Country risk factors weigh on investment strategies in DRC

From a purely telecoms perspective, the Democratic Republic of the Congo (DRC) is one of the most attractive markets for investment in Sub-Saharan Africa. The country has the third highest population in region, after Nigeria and Ethiopia, but one of the lowest penetration rates at 36.8% at the end of September 2013, according to BMI data. Furthermore, the intense competition between six active operators in the mobile market, four of which are backed by major regional players, creates significant opportunities for vendors and other third-party service providers, including tower firms and their suppliers. However, the market is not for the faint-hearted given the myriad of country risk factors at play. BMI expects these factors to play a major role in the financial and operational strategies of firms throughout the entire value chain of the telecoms sector.

There are six active mobile network operators in the DRC - Vodacom, Airtel, Tigo, Orange, Supercell and Africell. Based on market data published by the operators, BMI calculates that there were around 24.9mn mobile subscriptions in the country at the end of September 2013. This means growth of 31.7% in the first nine months of the year, albeit from a low base. We expect this trend to continue over our forecast period to 2017, but caution that there are considerable risks to our outlook. BMI’s current forecast expects the number of mobile subscriptions and the country’s mobile penetration rate to reach 30.6mn and 40.7% respectively by the end of 2017.

BMI calculations also show that Vodacom currently leads the market with a share of 35.4%, while Supercell lags the market with a share of just 2%. It is worth mentioning that available market share statistics are skewed by the different metrics employed by the operators in calculating the number of active subscriptions. For example, Tigo uses a 60-day definition for active subscriptions, while Orange and Vodacom use the 90-day definition. The newest market entrant Africell said its subscriber base reached 2.4mn eight months after it launched commercial operations in November 2012, a figure that could be heavily discounted if measured against a narrower activation period.

There is a strong likelihood for another major regional player to enter the market in the future, possibly through consolidation as opposed to launching greenfield operations. While Vodacom has settled its dispute with its local partner and now wants to remain in the market over the long term, Supercell remains an acquisition target. The operator continues to underperform in the market, despite launching commercial operations in 2002, mainly due to its limited network coverage. Supercell is active only in the eastern cities of Goma, Bukavu and Uvira and would need significant capital injection and technical expertise to expand its network and improve its competitiveness in the mobile market. MTN has been open about its interest to enter the market through consolidation having previously expressed interest in Supercell and Vodacom’s stake in its local joint venture. Vietnam’s Viettel is another operator that could consider entering the DRC market if the opportunity arises.

The DRC’s large population, albeit predominantly rural, points to significant subscriptions growth opportunities for mobile operators. This could be matched by considerable revenue growth in the long term from data services and corporate solutions in view of the rising demand for those services on the back of the country’s resource-driven economic growth. However, a combination of declining ARPUs, owing to fierce competition in the voice market, and high capex and opex, owing to the country’s geography, poor social infrastructure and security challenges, makes it inevitable that operators will prioritise cost efficiency in their operational strategies.

 

BMI believes that the need to manage costs and expand network coverage to underserved areas will be a major driver for infrastructure sharing services in the telecoms market. Helios Towers Africa was the first independent tower firm to move into the market following a deal with Tigo in late 2010. The firm would be keen to add Vodacom DRC to its portfolio following a deal with Vodacom Tanzania in July 2013. Eaton Towers is likely to join Helios in the market if it extends its relationship with Orange into the DRC. Eaton is already working with the operator in Uganda and Kenya.

The DRC presents a wide range of political and macroeconomic risks, almost on the same scale as its opportunities, which investors along the entire telecoms value chain would need to factor into their strategies and growth projections. Some of these factors as analysed by BMI’s Country Risk team are highlighted below:

Underperforming regional peers

 

M23 defeat no panacea for peace

Although the crushing defeat inflicted by UN-backed Congolese troops on the M23 rebels offers hope that Kinshasamay succeed in imposing government control over the chaotic province of North Kivu, it remains to be seen whether President Joseph Kabila’s unpopular government can enact the sweeping political and economic reforms necessary to address the underlying causes of conflict in the war-torn region.

Falling commodity prices weigh on economic growth

Economic growth in recent years has been heavily dependent on the mining sector, which we predict will see slower expansion over the coming years. This is due to a rising statistical base as well as lower commodity prices, which will deter investment in an economy that remains unstable and difficult to operate in. We predict that real GDP growth will fall from the 7.9% that we are forecasting for 2013 to just 6.0% in 2014, and that economic expansion will remain in the 5.5%-6.5% range for the duration of our 2013-2017 forecast period.

Weak State institutions

Huge distances, a largely nonexistent transport network, and a weak administrative structure mean that the Congolese central government has limited authority in many outlying areas. Some regions in North Kivu are under the direct control of rebel groups that have displaced government forces. In more stable provinces, local governments often disregard national policies and enforce their own laws. This is especially common in copper-rich Katanga, which has refused to implement policies that it sees as harmful to the mining sector.

Unbalanced economy

Though the DRC has experienced rapid GDP growth, BMI stresses that the country’s economy remains highly fragile and that growth has been far from inclusive. Given the economic disaster of the 1990s, the country only regained its 1990 level of production in 2012. GDP per capita remains among the lowest in the world, and we predict that the gap between Congolese GDP per capita and that of Sub-Saharan Africa will continue to diverge. It is also important to note that growth is highly dependent on the mining sector, making the economy vulnerable to shifts in commodity prices. This dependence on the mining sector also means that much of the past decade’s economic growth had a minimal effect on much of the population. The formal economy is small, constraining government revenues and causing widespread unemployment.

Growing demographic stresses

One reason why the DRC’s per capita GDP growth has been so slow is that the country’s population is expanding rapidly. This offers an economic opportunity as not only is the total population growing, but the share of Congolese people in the ‘economically active’ period of their life (aged 15-64) is also. This will create a surging workforce, and could boost growth. Unfortunately, given the fact that BMI expects the growth to be driven by the capital-dependent mining sector, a growing population will contribute to rising unemployment. Given the weakness of the Congolese formal economy, we believe that youth unemployment will remain endemic, especially in urban areas. BMI notes that high levels of unemployment and disenfranchisement among youthful populations are a powerful predictor of social instability.

DRC risk/reward - a tough balancing act

The extreme nature of the opportunities and risks in the DRC market makes an assessment of the country’s risk/reward outlook a tough balancing act for investors. Considering the consumer-centric nature of the telecoms market, BMI believes that network operators would maintain their interest in the market and find ways to ride out different political and economic storms. This may include a long-term strategy to minimise their stock of physical assets, such as telecoms towers, in order to focus on the provision of core telecoms services. However, this would require the existence of a vibrant and reliant independent tower market capable of taking on the risks of managing physical assets across the country, including the less stable regions.

Although BMI believes the size of the DRC market - geography and population - would support multiple independent tower firms, we caution that the risks of operating in the country are significant and partly explain the seeming lack of appetite by tower firms to expand into the market despite its growth potential. On the positive side, tower firms that do make it into the market can look forward to a relatively high tenancy rate given the large number of operators and other communications service providers in the country.

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Recommended further reading: TowerXchange’s DRC case study