Efforts to advance affordable, quality internet connectivity across the African continent face a myriad of hurdles. There is not enough late-stage funding to bring companies to scale, nor are there sufficient partnerships enabling last mile connectivity. Investors in the continent often have a shallow understanding of the sector, making it difficult to convince them on its importance and potential upside. The connectivity sector should, however, be an easy sell: it is crucial as a foundation to the advancement of key goals across a variety of sectors.
A group of investors, internet service providers, and development finance institutions met in Nairobi recently for a roundtable on the challenges plaguing the sector. The discussion was hosted by E3 Capital, the United States Agency for International Development, and FMO, the Dutch development bank. During the roundtable, experts strategized on what measures could be implemented to build lasting partnerships with and increase access to financing for businesses looking to provide meaningful connectivity to communities, ultimately resulting in more equitable
societies.
“We are helping people realize their dreams and goals. It is their goal that their kids have a better future than they had. They can do that by having education from the comfort of their own home,” said Dirk-Jan Koeman, Chief Business Development Officer at Poa, a Kenyan-based internet service provider, during the discussion.
PASSING THE BATON
A key challenge experienced by companies in the sector is lack of access to adequate funding at different stages of a business' growth. Paras Patel, founding Managing Partner of E3 Capital, described funding startups as a relay race. There are several grant funders in the market who make initial investments that enable businesses to reach proof-of-concept. These are then picked up by venture capital investors such as E3, who help companies grow and lead them on their path to commercial sustainability. VCs should then be able to help businesses garner interest from other
investors such as strategics, DFIs and corporates, as well as potential lenders, who would subsequently support companies in scaling their business and cementing their place in the market. This is where Paras Patel identifies the “missing middle” of Series B and Series C funding for connectivity businesses.
“As a Venture Capital fund, we are deployers of risk capital; we are comfortable investing in loss-making businesses. The problem is supporting businesses into early profitability and find an absence of patient, follow-on growth capital in the market to help them scale.” He explains that other sectors such as energy do not suffer from this issue and have seen an increasing supply of later-stage equity and debt financing.
Vladimir Dugin, Partner at E3 Capital, added that, in some settings, mobile network provision monopolies are in place, making it essential for entrepreneurs to receive initial funding to prove their solution is more efficient than incumbents. “Funds like E3 Capital need to take on early-stage risk and also provide mezzanine or debt funding for infrastructure businesses to prove they can actually reach a certain scale and commercial viability,” he said. “What is missing is this subsequent concessional debt to invest in capex-heavy, infrastructure scaling — to let entrepreneurs actually prove their business model is working.” Andre Mounif, Regional Director for Africa at STOA, Infra & Energy, an investing firm in large-scale infrastructure and energy projects in emerging and developing countries, explained that the connectivity businesses in Africa often require more initial, early-stage investment than their energy sector counterparts to reach the same level of maturity. Private equity infrastructure investment firms find the business models of most connectivity companies in the market too risky and generally unproven. Energy investments will thereby offer better equity returns and continue attracting more investment. To help rectify this gap, Inge Krijgsheld, with the Dutch Ministry of Foreign Affairs, said investors need a clearer understanding of the problem so they can allocate more patient capital to connectivity. Partnerships such as the one established between E3 Capital, FMO and USAID under the “Beyond Access” project are an example of transformative initiatives which can increase knowledge creation and sharing regarding the challenges and opportunities of investing in connectivity.
From the perspective of a large institutional investor, Vika Bhagat, Capacity Development Associate at FMO, said the sector should strive to publicize more exit success stories so investors get visibility over sustainable, commercially viable graduation models. “Not having clear exit pathways is not helpful in de-risking these investments,” Vika said. “Make these exit pathways clear to make successful cases for
what can be possible.”
Finally, Dirk-Jan Koeman from Poa suggests consolidation of the different pockets of funding available might be useful to ensure significant growth financing is available. “Wouldn't it be convenient if development finance institutions came together and said: ‘Instead of each of us dropping $USD 10 million into the next generic venture capital, let's create a pot of money that is needed for connectivity infrastructure
development instead,” he said.
COMMUNICATING AROUND CONNECTIVITY
Drawing in funding also requires better external communications about the sector to attract a broader range of funders, said Esther Njoroge, Associate in Partnerships for Impact at FMO, adding this will help funders not to feel as though they must be experts in connectivity before they can invest.
“Most Africa-focused investment funds — across sectors — come from development finance institutions where connectivity is not “top of mind””, Paras Patel said. “These institutions often have departments dedicated to energy or agriculture, but not connectivity. This makes it more difficult to articulate the needs of the sector.”
One of the key communication issues is the lack of awareness on what it means to be meaningfully connected. While there is a lot of data around how many people are connected to the internet in Africa, determining the number of people “meaningfully connected” — with affordable and quality access — does not currently sit at the heart of the discussion. Paras stressed that E3 Capital, in partnership with USAID and FMO,
is prioritizing the creation of content towards the education of different stakeholders such as investors around what meaningful connectivity entails.
“Africa has leapfrogged to mobile, which is great from a (mobile) internet penetration perspective”, said Dirk-Jan. “However, as a result fixed (wireless) access is still low, thus preventing a more meaningful engagement with the internet. This results in the perception that there is no need for additional infrastructure.”
Education on the importance of meaningful connectivity should include the benefits that connecting communities has for the achievement of other development goals such as access to education and healthcare, said Teddy Onserio, Africa Investment Advisor at the United States International Development Finance Corporation. The challenge will be to determine who shall be responsible for the creation of such
knowledge and its dissemination.
“The issue around connectivity is that it is not part of the core development goals agenda”, said Jeroen Harteveld, Fund Manager at FMO. “I believe we need to work on building and strengthening the narrative that having access to the internet enhances one’s quality of life and ability to make a living.”
Finally, education and knowledge dissemination campaigns should also target policymakers and politicians, so policies and budget allocations reflect the importance of increased connectivity, Esther said.
PARTNERSHIPS TO REACH THE LAST MILE
One of the most challenging factors to connecting rural communities to the internet is the affordability of these services. Dirk-Jan Koeman stressed that, when moving into rural areas, businesses face many unknowns, such as the size of the serviceable market, and whether it is far enough on the adoption curve to see the benefits of allocating limited income to it.
Kirit Rajput, Chief Executive Officer at Dumatel, a fixed data and wireless internet service provider in Kenya, said his company is focused on providing some of the cheapest entry-level packages in Kenya for fixed data. Nevertheless, his company can’t serve a rural area without external financial assistance; their lowest price point will be too high for the average household. Subsidizing the cost of last mile connectivity in countries such as Kenya is therefore crucial. There are plenty of capacity providers, mobile providers and equipment manufacturers, but none can
afford to independently reach areas who need connectivity the most.
One way in which Kirit suggests approaching last mile connectivity is through revenue sharing models, whereby the capacity provider can offer connectivity in partnership with companies such as Dumatel willing to establish the last mile connection. This may also include equipment manufacturers willing to subsidize the price of devices, all in the interest of sharing the revenue from the last mile.
Ben Roberts, Group Chief Technology and Innovation Officer at Liquid Telecom, points out that revenue sharing might not work in all contexts. Speaking as a middle-market capacity and infrastructure provider, it is complicated to establish revenue sharing with one client and not others. “When it comes to the last mile, there's only really space for a certain number of providers in certain areas to be successful,” Ben said. “You're sharing the same precious resource of using a licensed spectrum, and you are interfering with each other.”
Finally, Ben Roberts notes that further pushes to innovate will also bring down production costs and subsequently prices, facilitating last mile connections. “Retailers and providers are not building products for Africa. We need to have more high-quality research coming out of universities.”
ENABLING ENVIRONMENTS
There is a lot that can be done by non-commercial institutions to support the development of an environment permissive towards increased connectivity. An example discussed is the need for highly skilled and specialized engineers to found and work at Internet Service Providers (ISPs). Efforts should be made by local universities to respond to this demand for specific skills and develop programs that are highly pragmatic, and market driven in their educational approach. There would also be a lot of value in increasing academic focus in researching different
approaches to closing the meaningful connectivity gap, as well as R&D for services and infrastructure adequately adapted to the African context. This work can be encouraged through the deployment of public research grants, as well as increased funding of existing initiatives and research centers by both donors and governments. It will also be important to ensure there is sufficient supply of digital experts and professionals that can build web infrastructure and support the growth of digital businesses.
Growing demand for services encouraging online engagement will increase consumer need for and interest in meaningful connectivity. These can be government websites where individuals can pay tax and deal with personal bureaucracy, as well as ride sharing apps and other services providing opportunity to make everyday life more efficient. If there is also a move towards offering quality education through online platforms, the value addition of being meaningfully connected as a household will become increasingly apparent. This shift in demand for connectivity will also result in increased demand for high-end devices such as computers or tablets.
There was also a discussion of how policymakers can support; According to Dirk-Jan, ‘'It is important that both the public as well as private sector play their part in creating an enabling environment for increased connectivity. Internet access is a basic right and therefore it seems counterintuitive that it attracts excise tax, which is essentially a luxury tax.”
Overall, bridging the connectivity gap in Africa will call upon multiple stakeholder groups to drive demand and supply side initiatives. It will be important to see an increase in availability of patient, growth capital for connectivity businesses, as well as efforts from governmental and non-governmental organizations to increase knowledge of connectivity needs and availability of relevant expertise and technologies. A collaborative, multi-stakeholder approach that prioritizes sharing of best practices, such as that taken by E3 Capital, USAID and FMO in the Beyond Access project, is a good example of transformative partnerships for increased connectivity.