10 issues to consider when planning logistics in Africa

By Tielman Nieuwoudt

The high cost of transport is one of the biggest challenges for almost every industry in Africa. It is estimated that the cost of transporting goods is 60-70% higher than the US and Europe.  In particular, landlocked countries such as Burundi, Rwanda and Uganda are very negatively impacted, as these countries depend on transit solutions in neighbouring Kenya and Tanzania. For example, a report by Trademark East Africa revealed that it takes up to 71 days to import goods to Burundi from any of the other East African Community member states. 

Below are a number of issues to consider when planning your outbound transportation:

Road network 

The transport systems of Africa vary significantly across region and countries.  For example, Chad has only 60 km of paved roads per million people, whereas countries like Algeria, Tunisia, Namibia and Botswana boast over 2000 km of paved roads for a similar population.  Organizations need to have a good understanding of the road network, including trade corridors.

Network design

When considering your network design in Africa, you also need to consider the absence of all-season roads in certain areas. In many countries, a number of cities and villages are isolated during the rainy season. During a recent network design project in Tanzania, these additional issues provided some challenges for our network design software.

Rail

The railway, a relatively inexpensive means of transportation, has also been neglected with very few rail extensions in most countries. However, the cost of rail freight is double the cost in Asia and one-and-a-half times as high as in Latin America (UNECA). However, rail remains an option in some countries, and there is increased investment in the rail network.

Road safety

Road traffic injuries are a major concern in Africa. Many organizations restrict any night travel, as roads are considered too dangerous.

Fuel

Prices vary significant across the continent. In some countries large volumes of fuel have been smuggled across the border. For example, in Benin is estimated that 80% of the fuel is smuggled across the border. In Nigeria the fuel price is about N140 ($0.89) a litre, where in Benin is retails for N250 ($1.59) at the pump, and N200 on the black market.

Third party logistics (3PL) 

When considering outsourcing your road transportation, it is important to determine where 3PL companies operate in the country.  3PLs often cover the major roads well, and will likely offer reasonable rates for these routes. However, these costs escalate the rougher the road, as transporters need to factor in truck maintenance for these rough roads.

Agents 

In some cases agents are used to find and negotiate on the behalf of the company. Often agents are in a better position to negotiate better rates than big multinational companies.

Collaboration 

Assess potential organizations that you can collaborate with to consolidate shipments. In African markets, volume tends to be low and cash flow is limited. Hence, more frequent deliveries are required, resulting in Less than Truckload (LTL).  For example, it is a common practice for distributors and wholesalers in African markets to consolidate shipments ( e.g. Lagos Fair Trade), ensure Full Truck Load (FTL) and in the process reduce distribution cost.

Backhauling 

Organizations also needs to review backhauling opportunities. There are real opportunities in smaller towns to negotiate favourable rates where trucks are backhauling. Backhaul is a return journey of a vehicle from its destination to its point of origin with a non-paying load. However, the concept is still foreign to many transporters and most will try to charge you the full amount.

Transportation maintenance 

You also need to understand the make of vehicles that have readily available spare parts and maintenance in the country. During a project in South Sudan, we identified a make of vehicles that could not be serviced in the country. The vehicles had to be driven back to Kenya for service as there were no spare parts available in the country. Finding qualified technicians also turned out to be a major challenge.  In a country that struggled for years with civil war, there are just not enough technicians in the country.

 This article is re-published with permission from Frontier's content partner, The Supply Chain Lab.

What is private equity doing about risk in Africa?

​What does risk look like in the New Africa with its impressive headlines on growth, investment, and the emerging middle class?

The truth is that risk in Africa today is murkier than ever: lessened by reforms, muddled by continued misperceptions and shifting reputations. What does this mean for private equity (PE) investors – buyer beware? Yes and no. You just have to know where to look, and who to ask, according to Deloitte's latest East African Private Equity Confidence Survey.

Many of the elements that characterise African Private Equity portfolios are also their principal risk factors. Investors must plan for longer term engagements: projects in Africa can take triple the time of other markets to get off the ground from inception to income flow. Most deals are growth investments that require hands-on engagement. And the prominence of development finance in African PE means that investors must further contend with impact mandates and consider what acceptable risk looks like for any Development Finance Institution (DFI) partners.

Operational risks are the number one concern for most PE investors in Africa. General Partners (GPs) want to work with strong companies and good management teams, but those can be difficult to find in what is still a relatively immature corporate environment. The lack of larger deals and resulting focus on SME investing lessens the amount of track record information that investors have to work with. Many smaller deals are also minority stakes, and in those cases it is especially important to understand the people you are doing business with. Reputational risk looms large, and can become particularly critical for sensitive DFIs who answer to tax payers in their home markets. Investors need to assess the type and extent of corruption risks they face. In principle, corrupt staff members can be replaced. But if corruption is intrinsically linked to the company, it will be hard to work around.

Political risk today is much more nuanced than exploding headlines, and often linked to corrupt local politicians who like to disagree with the ‘nature of the investment’. Citizens are also legitimately becoming more vocal, helped by stronger media and, importantly, by their ability to expose wrongdoings on social media. However, even for the best behaved investors who tick all the right ESG (environmental, social, governance) boxes, risks remain: In a corrupt environment, it is still easy for vested interests to mobilise the local population against investors, and feed a distorted media campaign. This is a particular challenge for any investment involving land rights, whether in extractive industries or in large-scale commercial agriculture: land is a notoriously emotive and mismanaged asset.

Regulatory risk in Africa varies widely across sectors and countries – as do corresponding political risks. The risk of corruption and the risk of government interference in a deal will increase commensurate with both the strategic status of the sector in the country and also with the size of the sector. For strategic sectors such as oil and gas, mining, infrastructure, land-related agribusiness or financial services, investors face increased risk of political interference, hidden ultimate beneficial owners, corruption and legislative change. Larger, expanding, multi-jurisdictional sectors like retail and fast-moving consumer goods offer a happy medium, with more opportunities and less vulnerability.

Due diligence: Most PE firms do initial due diligence in house. The model, in any emerging market, is very relationship driven and even more so in Africa, where all investors will need to build up capacity on the ground quickly to keep up, whether through local offices, on-the-ground teams, fly-ins or local partners. There is a historical impression that you need to identify a Mr. Whatever-the-Country is that you’re working in who can open doors for you, but that is changing. More PE funds do the ground work themselves these days.

Risk insurance: Once in bed, political risk insurance as offered by MIGA and ATI or guarantee schemes can hedge further risks, but PE funds have not traditionally gone this route. Cost is a disincentive for GPs and LPs alike – just a few percent per annum can cut into your returns. And for private investors, most of whom still avoid real frontiers like CAR, insurance is not enough to make them comfortable with the risk. At that level, you’re either in or you’re out. Many investors in Africa hedge using mezzanine structures, pure debt or convertible loans.

Veterans and newcomers: Overall, seasoned investors that have been in Africa for years – Aureos (now Abraaj), ACA in Nigeria, or ECP to name a few – are better equipped to manage these risks. They are more accustomed to long-term investments, more familiar with local regulations, have more support built up in house, and more deeply rooted networks. They may have also already made mistakes that taught them crucial lessons. But there are so many opportunities across Africa that even PE outfits new to the market can find their way around it as long as they invest time and resources identifying the right deals for their investment profile and finding partners they can trust.

This article is extracted from Deloitte's latest issue of the 'East African Private Equity Confidence Survey'.

See the full report here

The ultimate guide for sea freight and shipping from China

By Fredrik Grönkvist

Figuring out how sea freight works is challenging particularly for small businesses. This guide is a well-rounded introduction to shipping and sea freight.

Unlike most sourcing agents I didn’t have a clue about how sea freight worked by the time I set up my first business. Another thing that struck me was the fact that it was, and still is, very hard to find decent information on how sea freight and shipping from China is actually working. I know that this is a big concern for small businesses importing from China and I receive questions about this topic on an almost daily basis.

My hope is that this article is going to provide the reader with a well rounded introduction to shipping and sea freight. In this article, I’ll introduce the reader to the shipping process and some of the things that you better keep an eye on when importing from China.

Incoterms 

Shipping Incoterms are international standard codes that decide when and where cargo shall be transferred between the supplier and the importer.Incoterms may look a bit confusing at first sight, but they are not hard to get at all. Basically an incoterm consists of two components: a three letter code and a city name. The three letters incoterm code specifies “how far” the supplier shall ship the cargo. Basically how much of the shipping you pay the supplier to handle. Based on the incoterm you select, you can let the supplier handle the shipping of products to a nearby port in China or all the way to your front door. I recommend inexperienced importers to select an incoterm that takes the cargo as far as possible. 

FCL & LCL shipping

Sea freight is not exclusive to those importers who purchase large quantities from China. If you want to import by the container then FCL (Full Container Load) shipping is the right choice, it’s also the cheapest mode of transportation if counted by cost per kilogram. However, for smaller buyers LCL (Less than Container Load) is available. In fact, you can basically ship cargo with very small volumes - even less than one cubic meter. See an in depth guide to FCL and LCL shipping here.

Who’s managing the sea freight?

There are two options here, either the supplier or you. I’ll begin with explaining the latter. Letting the supplier manage the shipping is common among inexperienced importers and even we let the supplier manage the shipping from time to time. It’s very simple and all you need to do is to tell the supplier that you want them to ship the cargo as CIF “Port of destination” (you actually have to specify which port you want it to be delivered to) and they’ll do the rest. The downside is that you’ll probably end up paying a bit more than if you would have managed the shipping by yourself.

As mentioned, you can also manage the shipping by yourself. This doesn’t mean that you have to swim all the way to China, pick up your cargo and then swim back home. It can be done from the comfort of your home and office by hiring a shipping and logistics agent. These companies are everywhere and they tend to offer discounts in return for a fairly small yearly service fee. The shipping agent can then manage your shipping,  from the Chinese supplier to a nearby port or a specific location within your country (i.e your warehouse).|
Do I need to pay any fees or taxes in China? 
No, you don’t need to pay any “export tax” when importing from China. However, you will need to pay for transportation to the port of loading in China and the cost for export clearance papers. Both of these are included in every incoterm from FOB (Free on Board) and above so you don’t need to even bother with this unless you select EXW as your incoterm.What about insurance?Insurance is included when you select CIF, that’s why it’s called “Cost Insurance Freight”. However, the definition of the insurance may vary between different shipping companies. When you let your supplier manage the shipping you are not in control of which shipping they select, which is probably the cheapest. I suggest that you contact a local shipping agent if you want to know what the insurance actually covers.Delivery timeThe transit time from China to most locations in Africa, Europe and the US is roughly 29 – 35 days. However, keep in mind that it can take a few days – sometimes up to a whole week – before your cargo is loaded in the port of loading in China. The same thing is true in the Port of Destination, it usually takes two to three days before your cargo is cleared and ready for pick up.

Sea freight is indeed quite slow and this means that importing from China certainly requires a lot more long-term planning compared to domestic product purchases. This has also been a major cause for the recent surge in reshoring in Europe and the US. In general I recommend businesses to place an order at a minimum 3 months before they need the products in their warehouse.What happens when the cargo arrives at the Port of destination?
Click here to read the rest of the article

Prospects for cement companies in Africa

Free download report: Outlook for the cement industry in Africa

Cement companies are expanding their footprints and investing in more capacity to meet the rising demand for cement in Africa.

In East Africa, old and new players are jostling for a share of the booming market, with Kenya and Tanzania attracting the most interest from investors.

In Southern Africa, cement companies are expanding to take capture growth opportunities in the region's massive pipeline of infrastructure and housing projects.

In West Africa, companies in Nigeria are taking advantage of government incentives to increase cement production.

Imara Securities looked at the sector recently and compiled the cement outlook report that we are now sharing with you.

Download the report  to get comprehensive information on:

• Regional consumption and production trends
• Drivers of consumption
• Opportunities for investment
• Risks for investors
• Top industry players and other Pan African companies to watch

To access this report you must be a Frontier member. Click on this link to sign up and get immediate access.

Visit www.frontiermarketnetwork.com to read some country-specific articles on cement production.

Private equity success story in Botswana

CEO of Venture Partners Botswana, Anthony Siwawa, speaks about the opportunities and challenges in the private equity industry in Southern Africa.

What led you to create an investment firm focused on Botswana? 

I come from a corporate finance background and spent some time investing in private equity in South Africa before moving back to Botswana. We established the business primarily because we saw the gap in capital deployment; 90% of the local capital was reserved for investment in the public market whereas the majority of the capital needed was in the private markets. Botswana had come from 30 years of uninterrupted high growth but investments were primarily in extractive industries. We wanted to channel capital into the fast growing local companies. 

What were the challenges you faced when fundraising for the first time? Do these challenges still exist and what strategies have you developed to overcome them? 

To fundraise effectively we spent a lot of time educating the market, government and regulators, as there wasn’t a strong non-banking regulatory framework. At the same time, the government was evaluating ways to stimulate the local economy, broaden the economic base away from traditional extractive sectors and attract capital from the private sector. 

This culminated in the launch of the CEDA Venture Capital Fund (CVCF) in 2002, which was primarily sponsored by the government of Botswana through the Citizen Entrepreneurial Development Agency. It was a US$40 million fund, which provided venture capital and growth equity financing to indigenous companies in high growth sectors such as manufacturing, retail, agribusiness, and financial services. 55% of the fund was dedicated for venture capital investments and 45% for growth capital investments, with ticket sizes between US$0.5 - 5 million. 19 investments were made through the fund, with 10 successful exits as of February 2014. 

In 2007, we decided to become a regional firm as part of our expansion strategy, after honing our investment strategy on the first fund. We focused on Namibia as it has the largest institutional structure in sub-Saharan Africa outside of South Africa, and there were only subtle differences between the economies of both countries. We were able to successfully raise the fund (approx. US$ 20 million) in 2010 from local Namibian institutional investors, as they saw this as an opportunity to re-invest in private equity, taking cognizance of the regulatory changes with regard to alternative assets as well as the country's need for risk capital. We had also considered raising capital from international institutional investors, but 2009 - 2010 were difficult years for fundraising globally. 

On our latest fund VPB III, we have developed a different fund strategy, which will enable us to list the fund on the Botswana Stock Exchange to attract investors from Botswana, Namibia and South Africa. This gives institutional investors an opportunity to invest in a listed entity (which they are familiar with), while accessing alternative investments. This hybrid model was created in response to local investor appetite. 

Beyond the extractive industries, what makes Botswana and Southern Africa an attractive area for investment? 

Southern African countries are going through significant infrastructure investment, which has driven growth in consumer demand. Hence our focus on primary industry sectors such as logistics, retail, financial services, healthcare and service industries, like hospitality across the SADC region - Botswana, Namibia, Mozambique, Zambia and South Africa

How has the environment for sourcing deals evolved with South African fund managers and companies looking north of their borders to access growth opportunities? 

As majority of our deals are sourced through our local networks, we are seeing some competition for deals, however we also view these companies as potential investment partners, (as they are relatively new to the market) and future exit opportunities. For example, we invested in a local transport and logistics business and then brought in a large multi-national as a partner, and have successfully grown it into a sector leading company.

How do you address the well-documented issues to investing in African SMEs? How do you create value in your investments to maximize your exit potential? 

We’ve found that entrepreneurs and family owned businesses don’t understand the asset class and its value-add, therefore education forms an important part of our investment process. On all our investments, we acquire a significant minority stake, take board seats, establish reporting requirements, instill improved governance procedures and have veto rights on major decisions. It is important to note that a key value addition is developing clear strategies for achieving economies of scale expeditiously, in order to realize value upon exit. 

In addition, we found that constant engagement and proximity to the portfolio company is also key to driving value. To date, the majority of our exits have been strategic sales or sales back to the entrepreneur / founder. 

What is your one key message to the market? 

As investors in Africa, we understand the needs of the local economy. We are primary industry investors and we know where future growth will emerge. These markets require clear, informed strategies that are tailored to the needs of the local economies. Success in our markets is rarely a straight line.

Anthony spoke to Frontier's content partner, the African Private Equity and Venture Capital Association (AVCA)

AVCA promotes and catalyses the private equity and venture capital industry in Africa.

How to distribute agro products in Africa

Are you an agro products supplier looking to access dealers servicing small-scale farmers in Africa?

There is now more investment and innovation in supply chains, presenting great opportunities in this market segment.

There is increased interest in agriculture in Africa and in particular small holder farmers (SHF). SHF’s output remains low and is seen by many organisations to hold the key to the chronic food shortages in Africa.

There are some key challenges for suppliers looking to expand their footprint to access agro dealers servicing small holder farmers.

Infrastructure – Infrastructure remains a key challenge as distances are great in African upcountry areas. According to the Monitor MBS report, the population density of India is five times that of Kenya and Senegal. Some farmers have to travel in excess of 50 kilometers for purchases from agro dealers. While African road networks have improved considerably in some key markets (e.g. Tanzania and Ethiopia) they remain generally poor.

Transport - According to a World Bank study, transport cost in Africa could be as high as 40% of profits. Dealers are adamant that investment in transport is essential to running a successful agro dealer business. Unfortunately, investment in trucks tie up much needed capital that could be used for inventory.

Channels – Channels and markets are less structured and accessing agro dealers servicing SHF in these fragmented markets can be an expensive undertaking with low returns. Few companies have the product mix to penetrate these markets and forming meaningful collaborations with other organisations or companies can be difficult. As one company put it to me, “the margins and product range are just not there”. Often companies poorly understand the landscape of potential organisations and partners they can work with.

Agents – Working with agents to reach SHF farmers can be an expensive and frustrating undertaking. Agents often require intensive training and turnover remains high. Agents are also sometimes left to their own devices with little supervision, support and no clear sales targets. Often limited attention is given to agent and agro dealer selection and they fail due to poor support.

The right product mix and timing – Due to seasonality the product range will not stay constant and companies don’t stock the right product mix for the required season. As one agro dealer put it to me “when we are looking for pesticides they have herbicides”.

Inventory and finance – For agro dealers, it is constant battle to stock the “right product” and maintain the required working capital. The high cost of finance and access to capital remain one of the key challenges for agro dealers. During the low season, paying business overheads can be a challenge, and often agro dealers lack the required business planning to plan for these seasons. Farmers often have to travel great distances for banking services, tying up valuable time and resources.

Counterfeit products – Whether you are in Botswana or Burundi, counterfeit products are increasingly a big problem for farmers.

Scaling models – Often, Bottom of the Pyramid (BoP) Route-to-Market models are in the early stages of development. Scaling the models remains a key challenge. As many companies have learned, you can run perfect pilots with all the “bells and whistles” but scaling it profitably remains an Achilles heel for many organisations.

Demand – As many companies in the BoP segment have discovered, need for a product does not always translate into demand. Often limited Below the line (BLT) marketing support is provided.

How to overcome challenges

To overcome these challenges, companies and suppliers require an innovative Route-to-Market model and partnership to access agro dealers servicing SHF. The following options could be considered to overcome these challenges:

Value proposition – Companies have the potential to create a unique value proposition by providing transport, investment, training and other services. As one agro supplier framed it, “we need to understand the hooks to get agro dealers to support our business”. Understanding the “hooks” or value proposition should be key for any Route-to-Market design teams.

Collaboration – For companies, it is important to assess the landscape and identify companies and organisations they could potentially collaborate with. Farmers in rural communities want to buy at a “one-stop shop”. As previously mentioned, few companies have the required product mix to provide exclusive dealership. Companies can also aim to provide a bundle of goods and services. Potential services and products could include insurance, credit facilities and agro information such as market prices. Shared channels and a bundled approach to services and products can go a long way in reducing cost and making Route-to-Market models viable.

Understand the consumer – It is important to understand the consumer or farmer. Products need to be tailored for the market. Farmers are price sensitive and price points need to match the farmers’ cash flow. As we have also seen in the consumer goods segment, best in class companies provide the right package sizes (e.g. Unilever sachets) at an affordable price (Coca-Cola 200ml returnable glass). A good example in the agriculture sector is Bayer’s Green World Stores that provide smaller package sizes to agro dealers.

Order generation and transport – Companies can assist agro dealers with order generation activities. This could be through the role of an agent or centralized telesales. Orders and shipment from multiple agro dealers could be bundled together to save transport and transaction cost. As previously discussed, for many agro dealers in rural areas, transport remains one of the biggest expense items.

Inventory holding and depots – Agents are facing high transport cost and great distance to make purchases, additional distribution centers and micro depots are often required. These depots could be managed by 3rd parties. Companies can also opt for shared facilities with other companies or organizations to reduce cost.

Value chain and pricing - Many companies have poorly designed pricing strategies and agro dealers often find them competing against other hybrid distribution models such as supplier owned and controlled retail shops and wholesalers. Companies need to map out the value chain and assess the margin required for each partner in the value chain.

Agents and marketing activities - With the right training, incentive schemes and development, agent networks can become important sales components for any company hoping to reach agro dealers in rural communities. Farmers are highly risk adverse and agents can act as key opinion leaders (KOLs) and help create demand and educate dealers. As one agro dealer put it to me, “farmers often buy products when they are not sure what the product will do”. Agents can provide an important role during field days and introducing farmers to demo plots in their respective territories. They can also distribute information and provide below the line (BTL) marketing material such as posters and pricing decals. Finally, agents can sell value added services (e.g. crop spray) and products (e.g. micro-credit) that will increase their income and make the model more sustainable.

Shop fixture and merchandising - Companies can assist with shop fixtures such as racks and also provide value information about merchandising, including supporting merchandising material.

Finance and access to capital - Agro dealer networks can play a key role to assist agro dealers to access capital through banks or Micro Finance Institutions (MFIs). Companies can also assist with start-up cost, consignment stock and provide credit facilities. Companies should also explore collaborations with mobile phone companies to provide m-banking facilities.

Reducing counterfeit - By establishing a reputable supply chain through certification and training, companies can educate dealers about counterfeit products. , including to bar codes and registration (e.g. Nigeria’s NAFDAC registration). As we have seen from the pharmaceutical sector, technology can play a key role in addressing counterfeit (e.g. M-pedigree).

Selection and Training - Companies need a robust system to identify and select dealers ad agents. Understanding the complexity of the sale and determine how much training is required. For example, agro chemicals require specialised training to handle and store chemicals. As training is expensive, it is sometimes necessary to select and work with a limited number of agro dealers and/or agents. Companies and organization can also collaborate on training requirements, such as basic business skills and business planning, to reduce cost.

Many SHF supply chains are long and expensive, but there is increased investment and innovation happening in the SHF landscape. Collaboration remains key and even though the road to these fragmented markets is difficult, there is potential for great rewards.

This article is supplied by Frontier's content partner, The Supply Chain Lab. 

The Supply Chain Lab is is a group of supply chain improvement specialists with a focus on factory to village supply chain solutions in frontier and emerging markets. The Supply Chain Lab focuses on strategy, assessments and implementation.