracy of any of the information in this publication but has done its best to base it on reliable sources; it cannot accept responsibility for any loss arising from the use of this information.