The times are changing in the Horn of Africa and the larger East Africa region. Ethiopia – once the byword for famine in the region – is now garnering attention from foreign investors. Sitting in the Sheraton Hotel in Addis Ababa, it is hard not to notice the number of private investors from London to Nairobi to Johannesburg passing through and talking about the changing environment and potential of investment in Ethiopia.
Government officials claim an average GDP growth of 10 to 11 percent over the past 7 years. Supporters and critics alike question these figures. International experts, including the International Monetary Fund (IMF), suggest that actual growth numbers average 5 to 7 percent. Regardless of which figures are right – both are respectable – the buzz in the street is justified.
All the excitement can overwhelm and confuse the first time visitor. “You hear all the talk and see all the news,” says one private equity investor from the U.S., “but when walking around you do not exactly see where the opportunity [for investment in Ethiopia] is because you still see so much poverty.”
This article is for that investor and every other investor wondering about the best opportunities for investment in Ethiopia. Here are my recommendations from number 5 to number 1 in order of potential return.
(5) Financial Services
The African financial services sector has greatly benefited from international banks playing a role in private equity and expansion deals. But such activity has been absent in Ethiopia – home to Africa’s 9th largest economy and 2nd biggest population.
Private investors lurk around banks in Ethiopia, eager to jump into a sector not yet available to them. For now, all they can do is dream about the potential of “almost 90 million people, one of Africa’s biggest economies, and high GDP growth means opportunity for financial services,” says one insider at Standard Bank, “plus don’t forget the huge unbanked population.”
In Africa, the most banked populations are in Mauritius and South Africa at around 82 and 58 percent respectively as of 2012. Experts estimate that Ethiopia’s unbanked population could be as high as 85 to 90 percent. As the Ethiopian economy transitions to the international stage, financial infrastructure will have to facilitate access to the various under-served communities. The recent introduction of mobile banking and related services is surely a step in the right direction.
(4) Telecom Services
Telecommunications is another restricted sector in Ethiopia. Experts estimate that mobile phone penetration in Ethiopia hovers between 10 and 15 percent. Internet penetration is below 1 percent largely due to poor infrastructure and very high prices.
The Ethiopian population will surely surpass 90 million by end of 2013. What mobile phones and internet could do for a population of that size is evident in the stories coming out of Kenya and Nigeria.
“That’s gold,” says one telecom expert. “The upper limit of customers is unknown with a rapidly growing population and increasing incomes.”
The potential of the telecom market is further evidenced by the Ethiopian government recently introducing mobile services for utility payments.
“Right now, the Ethiopian government is trying to make back the money it paid for access to the fiber optic cable,” says a former Seacom employee, but this should change over time.”
Telecom services would surely be number (1) on our list of investment opportunities if the sector were open to foreign investment. As one insider says, “[Telecommunications] is just starting to move in the country. Just wait and see.”
(3) Heavy Construction
Ethiopia’s infrastructure spending, as a percentage of GDP, is the highest in Africa. The Ethiopian government rightfully makes the delivery of infrastructural services, such as transport and energy, a focus of its development plan. Absent the government’s current and continued focus on infrastructure, the development story of Ethiopia would hit a wall.
Heavy construction sectors, including cement and steel, are the ancillary beneficiaries of this infrastructure build. The national building lottery is undergoing expansion in Piassa. As you drive out of Addis, you pass newly built affordable government housing or private housing developments; both promptly filling up after the final touches are added. Pass through Bole and expect to encounter changing roadways, as one road finishes construction and another undergoes it. “I don’t know which road is open today,” says my taxi driver.
Ethiopia has witnessed a housing and construction boom.
It is not just the government. All the buildings under construction in Addis are also a clear indication that those with money are investing in property.
Says Tsege, a local resident, “Walking around Addis is like walking through a major construction site.”
The prices of cement and steel remain high in Ethiopia and in Kenya and Tanzania, both of whom are potential export partners. Transportation and logistics still frustrate some companies, but such frustrations are eased by the government’s focus on transport, especially the rail corridor between Addis Ababa and the Port of Djibouti. Importing certain materials has confounded the industry, but the Ethiopian government expedites access to foreign currency for those exporting in these industries.
Energy costs are also one of the lowest on the continent. With the new hydro dams coming online over the next few years, the Ethiopian government will ensure cheap energy for its people and make Ethiopia a potential energy exporter for the region.
(2) Education
Ethiopia has no shortage of universities – there are more than 30 across the country. The government has successfully put schools into most villages. As a result, primary schooling continues to grow. Yet the literacy rate sits around 42 percent. This figure will improve over time. And as both primary education attendance and literacy improves, the secondary level of education, specifically universities and vocational schools, will become most attractive for private investment.
Furthermore, investing at this level presents multiple opportunities for scaling and developing infrastructure. Institutions can scale across the country with Ethiopia’s much dispersed population – the country is not nearly as urbanized as its neighbors. Institutions can also potentially scale across borders as Africans demand better secondary schooling options because companies and investors require higher training. One Ethiopian university has already expanded operations to neighboring Somaliland.
One challenge investors will face in this sector is a consumer base that remains relatively poor. Income per capita was estimated at $450 in 2012, less than one-third of the sub-Saharan average of about $1,535.
“But with the return of the diaspora, a growing middle class, and Ethiopians’ strong desire to learn, the education sector will continue to grow,” says one local education consultant. “It is just a matter of price and what is offered by the institution.” Skills desired in the market (inside and outside Ethiopia) include nursing, engineering, and technology. “If the students are not hired here,” says the educator, “they will be hired in other countries as long as the best quality of education is being provided.”
The changing dynamic of mobile phones and internet access can reduce the cost of soft infrastructure for institutions. Online and virtual training enables a group of institutions to share and fully utilize teachers across borders. Partnerships between institutions in Ethiopia and those in developed countries, such as the United States and United Kingdom, could also enrich students’ experience.
Multiple locations should improve teacher retention beyond the typical 3 years with institutions having the ability to move teachers around to multiple locations and keep the job rather new and challenging. International teacher recruitment fairs in the U.S. and the U.K. offer a plethora of rather young individuals interested in an international teaching career.
(1) Fast Moving Consumer Goods and Agribusiness
Agriculture and livestock account for more than 50 percent of GDP and employ more than 80 percent of the workforce. The young foreign consultants running around Addis in bunches and pronouncing allegiance to the Agricultural Transformation Agency (ATA) are a humorous indicator of the focus the government puts on agriculture. Ethiopia is also home to Africa’s largest livestock population, with huge exports to the Middle East.
The ATA, managed by Khalid Bomba, a former Wall Street banker and staffer at the Gates Foundation, works with local farmers on bettering planting skills, improving irrigation and organizing co-operatives among other things.
“Agriculture improvements here have been great,” says one ATA worker based in Addis, “but there are so many challenges for the country in agriculture that will take a long time to fix.”
Moving the value chain online in both agriculture and livestock could boost the economy more than the production gains achieved to date. Ethiopia’s diverse landscape and climate offer the world amazing coffee beans and delicious tea. At the moment, these products are generally processed and packaged outside the country to the disadvantage of Ethiopia. Once processed and packaged onshore, local Ethiopians could expect to see more than triple the price per kilogram they currently get for their generally raw, unpackaged and unbranded exports.
Livestock, fish, and poultry present the greatest space for growth. In a country where dairy consumption is at 17 liters per person per year, dairy production could be greatly improved and coupled with a campaign to improve dairy consumption. Fishery is a virtually untouched industry that is also in need of investors.
Chicken consumption is at 0.6kg per person per year, well below the 6kg sub-Saharan Africa average and the 36kg South African average. It is production that hampers this industry which faces high consumer demand despite high prices. With Easter quickly approaching, experts predict that the price of chicken at the market could rise to $3,75 per pound, well above the U.S. price per pound of about $1,02.
“Doro wat is national dish in Ethiopia that requires chicken,” says Abebe, an expat, “yet the cost of chicken means that most times when I have it at a local house, it mainly includes bones, not meat.” Adding broilers and cold storage to this value chain investment is the biggest challenge with the biggest reward.
Scaling concerns, boiler implementation, and veterinarian and disease concerns among other things will pester any potential investor. But with a growing market in Ethiopia, Tanzania and other neighbors, investors will keep trying until someone gets it right.
For years, one of Africa’s biggest economies has run under the radar. But no longer is it going to sit on the sidelines. The buzz is real. The opportunity is real. “Many of us [diaspora] did not see all this coming,” says a visiting Ethiopian from Washington D.C., “maybe it is time to spread the word and get more diaspora on the flight back to the motherland.”
[Kurt Davis Jr. for africa.com]
[Image source: www.ertagov.com]