Africa: The Potential Opportunities in Energy and Telecom

Updated from Feb. 27, 2008.

Editior's note: The iShares MSCI South Africa Index Fund's EZA largest stock is Sasol Limited SSL.

The South Africa Index Fund closed the trading day at $113.29 (up 1.43%) and Sasol closed at $48.68 (up 1.44%).

Africa's stunning lack of basic services, such as electrical and telephone grids and Internet connectivity, might cause many to despair, but Euvin Naidoo -- a leading advocate for Western investment in the underdeveloped continent -- looks at the map and sees something different: hope.

Naidoo, president and CEO of the South African Chamber of Commerce in America, noted that with the world pushing for alternative sources of energy such as windmills or geothermal power, it will be easier to develop and implement these new technologies from scratch in Africa than to impose them on the entrenched power grid in the West. "The key about disruptive technology is that it really has a chance to innovate at the base of the pyramid," Naidoo said in his keynote address at the 15th annual Wharton Africa Business Forum. "The base of the pyramid is the bottom -- the millions who are underserved."

Indeed, the Harvard Business School-trained South African said that adopting this glass-half-full, optimistic approach suggests there are numerous opportunities for new technologies to flourish among 900 million Africans who have steadily lagged behind the rest of the developed world so far.

Naidoo showed his audience a map of global Internet connectivity, with bloated depictions of Web-savvy Western nations from Japan to Portugal to the United States. But the massive African landmass is virtually invisible. He insisted that the African void today represents a massive future opportunity for an entrepreneur who can develop a scalable solution for multiple nations on a continent that is currently divided into 53 different governments.

"Africa is in ... a unique position. It almost has a competitive advantage due to that very situation of not having the connectivity, of not having the electricity grid," Naidoo said. He cited the example of windmills as a low cost and innovative power solution that would work better in a local, start-up situation, such as a remote African village, than it would in the West, with all its regulatory and economic obstacles.

The upbeat tone of Naidoo's keynote speech was very much in keeping with the theme of the annual Wharton conference. The overall intent was to keep the focus less on the seemingly crushing problems of Africa that tend to dominate headlines -- including an AIDS epidemic, massive debt, government corruption and brutal warfare -- and more on the less-publicized signs of an economic turnaround.

With little fanfare, Africa's gross national product has been growing at a rate of roughly 5% a year -- a pace expected to accelerate between now and the end of the decade. Foreign investment in the continent, meanwhile, has doubled since 1998, a trend that has been punctuated this year by China's multibillion dollar investment in South Africa's largest bank and its sizable loan to the Congo.

Indeed, some investors are seeing opportunities in Africa on a scale comparable to the other emerging markets in Asia or Eastern Europe that have proved so lucrative over the past decade, noted Naidoo. He said that Stephen Jennings, the billionaire founder of Moscow brokerage Renaissance Capital, told him Russia's emergence was a once-in-a-lifetime opportunity and that "Africa is a second once-in-a-lifetime opportunity." (According to media reports earlier this year, Jennings is doubling his investment in Africa to $1 billion.)

A Political Version of Chapter 11

Yet Naidoo -- a fourth-generation South African whose organization was recently highlighted by the Clinton Global Initiative -- acknowledged that despite the investment rush, the image of the continent still lags. To dramatize that problem, he showed the audience a standard classroom map of the world and then an actual satellite image, proving that Africa is actually much larger than commonly depicted in the West. In reality, the United States, continental Europe and China could fit inside the African land mass, with some room to spare.