Rwanda :A Fresh Look at Investment Potential and Limitations Tuesday, 15 April 2003

Transcription

1 Rwanda :A Fresh Look at Investment Potential and Limitations Tuesday, 15 April 2003 After listening to Rwanda's President Paul Kagame speak at an investment symposium in London in November 2007, Ritesh Doshi undertook several trips to Rwanda in January and February 2008 to assess the country's investment opportunities. Rwanda is a small, beautiful, land-locked country with kind but reserved people. The country is much smaller compared to its regional neighbours, but as a member of the Common Market for Eastern and Southern Africa (COMESA) and the East African Community (EAC), it has access, at least in theory, to a much larger market comprising of over 400 million people across 20 countries. Rwanda has approximately 9.5 million people, of which 90% live in the rural countryside as subsistence farmers, but the literacy rate is surprisingly high at over 70%. The main ethnic groups are the Hutu (84%), Tutsi (15%), and Twa (1%); however, after the genocide, ethnic identification has been banned, and most Rwandans say that they are Rwandan when questioned about their tribe. Over 55% of the country is Roman Catholic, and another 35% belonging to other Christian denominations, with a small number of Muslims. The government has been led by President Paul Kagame since 2000, although his party, the Rwandan Patriotic Front (RPF) has been in power since The forward-thinking leader has been praised by many for establishing security and promoting reconciliation and major strides in economic and development terms, but has also been criticised by some for being overly authoritarian and intolerant of dissent. The ruling elite appears to maintain strong relations with the business elite, which should come as no surprise given the pro-business stance of the government. The lack of open corruption gives one comfort that there is a more level playing field, although things are far from transparent. Being aligned with, or at the very least in favor with, certain people certainly does not do any harm. The government has also secured strong military and economic support from the West, namely the US, for its pragmatic, pro-business, no-corruption approach to business and development, and is largely seen as a regional ally given its strategic location in central Africa. Although there is little opposition to the ruling party, which is dominated by those loyal to the RPF, other token parties do exist. At 40%+, the Rwandan parliament also boasts the highest number of women anywhere in the world. President Kagame was the head of intelligence in Uganda for a number of years, and a number of people believe that the intelligence-led approach has led to the government always knows what you are doing. Although this cannot be corroborated first hand, one would be advised to maintain a low profile. The one benefit of the security presence is an extremely low crime rate, which makes Rwanda an ideal place to live and work, especially when considering the alternatives in East and Central Africa. The Rwandan economy experienced significant growth between 1995 and 2002, but has tapered down slightly since then, although inward investment in the last few years has been high. The significant investment into Rwanda in the last few years is as a combination of the West s positive sentiments about President Kagame and his government, as well as the optimism of the large number of returning Rwandans. The sectors fueling the growth until 2002 were increased output in manufacturing and agriculture, and more recently, in transport and logistics and tourism. The government continues to spend significantly on developing the country s infrastructure, which is vital to economic growth. Year GDP Growth % (Average, per year) % % % % % Sources: The sense of personal safety is one of the first things people observe on their first visit to Kigali, especially seasoned travellers to Africa. Not only is it the safest city in sub-saharan Africa I have visited, but amongst the safest I have travelled to anywhere in the world. Much of this can be attributed to the security services and police presence. The second thing one observes is how clean the city is. In addition to the strategic placement of (and actual use of) trash cans throughout the city, Rwandan citizens are required to commit the last Saturday of every month to engage in community service (umuganda), comprising of rubbish collection, building maintenance, or landscaping public areas. Investment Opportunity I believe that opportunities in Rwanda are plentiful, namely for small and medium sized enterprises (SMEs) and entrepreneurs, but less so for larger corporations. In a country that is rebuilding in parts, and building for the first time in others, opportunities are in every direction one looks. The following sectors are those that are or were of interest to me; during my time in Rwanda, my interest in some areas has grown, and in others completely diminished. Real Estate Rwanda is the most densely populated country in Africa with 343 people per square kilometer. A large number of returning and diaspora Rwandans have, driven by increased optimism for their country, purchased homes and land. Given that land is limited, this has fuelled the recent property boom and turned Kigali literally into a construction site.

2 Market appreciation is officially 16%, but in reality is closer to 35% according to a local estate agent. Rwandan land legislation can be difficult to understand. In a nutshell, titles to land are only granted on developed properties; when undeveloped land is purchased, the owners are granted an ownership contract with a 99 year lease. Upon approval of development plans, they are issued with a certificate confirming their ownership; once construction commences, one can apply for a full and permanent title. Kigali is growing rapidly, with hills that were bare a few months ago now littered with social security funded housing estates, and new developments of mansions built by the ruling and business elite. Residential property prices in prime locations range from USD75,000 for a three-bedroom house on a housing estate to mansions for USD250,000 on the hills overlooking Kigali s golf course. Rents are disproportionately high, resulting in high yields, with flats and apartments commanding premium rates of over USD2,000 per month, especially from expatriates, given that lack of smaller high-quality dwellings. Land is increasing in price, particularly in the hills surrounding Kigali. Commercial and industrial rents vary on location and size, but USD2,500 per month for a 10,000 square foot warehouse is common, while 30 square meter shops in town rent at USD900 per month. Development costs are approximately USD550 per square meter, including material and labour, but excluding the cost of land. Most construction is completed by local firms; thus what is effectively an oligopoly on skilled labour, coupled with transports costs for fittings, keeps development costs higher than the rest of the region. However, this can be reduced by up to 40% by importing the required materials as a foreign investment and brought in tax and VAT free. Developments can be a maximum of four floors (excluding the ground floor) before an elevator is required. Leisure and Entertainment Rwanda is a fast growing country with an increasingly affluent population. Although the income gap appears to widening, spending across all socioeconomic groups is rising, Unlike other capital cities in the region, the highest-earning groups are not entirely catered for. Apart from food and drinks, there is little else to do. On any given day, Bourbon Coffee (equivalent to Starbucks in the west or Java in Kenya) is busy all day, and at peak times finding a table is difficult. The levels of energy and buzz are reminiscent of the technology boom toned down a little of course, but with the same vibe, and lacking any concern for irrational exuberance. The opening of Bourbon s second branch will ease some of this congestion, although it s unique offering in Kigali will likely attract new customers who are less willing to travel far (by Kigali standards, 10 minutes) into town. On Tuesdays and Thursdays, the Hotel des Milles Collines packed out with a mixed crowd of locals, expatriates, and tourists, while the Serena Hotel s happy hour on Fridays hosts the Who s Who of the diplomatic, government, NGO, and business community. Weekend nights are easily wiled away at the recently opened Bee Lounge, Planet or Cadillac. The abundance of bars appears to be breeding a culture of alcoholism amongst the 20 and 30- somethings of Kigali. The restaurant scene is excellent in terms of quality, but variety lacks when compared to Kampala or Nairobi. The number of restaurants and bars catering to a demographic of perhaps 50,000 high spenders is low, with clientele always seeking new venues and options. The recent introduction of DSTV has been met with strong demand. However, the opportunity to exploit the lack of entertainment options is compelling; cinemas, bowling alleys, gyms and other entertainment options still exists. With the large number of returning Rwandans from the West and an increasing number of expatriates, the demand for leisure and entertainment is poised to grow. Coupled with the increasing propensity to spend by well-off locals, a new form of entertainment could capture a significant part of the market if positioned correctly - especially for those with children. Agriculture Rwanda's climate and altitude are ideal for growing a variety of crops, and as expected, coffee and tea are widely grown and exported. To date, little value-added washing or processing is done in country, but this is changing rapidly. Agriculture is responsible for 40% of the country s GDP, and over 90% of its employment. The highlands of the north provide the perfect environment to grow flowers, while avocados are easily and naturally grown in the southern part of the country, but not yet on a commercially viable scale. It is claimed that citrus fruits grow easily, but there are currently no large plantations. Rwandan chillies are popular locally and some of the hottest varieties in the world are grown here. A senior purchaser at Marks & Spencer recently mentioned that Rwandan passion fruit is the best he has ever tasted, and attributes this to the low levels of acidity. The main challenge to the export of any fresh agricultural or horticultural product is air transport costs. The current cost of air transport from Kigali to Europe is almost USD2.50, while it is USD1.80 from Nairobi and USD1.60 from Addis Ababa. In theory, the government is prepared to subsidize the cost for exporters to the ex-nairobi price, although this has not been tested in practice. The government is also willing to negotiate other subsidies, depending on the size of one s operation.

3 Processed agricultural products such as dried fruits and chilies, oil, or other extracts appear attractive as the cost of transport back to the ports is lower than import costs (USD2,500 for a 40 foot container). Furthermore, value-addition in Rwanda, where the cost of labour is low (as a result of the lack of trained staff), is beneficial to the local economy and to margins, which makes this an increasingly attractive option. In addition to Europe, the Middle East is becoming a destination for African agricultural products of high quality, as a result of a discerning customer base in that market. Tourism: Hospitality and Services Rwanda has been a tourist destination for a number of years, with numbers increasing yearly. The main attractions are the gorillas in the north of the country, although the rain-forests of the south, savannas of the east, and lakeside resorts of the west also have potential. Currently, tourists number approximately 30,000 per year, spending approximately a week in the country to visit the gorillas and Kigali. Even though decreasingly so, they often combine their trip with travels in Kenya and Tanzania. There are claims that tourism is growing by 20% per year, but that has not been substantiated. The business hotel sector was of interest prior to my arrival, but the number of high-end hotels currently under construction suggests that an over-supply of rooms is likely to occur in 2008, especially in Kigali. In addition to Dubai World committing to invest USD230 million in five properties across the country, a four-star hotel is being built by a UK real estate developer - complete with three full service restaurants, a spa, and a state-of-the art gym. Two others are under construction, but further details are not available. With the exception of Dubai World I remain sceptical about the medium-term returns in the hospitality industry, especially for new entrants. Poor service is a concern - most people in Kigali have become accustomed it and rarely complain. Outside of directly investing into hospitality, the most obvious ancillary service would be a training centre for hotel, restaurant and bar staff. The reality is that large hotel groups conduct their own training, as do many local restaurants. The others are unlikely to have their staff professionally trained due to high staff turnover rates, nor will above-average rates be paid for those already trained. The Rwanda Tourism Institute has been providing short term training (1 year; USD750) since 2006, and in 2007 introduced full four year degrees (USD3,000). They have partnered with Utalli, the long established and well respected Kenyan School of Hospitality, which gives RTI some credibility. However, given my doubts that there will be a significant growth in tourist numbers, a second school of hospitality would be difficult to justify, even with improved quality. Manufacturing and Processing The manufacturing sector is a vibrant part of the Rwanda economy. However, given Rwanda s recent entry into the EAC and its membership of COMESA, and with a view to bring it to parity with the other member states by the end of 2008, I believe that that manufacturing opportunities will become limited as challenges such as increased competition will arise. Without the scale of Nairobi or Kampala or easy access to inputs, the opportunity to cost-effectively manufacture diminishes rapidly, and is truly limited to a few industries where the cost to transport raw materials is higher than the cost to transport finished goods, such as jerry cans or bottled water. These COMESA-proof industries are the only ones worth investing in, and by local manufacturers accounts, can command a 25% net profit margin. The manufacturing sector in Rwanda remains both import and currency dependent; when coupled with the large upfront capital expenditure and an extended payback period of most industries, I have shied away from this sector, the only exception being the processing of agricultural products, addressed above. Trading Kigali is the trading hub for the country and the wider region, including Eastern DRC and Burundi; it also provides a bridge between Francophone and Anglophone Africa. The main challenge with trading is the high transport costs from the ports of Mombasa or Dar-es-Salaam: approximately USD5,000 for a 40 foot container; USD2,500 for a 20 foot container; USD180 per ton). Combined with the bureaucratic nature of Magerwa, the Rwandan customs bonded warehouse, the sometimes difficult-to-follow rules of the Rwanda Revenue Authority, and the lack of service from clearing agents, I am inclined to stay away from the trading sector as well. Challenges At present, one does not face the rampant corruption endemic in most sub-saharan countries, including East Africa, which is refreshing. Although obviously not insurmountable, this hassle factor is perhaps the number one deterrent to doing business in Africa, and the Rwandan authorities seem to have mitigated this to a large extent, although who you know matters more in Rwanda than its neighboring countries, given the lack of corruption. The challenges that Rwanda faces are a result of its landlocked location in Africa and its socioeconomic make-up: {tab=land-locked} Rwanda is land-locked, bordered by Uganda, Tanzania, the Democratic Republic of Congo, and Burundi. The majority of goods that arrive by ground come through Mombasa, although Dar-es-Salaam is being used increasingly, especially in light of the recent unrest and resulting transport interruptions in Kenya.

4 The two largest factors that impact most businesses importing raw materials or finished goods are cost and transit time. The average cost to transport a 40 foot container from Mombasa to Kigali is USD5,000 (USD180 per ton), while transit times can vary from two to six weeks after arrival at the port. Part of this can be attributed to the actual travel time, while port delays are not uncommon and more prevalent in Tanzania. The cost of the reverse - sending a container to Mombasa - is USD2,500, while transit times are similar. Most containers leave Rwanda empty, which creates an opportunity to process / manufacture locally and export by land. Air transport costs are high (USD2.50 per kilogram), and make it costly to export by air, despite flights to Europe via Nairobi or Brussels and a few cargo-only flights. The practical impact of these transport costs are exaggerated prices for anything imported, such as USD10 for a bottle of shampoo. ` {tab=workforce} Rwanda lost over 10% of its population in the genocide, and thousands more who fled the country. Unfortunately, many of these people made up the educated classes, leaving an acute shortage of skills and qualified people, which is still evident today. Monthly salaries are low, and the figures below include any tax or social security contributions that the employer must make: Regional Expatriates: USD1,000 + USD500 for housing Skilled Workers: RWF 65,000 (USD130) Unskilled Workers: RWF 50,000 (USD100) Rwandan employees work hard, even if less effectively than their Kenyan counterparts. Trained staff are far and few between, but most workers are generally honest and there is very little theft. {tab=market Size} Rwanda s population is approximately 8 million, of which 90% is rural. About 800,000 people live in Kigali, with another 200,000 commuting to work there daily. There is a large income gap, and a virtually non-existent middle class; the urban dwellers are by and large the haves. Although I expect a middle class to emerge in the next decade, its current absence means that the two business segments I believe will prosper in the near term are those catering to the masses, and those focused on supplying to the upper end of society, or earmarking their products for export. The small population is compensated for by Rwanda being the main trading partner with Eastern DRC. Goma, the hub of Eastern DRC, is a large purchaser of many of Rwanda s outputs and a vital trade link exists between the two. {tab=power} Electricity penetration across Rwanda is low at 5%. Kigali is fairly well connected, although shortages as well as surges are frequent. The government is making strides to exploit the natural gas resources in Lake Kivu, and is also looking to utilize micro hydroelectric power given the favorable terrain. The government has realized that the lack of power is a major impediment to growth, and is taking strides to resolve the current situation, although it may take longer than expected. Many manufacturing companies rely on their own generators and regulators, which raises the cost of production considerably and makes competing regionally difficult. {tab=instability} The opportunity in Goma is presented by regional instability, which is more of an issue than any internal security matters. Historically, these regional issues have been limited to Eastern Congo and Uganda, although more recently, the events following the disputed elections in Kenya have caused logistical difficulties, leading to shortages in fuel and food, and the resulting increase in prices.. {tab= Soft factors} All is not as it seems in Rwanda. Rwanda Investment & Export Promotion Agency (RIEPA) is mandated to make investing in the country a painless process, but the reality is that inefficiency and indifference at lower staff levels hinder rather than help in many cases. Commonly I heard that RIEPA put out the red carpet as companies look to come into Rwanda, but as soon as the companies invested, the red carpet was just as swiftly rolled back in. The Rwanda Revenue Authority also has some archaic and difficult-to-comply-with rules. This increased the time and cost to remain in compliance, which is challenging to any new business. With the lack of corruption, who you know matters more than in other African countries where small gifts can facilitate things. Whether it is well connected people in government or the business elite, development agencies or foreign governments, it sometimes takes a well-placed person to get something simple processed, and is worth keeping in mind. {/tabs} Conclusion - Open for Business Rwanda is a strikingly beautiful country full of warm and honest, although not necessarily skilled, people led by a forward-

5 thinking government that is making strides towards a market-based economy that is furthering development through economic growth. For the country s upward trajectory to be maintained, the investment in people must match that spent on infrastructure, i.e. roads, energy and technology, especially if the goal to turn the country into the service-based economy by 2020 is to be achieved. The zero-tolerance policy regarding corruption is unique in Africa, and appears to be largely followed throughout the system. The opportunities in Rwanda are plentiful, but limited at this time to certain sectors given the current dynamics. We see short- and medium-term opportunities in the areas of entertainment, real estate and agricultural exports. One foreign investor put it simply: There are two ways to operate in Rwanda: Either so far below the radar so that no one cares what you are doing or having such high level connections that no one can touch you. Kigali evokes memories of early-independence Nairobi, safe, clean and beautiful, making it an ideal place to live and conduct business. In some ways, however, it feels like the Wild West - full of opportunity, but not without its pitfalls. In conclusion, we believe that Rwanda s time has come, and it is finally open for business. {slide=about the Author} An experienced private equity professional, Ritesh founded Ndovu Partners to assist firms in the East African Community unlock value in their assets, in addition to identifying and capitalising on investment opportunities in the region. Having begun his career at Credit Suisse, where he worked in the Investment Banking Division and Private Equity Funds Group, Ritesh later established the London office of Probitas Partners, a boutique investment bank focused on private equity, where he was a Vice President. With five years of private equity experience, Ritesh took over a business providing human resource solutions to the pharmaceutical industry in the UK, which he restructured, re-branded, introduced new systems to and successfully sold to a trade buyer. Ritesh holds a BSc in Management from the London School of Economics & Political Science, where he is an Honorary Lifetime Student.{/slide}