21 SCN 38-595

SCN 38-595

Suggested by Clive Tasker

THE FIVE TRENDS POWERING AFRICA'S ENDURING ALLURE TREND 3: LEAPFROGGING THROUGH TECHNOLOGY by Simon Freemantle

From: “Africa Macro - Insight & Strategy”, Standard Bank, September 23, 2011. http://ws9.standardbank.co.za/sbrp Reproduced by The European House-Ambrosetti for the Forum “Developing the Regions of Africa and Europe”, Taormina, October 6 and 7, 2011.

Insight & Strategy — 23 September 2011

Leapfrogging through technology

2 Africa Macro

Insight & Strategy — 23 September 2011

3000

1500

0 Mobile subscribers 2000

2010

Sources: ITU, Standard Bank Research

Figure 2: Africa’s mobile phone revolution

600 540 mn 450

300

150

15 mn

0 2000

2002

2004

Fixed telephone lines

Africa Macro

2006

2008

2010

Mobile cellular subscriptions

Sources: ITU, Standard Bank Research

Figure 3: Still, penetration remains comparatively low

160

25 20

120

15

80

10

40

5 0

Africa

0

Mobile subscriptions per 100 inhabitants

2009/10 growth rate (%) RHS Sources: ITU, Standard Bank Research

3

Internet users

Asia Pacific

In no area has the terrain altered more seismically than in mobile telephony. Much of the importance of mobile phones in the African context rests in the manner in which they allow Africans to sidestep pervasive infrastructure constraints, share information more freely, thus making markets more efficient, and stimulate and support entrepreneurial verve.

Where in 2000 there were only 15 mn mobile subscriptions on the continent, by the end of 2010 there were believed to be over 500 mn (Figure 2). Accounting for multiple subscriptions (many people hold more than one sim card), it is likely that around one in three Africans currently subscribe to one of the continent‟s mobile service providers. As such, considering mobile penetration rates in excess of 100% in much of the advanced world, substantial room remains for continued growth in the African mobile phone industry (Figure 3).

4500

Arab States

Mobile telephony has been transformative

Mn people

Americas

Unlike in the past, Africa has not been left stranded. The continent‟s population has vigorously embraced technology in general, and telecommunications in particular, as a means to enhance socio-economic prosperity. This „revolution‟ in Africa is allowing the continent to leapfrog traditional stages of development, contributing to the forging of a new, and more appropriate, economic course. Ultimately, in many ways, technological advancements, and the manner in which they have been absorbed in Africa, are assisting in gradually narrowing the persistent gap between Africa‟s and the rest of the developing world‟s developmental trajectories.

6000

Europe

Importantly, these developments have included, indeed are increasingly being led, by participants in the developing world. At present, access to mobile networks is available to 90% of the world‟s population, and 80% of those residing in rural areas. Three-quarters of the world‟s mobile subscribers are found in the developing world, up from half in 2005; in 2010 alone India and China added an estimated 300 mn mobile subscriptions.

Figure 1: Telecommunications connecting a flatter world

CIS

Across the world, technological enhancements are fundamentally altering the way human beings connect, communicate and transact, providing new sources of commercial nutrition. Consider that, where in 2000 there were approximately 360 million (mn) internet users worldwide, by 2011 this number had swelled to over 2 billion (bn). According to the International Telecommunications Union (ITU), by the end of 2010 there were an estimated 5.3 bn mobile cellular subscriptions worldwide, including 940 mn subscriptions to 3G services (Figure 1). Staggeringly, in 2010 alone, roughly 200,000 text messages were sent globally every second, which, assuming an average cost of USD0.07 per message, would have generated USD840,000 in revenue for mobile operators each minute (and over USD1.2 bn per day). More recently, social media has captured the imagination—and enabled deeper communication on an unprecedented scale.

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Supporting these future growth projections, Informa Telecoms & Media has estimated that over the next five years east and central Africa will enjoy the highest mobile subscription growth rates in the world, with Ethiopia (the continent‟s second most populous nation) Eritrea and Madagascar expected to see subscriber numbers increase by more than 100% by 2015. Further projections suggests that mobile subscriptions in Africa will reach 800 mn by 2015—three -quarters of this increase is expected to come from eight countries (Nigeria, Egypt, Tanzania, Sudan, the Democratic Republic of Congo (DRC), Uganda, Angola, Kenya, and Ghana). Indeed, at current and anticipated growth rates, mobile penetration rates are expected to reach 100% by 2020 (Figure 4) - implying a real penetration rate (considering again the prevalence of multiple sim card holders) of around 60%. Unsurprisingly, Nigeria has rapidly elevated to become one of the developing world‟s most dynamic telecommunications markets. At present, there are estimated to be over 90 mn mobile subscribers in Nigeria, making it the world‟s tenth-largest mobile market.

Figure 4: Growth in ICT is expected to be strong

Access per 100 people 120

90

60

30

0 1995

2005

2015

2025

Mobile access

2035

2045

Broadband access

Sources: Institute for Security Studies, Standard Bank Research

Figure 5: Mobile operators have expanded aggressively

Naturally, mobile phone operators ahead of the curve have prospered. South Africa‟s MTN, the United Kingdom‟s Vodafone and India‟s Bharti Airtel (since purchasing the African assets of Zain for USD10.7 bn in 2010) have carved out meaningful shares in most of Sub-Saharan Africa‟s (SSA) core markets (Figure 5). Bearing in mind the projections for mobile phone user growth above, as well as the fact that mobile phone operators in Africa make twice as much off each subscriber than firms in countries such as India, corporate activity in this sector is likely to remain robust.

More Africans are connecting to the internet As of March 2011, there were approximately 120 mn internet users on the continent (it is more accurate to consider internet users rather than individual subscriptions in Africa as the users-to-connections ratio is often, as in key West African markets, upwards of 20-1), implying a relatively low penetration rate of 12% (Figure 6). Out of 100 inhabitants on the continent, 9.6 are internet users, compared to 21.9 in Asia Pacific and 65 in Europe. Only around 6% of the world‟s internet users are in Africa, a disproportionately moderate figure. Yet, the growth in African internet users has been scintillating. Between 2000 and June 2011, internet usage on the continent grew by 2,527%, compared to a world average of 480% (706% for Asia and 353% for Europe).

Naturally, these growth patterns are influenced by the low originating base, yet a positive trend is clear and increasingly inclusive. Indeed, in some countries, growth has been particularly profound; over the course of the past decade Algeria has seen internet users increase from just 50,000 in 2000 to 4.7 mn in 2011, Morocco from 100,000 to 13.2 mn, Nigeria from 200,000 to 44 mn, Kenya from 200,000 to 3.9

Sources: MTN, Bharti Airtel, Vodafone, Standard Bank Research

Figure 6: Africa lags the world in internet usage

1000

Percent of population

Mn people

750

75

500

50

250

25

0

0 Asia

Africa Europe Latin North Middle AmericaAmerica East Internet users

Internet penetration

Sources: ITU, Standard Bank Research

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Africa Macro

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Insight & Strategy — 23 September 2011

mn and Sudan from 30,000 to 4.2 mn.

Mobile telephony has clearly inspired growing internet usage in Africa. Consider that, globally, in 2013 mobile phones are anticipated to overtake personal computers as the most common web access device in the world. Given at times tremendous infrastructure constraints, fixed broadband penetration rates in Africa are remarkably low (less than 1%), compared to mobile broadband penetration rates of almost 4% (which compare more favourably with the developing world average) (Figure 7). In the area of mobile broadband, growth projections are stellar—by 2015 it is believed that there will be upwards of 250 mn mobile broadband subscriptions in Africa. Considering alternative metrics, and as outlined in Figure 4, it is expected that, where in 2010 only 6 out of 100 Africans had access to broadband, by 2020 this ratio will have elevated to 22.

Meanwhile, despite rapid growth, access across the continent is heavily skewed towards a few large countries. At last count, almost half of all internet users on the continent came from Nigeria, followed by Egypt, Morocco and South Africa (Figure 8). In the DRC, despite internet user growth of over 100,000% since 2000, fewer than 0.5% of the population are internet users. The same is true of Ethiopia, where just 0.4% of the population use the internet.

Africans are embracing social media Linked again to the success of mobile telecommunications, Africans are eagerly embracing social media as a new means of sustaining and building relationships. The youthful balance of the continent‟s population supports these shifts.

While overall subscriber numbers are comparatively small, Africa is one of social media group Facebook‟s fastest growing markets. According to most recent statistics (the pace of change is so swift that data is substantially altering on a weekly basis), there are around 32 mn Facebook users in Africa (up from 10 mn in 2009), 3% of the continent‟s population. However, measured against internet users (the socalled “Facebook Index”), this ratio elevates. In all, more than one-quarter (27%) of African internet users have Facebook profiles, compared to 18% of Asian internet users, and 23% of internet users in the Middle East (Figure 9). The manner in which social media enabled the mobilisation of dissent in Tunisia and Egypt in early 2011 is an instructive indicator of its potency. As at 30 June 2011, there were over 14 mn Facebook users in North Africa, with 6.5 mn and 2.4 mn in Egypt and Tunisia, respectively. 23% of all Tunisians have Facebook accounts. And in the first six months of 2011, around 3 mn Egyptians joined the networking platform, with around 700,000 joining in both Nigeria and South Africa (Figure 10).

Meanwhile, indigenous social media platforms, such as Ushahidi, have also emerged, leveraging the growth of mo-

Figure 7: Broadband penetration comparison (2010)

Percent of total population

16

12

8

4

0 Fixed broadband

World

Mobile broadband

Developing countries

Sources: World Bank, ITU, Standard Bank Research

Figure 8: African internet users by country

Zimbabwe, 1.4% Uganda, 3.2%

All other, 13.4%

Tunisia, 3.6% Kenya, 4% Sudan, 4.2% Algeria, 4.7% South Africa, 6.8%

Nigeria, 44%

Morocco, 13.2%

Egypt, 20.1%

Sources: ITU, Internet World Statistics, Standard Bank Research

Figure 9: Africans are uniting through social media

240

Mn people

90 75

180 60 120

45 30

60 15 0

0 Asia

Africa

Latin Europe North Middle America America East

Facebook users

Facebook index* RHS

Sources: Facebook, Standard Bank Research

5

Africa Macro

Africa

Insight & Strategy — 23 September 2011

New fibre-optic cables will raise connectivity Unlike with fixed line telephony, fixed broadband is likely to appreciate strongly in Africa in the coming decades as new fibre-optic cables increasingly link the continent to central hubs in Europe, the Americas and India. At present, broadband costs in Africa are exorbitantly high, due in part to heavy residual reliance on satellite communications and microwave networks. According to the ITU, the cost of a fixed broadband sub basket in Africa in 2010 was 291% of gross national income (GNI), compared to a developing world average of 112%, 27% in the Asia Pacific region, and only 2% in Europe. Last year it was reported that the top five most expensive places in the world for fixed line broadband were all in SSA—led by Central African Republic, where the cost was nearly 40 times the average monthly income of the population. However, the depth of the commercial opportunity in Africa is inspiring foreign investment (largely private), increasing competition and allowing the opportunity to lower the costs for consumers.

This dynamic has already played out in the mobile telecommunications space, where fierce competition in voice, and increasingly data, has led to comparatively low pricing, which has supported the pace at which subscriptions have elevated. Indeed, where private funding has been largely elusive in plugging Africa‟s overall infrastructure deficit, in the telecommunications sector the majority of annual spending comes from firms, rather than governments (Figure 11).

The World Bank has estimated that, between 1998 and 2008, as mobile phone subscriptions in Africa swelled from 2 mn to 400 mn, over USD56 bn in investment was attracted by the industry.

Figure 10: Top 20 countries by Facebook users (Jun 11)

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25 20

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15 4000 10 2000 0

5

Egypt South Africa Morocco Nigeria Tunisia Algeria Kenya Ghana DRC Senegal Cameroon Uganda Ethiopia Tanzania Mauritius Angola Madagascar Namibia Zambia Botswana

bile telephony on the continent. Ushahidi was originally developed to share and map information related to violence emerging from Kenya‟s disputed 2007 elections, but has since swelled to become a non-profit company using the concept of crowdsourcing for social activism and public accountability. Recently, versions of Ushahidi have been used to create crisis and recovery maps following earthquakes in Haiti and Chile, wild fires in Russia, and the tsunami in Japan.

Users('000)

Penetration rate (%) RHS

Sources: Facebook, Standard Bank Research

Figure 11: Funding for African infrastructure

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USD72 bn

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Transport Telecom

Public and donor

Water & Sanitation

Private

Figure 12: New cables elevate African connectivity

Sources: Standard Bank Research

Africa Macro

Energy

Source: World Bank, PPI Database, Africa Infrastructure Diagnostic

New, mostly privately funded, cables linking Africa‟s eastern and western coasts to international networks are set to dramatically alter overall connectivity (Figure 12). In particular, African corporate enterprises—large and small—will benefit from the increasing bandwidth capacity and reduced cost of internet services. On the east coast of the continent, three cables are of particular importance: The East African Submarine Cable System (EASSy), which is owned and operated by a group of 16 African (92%) and international (8%) telecommunications operators and service providers; The East African Marine System (TEAMS), which is co-owned by the Kenyan public-private consortium TEAMs (Kenya) 6

0

Insight & Strategy — 23 September 2011

However, intra-African backhaul networks are essential in order to distribute the advantages of these new cables and maximise their anticipated economic gains. At present 88% of Africa‟s terrestrial backbone infrastructure is wireless, with the remaining 12% comprising fibre-optic cable. For mobile operators, 99% of total infrastructure is wireless, though fixed operators are more balanced with 60% wireless and 40% optical fibre. Regardless, in the absence of substantial investments in elevating current intra-regional linkages, for large areas, and in particular landlocked countries, broadband costs will remain excessively high— consider that backbone optical fibre networks are up to 90% cheaper and offer significantly higher bandwith (satellite networks have a maximum capacity of around 10 megabits per second (Mbps) compared to over 1 Tbps for fibre networks). Investment in intra-regional networks is also likely to focus on areas with high user demand, the majority of which will be urban.

6000

Gigabits

No. of African countries

20 15

3000 10 1500

5

Landing points RHS

Sources: Standard Bank Research

Figure 14: Nigeria, household internet access mode

Other, 10.52% Mobile phone, 18.89%

Modem dial-up, 44.96%

Wireless, 18.45%

Leased line, 3.00%

ADSL, 0.10%

ISDN dialup, 4.08%

Sources: RIA Household Surveys, Standard Bank Research

Africa has pioneered innovative ICT solutions

Figure 15: M-Pesa’s success has been engaging

Much of the growth in information and communications technology (ICT) access in Africa in recent years has been inspired by innovative approaches to challenging market conditions. Infrastructure constraints, exacerbated by geographical fragmentation, have added particular pressure.

Meanwhile, competition amongst Africa‟s core mobile operators has been increasingly fierce, particularly as around 95% of all users on the continent are prepaid, and, as such, more likely to shift to new operators. Consider that, where average revenue per user (ARPU) per month in 2009 was USD57 in Japan, and USD36 in Europe, it was only USD9.8 in Kenya and USD12.7 in Nigeria. Firms such as MTN and Airtel have used a variety of innovative methods to ensure profitability, such as outsourcing of back-office operations, dynamic tarriffing, and borderless roaming.

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SAT-3

TEAMS

Seacom

EASSy

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Number of M-Pesa customers (mn) Number of agent outlets countrywide RHS Sources: Safaricom, Standard Bank Research

7

25

4500

WACS

And on the west coast of the continent, the region‟s primary connection in the past (SAT-3), is being bolstered by the following cable linkages: MainOne (privately-owned); Globacom(Glo)-1, which is owned by the Nigerian mobile operator Globacom; The West African Cable System (WACS), which is owned by a consortium of mostly private investors (including MTN, which has invested USD90 mn in the cable, allowing it to receive 11% of its initial capacity); and Africa Coast to Europe (ACE), which is owned by the ACE consortium, led by France Telecom. The capacity and reach of the various new cables differs substantially, though, importantly, and in large part as a result of the landing in 2009 and 2010 of some of these cables, Africa‟s international bandwith capacity has increased 120 times to over 10 terabits per second (Tbps) since 2008 (Figure 13).

Figure 13: Africa’s connections multiply

ACE

Ltd (85%) and Etisalat (15%); and Seacom, a privatelyowned and operated cable system which has already attracted investment of around USD600 mn.

Insight & Strategy — 23 September 2011

Yet it is in the area of mobile money transfers where Africa has been most pioneering, using innovative means to create new economic opportunities. From a virtually non-existent base five years ago, it is estimated that there will be upwards of 350 mn users of mobile money transfer services in Africa in 2015. Mobile money offers a swifter, safer and more cost effective means to transfer money, and has been revolutionary in the manner in which it has extended financial services to the informal economy.

Kenyan mobile operator Safaricom‟s M-Pesa service has led the charge. Since its inception in 2007 M-Pesa‟s growth has been staggering—as at 31 April this year over 14 mn Kenyans were served by 27,988 M-Pesa agent outlets (compared to less than 1,000 bank branches) throughout the country (Figure 15). In 2010, these 14 mn Kenyan MPESA users transferred an estimated USD7 bn, equivalent to 20% of national gross domestic product (GDP), through M-Pesa. Perhaps most demonstratively, M-Pesa‟s success has spawned over 60 similar programmes across the globe.

Some are already showing signs of comparative success.

For instance, since launching mobile money services in partnership with Stanbic Bank in Uganda, MTN has already amassed over 3,000 mobile banking agents across the country. By the end of August 2010, MTN had 1.2 mn mobile money subscribers, transferring a monthly average of USD60 mn, 60% of which was sent from urban to rural areas. In 2010, the Bank of Uganda recorded USD400 mn worth of mobile money transfers, with registered mobile money customers quadrupling from 552,000 in 2009 to around 2 mn by the end of 2010.

Beyond mobile money transfers, mobile phone usage has supported various poverty-alleviation and empowerment schemes across Africa. For example, in 2009, MTN Uganda, in partnership with Google and the Grameen Foundation, launched five mobile phone applications aimed at providing real-time health and agricultural information, and a virtual marketplace for trading goods and services. Among the applications are Google Trader, which, through matching buyers and sellers of agricultural produce and commodities, allows local small-holder farmers to broaden trading networks and reduce transaction costs. Another application, Farmer‟s Friend, provides a searchable database through which users can access agricultural advice and weather forecasts. And, Health Tips and Clinic Finder provide healthcare support for rural households, the importance of which is borne out by the assertion that, according to McKinsey Global Institute research, upwards of 80% of all health issues can be solved by mobile phone, at a cost per capita that is 90% lower than that of traditional healthcare models.

Figure 16: Ave. daily value of M-Pesa client transactions

800

Ksh '000

400

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-400 Rural Cash in

District

Urban

Cash out

City Net cash in

Sources: Eijkmann et al., Economist (2010), Standard Bank Research

Figure 17: Growth effects of ICT

1.6

Economic growth, percentage points

1.2 0.8 0.4 0 Fixed

Mobile

Internet

Broadband

High-income countries Low-and-middle income countries Sources: World Bank, Standard Bank Research

Figure 18: Burkina Faso, BOP spending on ICT

BOP1500

BOP1000 BOP500

BOP3000

BOP2000

BOP2500

The economic effects of ICT are profound Evidence is mounting of the economic gains possible from elevated ICT access throughout the developing world. AcSources: World Resources Institute, IFC, Standard Bank Research

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cording to the World Bank, for every 10 percentage points (pps) increase in fixed line access, economic growth is likely to advance by 0.43 pps in high-income countries, and 0.73 pps in low-and middle-income countries. An even more robust relationship is evident in mobile, internet and broadband access—indeed, a 10 pps increase in broadband penetration could effect an increase in economic growth of up to 1.21 pps in high-income countries and as much as 1.38 pps in low-and middle-income countries (Figure 17).

Elaborating on these positive linkages, the World Bank has further found that an extra 10 phones for every 100 people in an average developing country could boost GDP growth in the respective economy by as much as 0.8 pps. Furthermore, Booz and Company have found that a 10% increase in broadband penetration in a specific year is correlated to 1.5% greater labour productivity growth over the following five years. Considering the room for expansion in the majority of African markets, it is clear that rapid uptake of mobile telephony is likely to continue to provide substantial support for wider growth aspirations. Indeed, recent evidence in Kenya adds credence to these assertions. Without the telecommunications industry, it is estimated that Kenya‟s GDP growth since 2000 would have been 0.9 percentage points lower on average. And, a recent study has also shown how the incomes of Kenyan rural households have increased by 5%-30% since they began using mobile banking.

Conclusion Few alterations of Africa‟s macroeconomic vista have been as noticeable and inclusive as the growth of the continent‟s ICT sector. Already, Africa‟s base of the pyramid (BOP) consumers spend USD4.4 bn per year on ICT. As incomes rise, so too will spending on ICT products and services—for instance, in Burkina Faso, 1% of household spending in the BOP500 market is allocated to ICT, whereas 5% of household spending is allocated to ICT in the BOP3,000 category (Figure 18). Crucially, Africa has not been a bystander in the manner in which telecommunications is able to alter lives, and create new economic opportunities. Increasingly, as incomes elevate, investment in broadening critical infrastructure will enhance nascent gains.

Yet, optimism in the ability of ICT enhancements to raise productivity and growth should not disguise the substantial impediments which remain. While new cables are likely to drastically alter the cost and speed of broadband connections, the majority of Africans will remain locked out of these improvements should supportive backhaul networks not be created. Fortunately, private funding for ICT in Africa is considerably less elusive than it is for other infrastructure priorities. Yet, too many markets remain inadequately liberalised for the gains of telecommunications to effectively percolate throughout the economy. Quite clearly, those countries adopting pragmatic and investor-friendly policies in the ICT 9

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space will gain an edge in unlocking the potentially profound gains ICT is able to generate.

The first two reports in this series dealt with Africa‟s rising, youthful, and urbanising population. While opportunities within this demographic and locational shift are lucid, they are by no means inherent. Institutional support will be of fundamental importance in order to ensure that a rising population is able to find the means for economic betterment. Supporting and stimulating further advances in ICT will be a critically important determinant separating those that triumph and those that falter. The availability and affordability of mobile and broadband services can, as it already has in key markets, support economic growth and provide one of the means through which Africa‟s human capital advantage can become pronounced. The pace of change is likely to continue to be robust; those actors—be they firms, development institutions, or governments— approaching these alterations innovatively will be rewarded.

Through embracing telecommunications with such vigour, Africans have bridged a gap in the developmental trajectory with much of the emerging world—creating solutions based on local market fundamentals, suited to the proclivities and pockets of African consumers, and geared towards broadening the beneficiaries of nascent socio-economic gains.

References Cilliers, J; Hughes, B; Moyer, J. 2011. African Futures 2050: The next forty years. Institute for Security Studies, Monograph 175. January 2011.

International Telecommunications Union. 2010. The World in 2010: ICT Facts and Figures.

McKinsey Global Institute. 2010. Africa’s path to growth: Sector by sector. McKinsey Quarterly, June 2010.

Qiang, C; Rossotto, C; and Kimura, K. 2009. Economic Impacts of Broadband: Chapter 3 of the Information and Communications for Development 2009: Extending Reach and Increasing Impact report, World Bank, Washington, DC. The Economist. 2009c. Mobile marvels: A special report on telecoms in emerging markets. Economist Print Edition, September 6 2009.

Wallis, W; Manson, K; and England, A. 2011. Africa: Ripe for reappraisal. Financial Times, May 18, 2011.

World Resources Institute. The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid. Co-publication of the World Resources Institute and International Finance Corporation.

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