Africa as Tech’s new frontier – a great opportunity for the informed risk taker
- Investment Support
Africa as Tech’s new frontier – a great opportunity for the informed risk taker
For more than a decade, many prominent business thinkers have touted Africa as the “next big thing”. The continent’s favourable demographics, changing political landscape and untapped economic potential have all been variously highlighted as reasons why Africa is ripe for a business revolution. At various points in time, key economic indices appeared to be proving any doubters wrong. For instance, in 2019, out of the ten fastest-growing economies in the world, five were in Africa. Consequently, several of the world’s leading corporates and investment firms turned their focus to Africa, attracted by the prospects of earning huge returns as early movers in this frontier market where others dared not venture.
However, the reality of doing business on the continent is that economic indices can only ever tell part of the story. The feedback from those who have made the bold step is one of mixed fortunes, ranging from spectacular market success to disappointing market exits to an ongoing search for “bankable” opportunities. So where does this leave the African business revolution?
Several observers have pointed to global trends which have emerged in the world of technology over the past 12 months. Investment into digital services and technology-enabled solutions has accelerated. This is evidenced by a rapid increase in the number of technology start-ups achieving “Unicorn” status – a valuation of USD 1bn or more. This has reached record levels, with more than 130 companies achieving Unicorn status in the last quarter alone. The COVID-19 pandemic has played a key role, catalysing a renewed push for digital alternatives to traditional ways of doing business that is set to continue for some years to come.
However, this has been accompanied by an evolving and often unpredictable regulatory environment for tech companies and their investors. While new regulation can enable growth, it can also threaten to stifle innovation and creativity. For example, in recent months regulators in some markets have acted to curb the use of cryptocurrencies, citing the risks of speculative trading. Meanwhile, a new “Digital Markets Act” has been proposed in Europe as a means of addressing issues surrounding fair competition practices among leading tech companies. Discussions around tax reforms for the tech sector also continue to rumble on in the background.
Similar trends are being witnessed in Africa, both in terms of the acceleration of investment into tech and increased government attention on the need for appropriate regulation of the sector. Furthermore, Africa has always presented its own unique opportunities and challenges. The market opportunity to develop African tech is immense. Africa currently accounts for less than 1% of global data centre capacity – a staggering deficit when you consider that it is home to more than 1.3bn people, a population that is both rapidly growing and rapidly urbanising. Africa is also home to an uncomfortably large proportion of the world’s unbanked population (with 3.4% of them residing in Nigeria alone). Such statistics point to the breadth of opportunities in Africa’s tech ecosystem, from fintech to data hosting to digital logistics.
Risks vary between countries: the experiences of Nigeria and Kenya
Nonetheless, the associated challenges and risks can vary widely from country to country. The need to be properly informed about risks specific to each market, and how to navigate them, cannot be over-emphasised. Control Risks’ panel of Africa experts explored some similarities and differences between two of Africa’s largest tech markets, Nigeria and Kenya, in a 28 July webinar. Topics covered in the discussion included the following:
Regulation will continue to evolve
Nigeria is experiencing something of a step-change in its tech ecosystem. In 2021 alone, at least nine Nigerian fintech start-ups have announced capital injections ranging from USD 1m to USD 170m. This is on the back of the emergence of payments firms Interswitch and more recently Flutterwave as bona fide Unicorns. There is also an ongoing scramble among global technology firms and investors seeking to capture market share in Nigeria’s under-developed but rapidly growing digital infrastructure market. Investment is pouring into data centres, as well as terrestrial and under-sea cable networks.
All of this activity has not gone unnoticed by regulators. In Nigeria, we now regard regulatory risk as being on a par with the more traditional challenges of operating in the country. The recent ban on Twitter as well as curbs on cryptocurrency trading highlight the unpredictable and often sudden nature of regulatory intervention. Although the Nigerian government has acknowledged tech as a key contributor to economic growth and diversification, we have seen instances where disruptive new regulations have come into effect with sometimes as little as 24 hours’ notice and justified on the basis of protecting national interests. Sweeping statements about potential new taxes for the tech industry, albeit so far unmatched by concrete action, have also put tech companies on notice. However, industry experts also highlight that in many ways Nigeria’s tech industry regulators are on a learning curve and are striving to keep up with the pace of change. Nevertheless, the key takeaway here is that tech regulation in Nigeria is going through a period of evolution and it is wise to pay close attention to developments.
This contrasts somewhat with Kenya, where the tech sector, fintech in particular, is more mature and the regulatory environment is relatively supportive. However, Kenya’s regulators have expressed scepticism around the impact and uses of cryptocurrencies and the government introduced a new digital services tax earlier in the year. The government has also expressed concerns about the use of social media to promote inflammatory rhetoric. However, rather than introduce blanket bans or internet shutdowns, the government is more likely to rely on targeted individual arrests and prosecutions. Furthermore, the impact of social media on mobilising public protests has so far been limited when compared with elsewhere in Africa. However, the next general elections slated for August 2022 will be an interesting test for the use of social media in that context.
Security challenges with a local flavour
Despite experiencing periodic security crises, whether in the form of terrorist attacks or electoral violence, Kenya enjoys a relatively predictable security environment. An open media environment has also allowed social media to thrive, though the government is wary of external actors using online channels as a means of shaping public opinion.
Nigeria‘s myriad security challenges are well documented and the impact on specific segments of the tech sector can vary widely. Nigeria is also currently contending with high levels of opportunistic crime, including incidents of theft and vandalism. These will continue to pose challenges for digital infrastructure development, whether that be around vandalism of telecoms towers or theft of network cables. Furthermore, the Nigerian government’s stance towards social media in recent months has been somewhat adversarial. For example, it accused Twitter of enabling youth-led disruption that allegedly undermined national security.
Social and governance risk management is key
Many organisations are – and should be – invigorating their approach to environment, social and governance risks. There are a range of considerations specific to the tech industry. From the environmental side, tech organisations need to consider their impact on the environment. This can include energy consumption, with expanding data demands as well as the expansion of hardware manufacturing and communications networks.
However, the most complex issues facing tech companies in Africa will sit in the social and governance space. Risks include community relations issues, a particular concern for large infrastructure projects such as laying of cables or construction of cell towers. Such challenges become even more complex in rural areas, which might be difficult to access or where there might be a lack of clarity over land rights. If an organisation fails to manage such issues proactively and competently, this can result in a loss of social licence to operate, with consequences for security, operations and reputation. It is also critical to consider the labour rights element of technology infrastructure projects in Africa, where there can be less oversight of labour protections and human rights practices.
These challenges all call for effective security, community engagement and labour welfare frameworks, where there is no substitute for in-person engagement and on-the-ground monitoring and assurance. The challenges in this area are just as relevant to projects in Nigeria as they are in Kenya and indeed the rest of Africa.
Perhaps tech is where Africa’s business revolution will really begin to take hold, and there is sufficient evidence to support those who say that it might indeed be the case this time. It is also true that great risk often comes with great reward, and nowhere is this truer than on the African business scene. For instance, the scale of the opportunity in Nigeria, home to an estimated 200m people cannot be overlooked. African countries are also working towards increased cooperation on trade, as evidenced by the launch of the African Continental Free Trade Area in early 2021. There is therefore plenty of room for optimism, as long as the risk taker is well informed and plans ahead to navigate the potential challenges discussed above.