Investing At the Dawn of the African Century



“Why invest in Africa when “the risk is so high?”  – I would have thought the answer was so obvious as to make the question irrelevant, but that doesn’t change the fact that we get asked this on a regular basis — by international investors and African journalists alike. The question is generally followed by one version or another of our continent’s perceived woes: poverty, under-developed institutions and conflict…

As we see it at Citadel Capital, it comes down to this: If you are satisfied with a one per cent return on your investment, go buy 10-year Swiss bonds. Otherwise, go to Africa, because our continent today stands on the cusp of a major boom. We see Africa as the last great frontier in investing.

Across the continent, there are billions of dollars a year in infrastructure investments seeking funding — and an abundance of natural resources that will be the nucleus of an industrial base across the continent. Crucially, a new generation of policymakers has opened power generation, energy distribution, refining and large transportation projects to the private sector. A global commodities boom has fuelled exports. Africa now holds 61 per cent of the world’s total uncultivated land, a reality to which African policymakers and global buyers alike are waking up to. What’s more, we have an incredible potential demographic dividend: One billion consumers today and, by 2040, the world’s largest working-age population.

As a result, we think we’ll see a four-factor growth story here in Africa: Export-led growth, the power of the African consumer base, the impact of optimally developing natural resources, and the development of infrastructure to support all of this. That’s why we’ve seen an average of six per cent GDP growth across Africa in the last decade and it is why the World Economic Forum is estimating that Sub-Saharan Africa will see GDP grow by 35.7 per cent by 2017 to USD 1.9 trillion.

Harnessing these opportunities demands a willingness to delve deeper, to be hands-on with your investments, to get to know the countries and the industries in which you invest. But whether you’re building critical infrastructure, manufacturing for domestic consumption or making value-added exports, Africa, as we see it, is the last great frontier in investing and perhaps in no sector is that reality clearer than in the transportation industry.

Looking at East Africa, the region has some of the highest consumer prices in the world, particularly outside major urban centers, due in large part to the high cost of transportation on poorly maintained and fragmented road networks. To take the extreme example, South Sudan has among the highest food prices in the world. Maize at the retail level is sold at US$ 10 per kilogram, and a three-liter bottle of cooking oil costs US$ 16. In fact, a tonne of maize costs more than triple the international price.

The pinch may not be felt as sharply in Kenya and Uganda, but there is no doubt that citizens have suffered as a result of decades of underinvestment in rail infrastructure. That’s where the Citadel Capital-led consortium that acquired Rift Valley Railways comes in.

Our turnaround of RVR is based on four pillars and serves, we think, as a proven methodology for unlocking value in the transport sector: a clear strategy; the provision of adequate financing; the deployment of global cutting edge technology; and the supervision of all of this by globally-qualified experts who understand how to do business in Africa.

The first four years of the concession, from 2006 until 2010, were effectively wasted before the original franchisee was replaced by an amended covenant signed by new investors — Citadel Capital, Kenya’s TransCentury and Uganda’s BOMI Holdings — in late 2010.

RVR initially thought it needed USD25 million in investment under the first concession and USD40 million in the second. But after a detailed inspection of the 2,300-km of track and other assets, we found that even the USD 40 million investment threshold was an underestimation by a factor of seven.

That’s why we worked with our partners between August 2010 and September 2011 to line up full funding for a USD 287 million (Sh24.7billion) turnaround. This is an amount we felt was necessary to bring the railway system back up to speed after three decades of neglect. Noteworthy investment to revive the railway only began in December 2011, after the first draw-down. To date, almost two years to the day later, USD 156 million (Sh13.5bn) has been injected into turning around the railway system.

This is a scale of private-sector investment unmatched over the same period in East Africa and exceeds by 700 per cent the investment target in the agreement. Indeed, we’ve invested more in the rail system in the past 18 months than was invested in the previous 18 years.

This investment has been overseen by a world-class operating team at RVR made up of Kenyans, Ugandans and international experts from America Latina Logistica (ALL), the global specialist in emerging-markets rail based in Brazil.

Under new management, RVR has introduced a GPS-based automated train warranting system that makes RVR by far the most technologically sophisticated rail operation on the continent. We have relaunched the Tororo-Gulu-Pakwach line in Uganda for the first time in 20 years, opening the door to new economic opportunity in Northern Uganda and setting the stage for growth in regional trade. We have rehabilitated over 900 wagons and are now purchasing 20 new state-of-the-art locomotives. We’ve completely rebuilt 73 kilometers of new rail between Mombasa and Nairobi, and continue our aggressive program of reconditioning existing rolling stock and locomotives at workshops in Kenya and Uganda.

Crucially, we’re also investing in people too: Part and parcel of the turnaround program is over USD 10 million of training and capacity-development programs, structured with ALL (the largest private sector railway operator in Latin America) to bring best-in-class railway operations know-how to RVR’s engineers and technicians. And the market has noticed: When we launched our first Management Trainee Development Program in the top universities across East Africa, over 3,000 qualified young engineers and economists applied to be a part of the new RVR.