Why poor infrastructure will limit the growth of your startup

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Africa has a huge infrastructure shortfall, with the World Bank estimating the continent will need to invest US$93 billion each year for the next decade to address the deficit. The issues with infrastructure are a major obstacles to sustaining Africa’s growth, and put limitations on the continent’s exciting startup sector.

In spite of the shortfalls, infrastructure spending has yet to reach the required levels. The African Development Bank (AfDB) says Africa invests only four per cent of its collective GDP in infrastructure, a paltry figure compared with China’s 14 per cent.

Some countries are doing alright. South Africa is ranked 32nd globally for its infrastructure, though as we shall see it still has serious issues. Mauritius ranks 42nd, and Namibia is 52nd. Elsewhere, however, there are more serious issues.

Nigeria needs to spend US$15 billion each year to make up its shortfall. Tanzania, in 130th, has “poor roads and ports”, 128th place Mozambique has problems across the board, while Angola (139th), in spite of being Africa’s second biggest oil exporter, has some of the least developed infrastructure in the world.

So where are Africa’s infrastructure problems, and how do they affect startups?

Power

It’s been a pretty big year for Africa power problems. South Africa has long been familar with the concept of “load shedding”, major cities across the country subject to regular power outs as state utility Eskom battles to take pressure off the unsatisfactory national grid. Nigeria had diesel shortages this year, while – and take it from someone that has spent time in these countries this year – power outages are also a regular occurrence in the likes of Kenya, Tanzania and Zambia.

It is clear to see a chronic shortage of power affects the whole continent. The AfDB says 620 million people – 60 per cent of the continent – are without electricity in Africa. McKinsey says the region is “starved” of electricity. Even those that in theory have power face high prices and unreliable supply.

So how does this affect your startup? Well, the obvious answer is a lack of power seriously affects your ability to work and power your business. Anyone that has spent time trying to run a business in a country like Zambia will tell you how disruptive (not in a good sense of the word) power outages are – lights out, Wi-Fi off, phone lines down on a regular basis.

Yet there are other factors too. The smaller the amount of people that have access to electricity, the smaller your potential customer base. If people can’t find out about your startup or get in touch with you, they are unlikely to be customers or users. Meanwhile, lack of power also impacts on ability to spend. Countries that have electrification rates of less than 80 per cent consistently suffer from reduced GDP per capita. So it isn’t only the hindrance of being unable to run your business effectively because the lights are out and your laptop battery is dead. It’s that potential customers can’t find you, and without power are less able to afford your services even if they do.

Internet access

If you’re running an online business, chances are you’re attempting to sell online services to online customers. So, in spite of growth, lack of internet connectivity is likely to be a hindrance to your business.

As with power, there’s the usual issue that when the internet goes you can’t work. Worked in a co-working space in Nairobi? Then you know at times the internet is extremely spotty, and at times it isn’t there at all. This could be due to as extensive a problem as insufficient coverage – unthinkable to think that can still happen at the heart of the “Silicon Savannah” – or something as simple as a cable cut, but it all has a direct impact on your business.

Troubles with internet connectivity across the continent also limit your potential customer base, both in terms of addressable market and spending power. Chances are if people aren’t online they can’t find you and can’t use your services. The size of the problem varies across the continent – Morocco has an internet penetration rate above 50 per cent, but in some countries it is less than two per cent.

As with lack of power, lack of internet connectivity not only hinders startups in terms of reaching potential customers and making services available to them. It also has a direct impact on spending power. The most commonly cited evidence of this is a World Bank study that found countries experienced a 1.38 per cent growth in GDP for each 10 per cent increase in broadband penetration. So less connectivity results in less spare cash for consumers to spend on using your services or products.

On the plus side, internet connectivity in Africa is growing fast, assisted by groups such as the Alliance for Affordable Internet, the World Wide Web Foundation and Internet.org. Much of this growth in subscriptions can be attributed to the ever pervasive mobile phone. Submarine cables continue to land and be extended, while more local internet exchanges are being established.

This growth will continue. When it finally happens, the migration from analogue to digital broadcasting will open up yet more opportunities to increase internet access by freeing up unused spectrum. Yet other factors remain to be addressed to make internet access as affordable and convenient as Sir Tim Berners-Lee originally intended. Costs need to come down before it is truly available for every African, and in the meantime startups are limited by its lack of spread.

Transport

It sounds simple, but poor roads hurt your startup. So does the lack of railway infrastructure, or the high cost of flying even local routes. Travel down from Dar es Salaam to Cape Town via public transport, as this author recently did, and it becomes painfully obvious.

The 1,800 kilometre train between the Tanzanian capital and Kapiri Mposhi – not Lusaka, note – in Zambia, clunks down over a period of well over two days. It stops in unexpected places, breaks down regularly, and is unable to carry heavy goods. Disused wagons are common, and travellers can look out of the window to see the abandoned wreckage of older trains by the side of the track.

The Tazara, one of Sub-Saharan Africa’s biggest post-independence infrastructure projects, is indicative of the transportation issues across the continent as a whole. Railway systems are sparse and, when they exist, of poor quality. Many roads are the same, of poor quality, narrow, and dangerous. There are also not enough of them.

Only around 60 per cent of Africans live within two kilometres of an all-season road. In Kenya, it is only 32 per cent of people, in Angola 31 per cent, in Tanzania 18 per cent, and in Ethiopia it is as low as 10.5 per cent. In much the same way as lack of internet connectivity limits your addressable market, so to does the lack of transport infrastructure.

Tech startups can be affected by these issues in the same way as other businesses, such as manufacturers or agriculturalists. If it is difficult to obtain materials you need, your business is slowed down. And if you cannot deliver your products to customers, wherever they may be, your scalability and your ability to deliver quality customer service are hurt. E-commerce is the main victim of this. Already hindered by lack of internet, it is also hurt by the difficulties in delivering to customers outside the major cities, prompting companies like Jumia to launch their own logistics arms.

Where we go from here?

It is not of the levels required, but investment in infrastructure is coming. South Africa has one of the most ambitious investment programmes on the continent, while there are notable infrastructure projects in West and East Africa too. Aside from the public sector, private firms and investment groups have also realised the opportunity in funding infrastructural development. Convergence Partners is one such firm, in July closing an infrastructure fund with capital of over US$200 million.

The level of investment must improve, however. A recent report by DP World said more investment in both “soft” and “hard” infrastructure was needed in Sub-Saharan Africa. The World Economic Forum’s most recent survey of investors found the inadequate supply of infrastructure was a major obstacle to doing business in Africa. DP World said infrastructure development has actually slowed in the region since 2009.

So startups must watch and wait as the continent continues to develop into one that can provide an environment in which they can be truly successful. Yes, there are certainly opportunities that stem from the lack of infrastructure, with tech solutions developed that tackle issues in power and internet provision – BRCK, for one – and logistics – WumDrop is an example. But for now infrastructure issues limit both a startup’s ability to do business and the size of their addressable market, creating one of the most sizeable obstacles to Africa’s first unicorn.

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Passionate about the vibrant tech startups scene in Africa, Tom can usually be found sniffing out the continent's most exciting new companies and entrepreneurs, funding rounds and any other developments within the growing ecosystem.

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