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East Africa: Inside one of the world's fastest-growing markets

East Africa is growing at the fastest rate of any region on the continent. If contractors can tolerate the slow-moving bureaucratic wheels, they won’t be short of business opportunities. Binyamin Ali reports.

East Africa is one of the fastest-growing areas in the world.

With a collective GDP growth rate of 5.9 per cent led by the region’s big four economies – Ethiopia, Kenya, Tanzania and Uganda – business is booming across a variety of industries.

A large part of this boom is being fuelled by the need to build roads and railways, energy and agricultural infrastructure, as well as a huge housing stock for the growing populations.

Accordingly, opportunities for UK contractors are emerging at breakneck speed.

Multiple streams of work  

Atkins has worked across Africa for a number of years, but until recently this had been limited to consultancy work.

In October 2016, however, the company completed the acquisition of Howard Humphreys, a multidisciplinary consultancy based in Kenya and Tanzania.

“The real growth engine of [the continent] is East Africa,” says Atkins Africa managing director Paul Shepherd-Smith. “There are markets like South Africa which are very different and arguably more mature, so a market like South Africa is probably more difficult to break into. It already has international-quality firms operating there.”

The region that Atkins has targeted, combined with the business it acquired, have proven to be two shrewd decisions.

Howard Humphreys was founded in 1931 and is firmly established in Kenya and Tanzania – the two fastest-growing economies in East Africa. The firm also has a civil engineering background, which is an area Atkins has identified as a crucial source of business.

As well as targeting the pipeline of work in the infrastructure and civil engineering spaces, Kenya’s commitment to build up to one million affordable homes has encouraged Atkins to target some of this work too. “We’ve started to work with a developer on some affordable housing,” Mr Shepherd-Smith says. “It’s using modular technology so that we get speed and quality of construction.”

“The real growth engine of [the continent] is East Africa. There are markets like South Africa, which are very different and arguably more mature, so a market like [that] is probably more difficult to break into”

Paul Shepherd-Smith, Atkins

Many of the large-scale projects across the continent require structured financing deals that involve development banks and international financial institutions. This feeds into Atkins’ acuity business, a part of the company that specialises in “unlocking projects through structuring deals and making sure finance is in place, so that is absolutely the right environment for that kind of work”, Mr Shepherd-Smith explains.  

In 2016 a report by Deloitte found that some $27.4bn of construction works were either under way or had been approved in East Africa. Transport-related work made up nearly half of these projects, with energy and real estate accounting for 25.6 per cent and 11.6 per cent respectively.

With so much work taking place, co-ordination at government-level is critical. Having worked with the Qatari government’s central planning office to co-ordinate simultaneous national-level projects, Atkins is targeting consultancy work of this nature in East Africa too.

“The Kenyan government has got four pillars, as they call them, which they want to deliver against,” Mr Shepherd-Smith says. “We’re looking to try to support them on one or two of those key pillars. That would be around project prioritisation, financing for projects, legislation and other things that might need to change, and bringing together key stakeholders.”   

Growing contractor interest

Other major construction firms in Africa include Bam, Mace and Mott MacDonald.

Mace has been on the continent for almost a decade, operating primarily in South Africa and its neighbouring markets. In 2016, the firm strengthened its foothold in the country with the acquisition of quantity surveying firm MMQS.

Buoyed by the amount of work on offer across the continent, Mace acquired YMR – another quantity surveying firm – the following year. YMR, however, is in Kenya – East Africa’s strongest economic hub.

In comparison to global consultancies, YMR is a relatively small firm with a turnover of $6m. What made it an attractive target for Mace was the company’s knowledge of various local markets and its desire to grow.

“As YMR, we were primarily offering cost management [which] we’re really strong in, particularly in the real estate sector,” says MaceYMR managing director for East Africa Simon Herd. “What we’re doing with Mace now is looking at infrastructure, transport, airports, energy, oil and gas – these are the areas with a lot of growth.”

mace sanlam tower pan africa tower nairobi

mace sanlam tower pan africa tower nairobi

Source: Mace

Sanlam Tower in Nairobi – Mace has been active in Africa for almost a decade

As well as working in the core boom markets of East Africa, YMR has also worked in Eritrea, Djibouti, Sudan and South Sudan, as well as the island nations of Seychelles and Mauritius.

Mr Herd points out that all the countries in the region are very different, with many of these differences influenced by domestic politics. In Kenya for example, ballots for the 2017 presidential elections had to be recast after the initial result was annulled by the Supreme Court. The uncertainty this created dragged the economy down to its slowest rate of growth since 2011, with GDP in Q3 and Q4 of 2017 growing at 4.9 per cent.

With this period of uncertainty safely navigated, now, “there’s a good five-year window before the next election and everybody is positive”, Mr Herd says. “There’s a lot of interest across all sectors.”

Slow-moving paperwork

As well as the political risks, lack of familiarity with local ways of doing business can be a significant stumbling block.

Consequently, when firms decide they want to enter the market afresh or look to increase their presence, as in the case of Atkins, joint ventures and acquisitions are the most popular route.

“That can provide a degree of familiarity with local procurement rules, an existing presence on the ground and personal contacts,” says Kwadwo Sarkodie, partner at law firm Mayer Brown, which has drawn up numerous contracts for companies operating in the region. “That can often be extremely important, particularly when going into long-term commitments with the government, which many of these infrastructure contracts involve.”

Procurement procedures for projects backed by government can also be tricky to navigate, with some government agencies being especially restrictive in their application of the rules. “A very minor deficiency or non-compliance with a procurement procedure could result in the entire tender being invalidated,” Mr Sarkodie adds. “You have to be careful with compliance and that’s across those countries.”

“A very minor deficiency or non-compliance with a procurement procedure could result in the entire tender being invalidated. You have to be careful with compliance and that’s across those countries”

Kwadwo Sarkodie, Mayer Brown

Foreign companies must also register with each nation’s respective business licensing agencies or investment authorities. As with the procurement system, this can be a lengthy process that takes months to complete, Mr Sarkodie says.

Similarly, due to the involvement of development banks – such as the African Development Bank – in a significant number of public sector projects, the bureaucratic processes can adversely affect payment for work too. “There’s complexity around how the money gets in and then gets distributed,” says Atkins’ Mr Shepherd-Smith. “But it all gets done – it’s just a matter of it taking time.”

The private sector on the other hand is much like anywhere else in the world, according to both Mr Shepherd-Smith and Mr Herd, with promptness of payment varying from client to client. 

What’s the outlook?

Despite these drawbacks, the rise in both the number and variety of companies the region is attracting shows no signs of slowing down.  

The Middle East’s recent dip in economic output after oil prices fell in 2015 and 2016 prompted some investors to increase their interest in nearby East Africa.

Whether they are interested in developing their own projects or funding existing ones, the involvement of firms with a global presence such as Atkins and Mace can act as an enticement. “For a lot of these organisations, it’s almost de-risking elements of that market entry by being able to work with someone that has an international pedigree, rather than a local conventional team,” Mr Shepherd-Smith says.

With governments making political pledges to deliver development against a backdrop of growing demand for services and urbanisation, the outlook for the region is positive, says Mace’s Mr Herd.

“There’s a big population and its growing from a low base – there’s so much to be done,” he says. “Over the next five years, it’s looking really good. 

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