Africa’s telecommunication’s sector is undergoing rapid change as operators seek to consolidate their positions in key markets and refine investment spending, leaning less on ECAs and favouring more flexible financing structures. Freddie Heritage reports.
The telecommunications (telecoms) industry in Africa has become synonymous with a surge in investment in mobile technology in recent years, as stakeholders throughout the continent are choosing to by-pass spending on traditional, fixed-line communication.
Mobile penetration rates have sky-rocketed in the last 10 to 15 years, following an acceleration in technological advancement and greater investment.
In the report, Telecoms in Africa: innovating and inspiring, PriceWaterhouseCooper (PwC) predicts that in 2015 the mobile sector will account for more than two-thirds (68.9%) of all cumulative investment in telecoms in Africa.
Over 90% of the population in most African countries remain unreachable via fixed-line telecoms, yet in some markets investment has seen mobile penetration reach more than 100%, demonstrating that individuals frequently use more than one sim-card. Botswana, for instance, saw rates reach 158% in 2013, as interconnectivity levels between operators remain low and calling across different networks can be costly.
There remains plenty of room for further investment under the right circumstances. Connectivity is flourishing in certain regions, whereas continent-wide mobile coverage remains patchy. The Central African Republic (CAR), for example, has a penetration rate of just 28%, as does the Democratic Republic of Congo (DRC). The sheer size of these territories and the relative isolation of much of their population, as well as a lack of accompanying infrastructure, has thus far limited telecoms companies’ ability to cover them.
Financing the market
Evolution in the African telecoms space has also seen the financing demands of telecoms companies change. Trade head for Africa at Citibank in Johannesburg, Yusuf Ali Khan, tells GTR that over the last 10 to 15 years, he’s seen a growing trend towards short and medium-term, locally-sourced financing in telecoms.
“A decade ago, telecoms companies were considerably more active in terms of seeking finance for projects,” he says. “Initial financing structures used by telecoms companies had the backing of ECAs. Banks provided finance under ECA umbrellas, as governments looked to secure supplies of telecommunication equipment.”
“That has changed substantially because of the changing banking environment, including in Sub-Saharan Africa. Local banking markets are now deep enough to service those five or seven-year tenors the telecoms companies often look for,” Khan explains.
Plain and simple loan structures, on a syndicated or bilateral basis, seem increasingly to be the preference of telecoms companies in Africa, who are choosing the flexibility of private market lending over the security of ECA-backed loans. A growing requirement to service debts in local currencies may be a reason for this, says Khan.
“Since the revenue stream of a telecoms company is often in local currency, obtaining finance in that currency as opposed to US dollars, for example, can be more cost-effective in terms of foreign exchange.
“Being a foreign bank in Africa, Citi may not necessarily have the depth in local currency that borrowers need because there’s no regional banking network, so local banks become integral to the process. Citi partners with them regularly, depending on the size of a telecoms deal.”
While local banks can make good partners to foreign banks, who may not have ready access to local currency, Khan admits there remains opportunity for ECA-backed financing in regions as yet untouched by telecoms firms. Countries like the DRC, where the banking sector is premature and political risk is a serious concern for investors, can benefit from secure, long-term structures.
EKN, the Swedish ECA, still guarantees considerable amounts of African telecom sector deals. According to the organisation’s director general, Karin Apelman, there remains a spectrum of risks faced by telecoms companies when looking to start out or expand into new markets in Africa, which makes the security provided by ECAs attractive, if not essential.
“The risks we cover vary from country to country,” she tells GTR. “In some cases, risks are limited to hard currency (such as in Sudan), in other cases it’s a problem with sustainable lending because a company is state-owned (Ethiopia), in some cases it is difficult to find reliable macro data (Madagascar), and sometimes there are regulatory uncertainties (Zimbabwe).
In many cases though, it’s the credit risk, not the political risk, which is the main focus.”
The outlook is similar for Africa’s ECAs.
Chief operating officer at Export Credit Insurance Corporation of South Africa (ECIC), Mandisi Nkuhulu, sees dwindling opportunities to participate in telecoms as cash rich pan-African operators with strong balance sheets have less and less need for ECA-backed loans that often come with too many strings attached.
“Sometimes it is cheaper for telecoms [companies] to raise a corporate loan at the parent company level, negotiating cheaper financing terms with fewer covenants, compared to an ECA structure that comes with the additional costs of insurance and tighter covenants when raising funding at a project level,” Nkuhulu tells GTR.
Risk-sharing arrangements with multilaterals and development banks can provide respite for nervous investors and opportunities for financial institutions (FIs) that may otherwise be unable to participate in the sector’s projects. Khan tells GTR that Citi’s agreement with the Overseas Private investment Corporation (Opic), which covers deals between US$30mn and US$50mn (or the equivalent value in local currency) has enabled the bank to successfully take part in more African telecoms deals.
Similarly, Apelman confirms that EKN’s close relationship with Afreximbank better enables the facilitation of export financing to telecoms operators in various African markets: the African bank’s on-the-ground local knowledge adding additional incentive.
The jurisdictional limitations of ECA coverage can often make such an arrangement necessary.
“ECIC financing is tied to the level of supplies with a minimum South African content, which provides obvious constraints when covering projects across the continent,” says Nkuhulu, who identifies the Multilateral Investment Guarantee Agency (Miga) as a financier with no national content constraints and the subsequent capacity to support clients anywhere.
Consolidation and investment
Director, operators at IHS Technology, Julian Watson, tells GTR that in Africa, market consolidation is an increasing focus of telecoms companies, with a particular trend seen in infrastructure sharing arrangements which attempt to limit costs and enable further investment.
“There’s been a lot of sub-sea cable laying and satellite launching activity that attempts to connect the continent, but the rate at which these projects are launching has slowed,” he says. “Five or six years ago, we saw a lot of activity, and now we’re at the stage where a lot of these projects are being completed.”
“The big issue for Africa now is not so much the level of international connectivity, it’s a lack of domestic capacity. In the UK, we have fibre optic backbones connecting cities, which there’s a lack of
African operators like Etisalat, MTN and Airtel are divesting more and more of their mobile towers, which are an expensive but necessary infrastructure in mobile connectivity. On the mobile towers are base stations that transmit across a mobile network. Towers can support more than one base station, and an increasing number of tower-sharing arrangements mean that operators no longer need to build and maintain their own towers exclusively.
In September 2014, Airtel agreed its second tower divestment deal, selling 3,500 towers across six African countries over 10 years to Eaton Towers (one of a growing number of independent telecoms tower companies that are buying up towers across Africa). Like most operators, Airtel wants to raise margins across the 17 African markets in which it’s active.
“Recently we’re seeing these operators sell a swathe of their towers across their markets, raising cash that can then be invested in other areas and reducing capex on passive infrastructure,” says Watson.
“Historically, there hasn’t been much in the way of tower sharing, but regulators in Nigeria, Tanzania, and Uganda are pushing for it because it makes the cost of improving mobile coverage lower.”
Infrastructure divestment is one aspect of a broader trend among mobile operators throughout Africa towards market consolidation. 2014 has seen a string of merger and acquisition deals between local and regional operators, as telecoms companies adopt a more focused view on Africa, identifying the optimal areas for growth.
One of the largest deals of 2014 was that between UAE-based Etisalat and Morocco’s Maroc Telecom. In May, Etisalat sold its operations in six West African markets to Maroc in a US$650mn deal that was contingent on Etisalat subsequently acquiring a 53% stake in Maroc. By grouping most of its African assets under Maroc, Etisalat is able to save money for technology procurement and boost revenue.
Significant investment is now being made in 3 and 4G data connectivity, particularly in East Africa. In October 2014, Vietnamese-owned operator Viettel announced a US$1bn investment in a 3G mobile network in Tanzania, while in the same month, regional operator Smart Telecom said it would invest US$300mn over five years in developing its data offering in Burundi, Tanzania and Uganda. Commenting on the deal, Smart Telecom CEO, Abdellatif Bouziani, told journalists at the time that, “telecoms are shifting from voice telephone to data, and this is where modern telecoms requires advanced technology and infrastructure to provide high-quality services to the public”.
For Nkuhulu at ECIC, new technology could become the focus of ECA coverage: “New types of technology, like fibre optic cabling, definitely represent opportunities for ECAs, with banks able
to advise on the regional M&A deals,” he says.
Some lenders may be encouraged to delve deeper into African telecoms in light of the sector’s changing landscape, but despite huge overall growth, Watson is sceptical, suggesting financing decisions should be based on sound business models only.
Beyond the broad global economic downturn risks that many sectors in Africa remain exposed to, operators in the telecoms sector, particularly new entrants, are vulnerable to the “over-liberalisation” of some markets. Efforts during the 1990s and 2000s to deregulate telecoms by some African governments, whilst paving the way for huge growth in the sector, has meant that many stakeholders find it too difficult to compete.
“The last few years has shown that many new entrants [to telecoms] have been unable to gain significant market share, and are unlikely to turn a profit,” says Watson. “Banks should certainly be cautious about who they lend money to.”
In Côte d’Ivoire, for instance, the six operators that dominate the market have been able to push out the three new entrant operators by lowering prices. “Existing operators have tried to and block or delay the launch,” explains Watson. “It’s an issue for regulators, who aren’t doing enough to ensure a level playing field.”
Although operators are increasingly looking to harmonise Africa’s telecoms networks, the regulatory environment still differs drastically from market to market and there remains a long way to go before a continent-wide regulatory model is achieved.
Some attempts are being made in a few of Africa’s largest telecoms markets. The Nigerian Communications Commission (NCC) – the Nigerian regulator – for example, proposed in 2011 the introduction of a unified set of rules for telecoms throughout West Africa and the establishment of the West African Telecom Regulators Assembly to oversee their implementation. The need for consistent regulation is an issue that will continue to hold the sector back unless further efforts in this direction are made by national and regional operators.