Africa's mobile markets have become the fastest growing in the world, achieving some 40%-plus year-on-year growth. This growth is being fuelled by a range of factors typical of emerging and developing markets and is also influenced by the effects of market saturation in more developed nations. Increasingly the focus of international operator interest, Africa's numerous and potentially lucrative telecoms opportunities present a unique investment risk profile that may not necessarily represent a 'comfortable' proposition for the average Western investor.

The dynamics

Africa has a population of around 800 million and a telephone penetration rate of around 25%. This means Africa is critically short of telecoms infrastructure. Conservative estimates suggest that Africa's voracious appetite for reliable and affordable telecommunications services will attract $11bn (£5.37bn) per year in telecoms investment over the next 10-year period.

Telecommunications is now a national priority for most African states with the link between investment in the sector and economic, social and cultural development having been firmly established. Many African countries, particularly those in West and East Africa where growth potential is highest, are developing more sophisticated telecommunications policies that are more conducive to foreign investment. Indeed, international regulatory best practice has frequently been introduced, often with the help of, or as a condition to, World Bank funding.

Liberalisation has been under way across Africa for the last eight years in the mobile space and will continue to offer new licence opportunities. Throughout 2007, new mobile and fixed operating licences have continued to become available in several key markets such as Nigeria, Kenya, Egypt, Tunisia and, most recently, Senegal. On the privatisation side, more than one-third of African state telecoms companies are privatised or set to undergo privatisation in the near future, presenting further investor opportunities. At the time of writing, Gabon Telecom, Gamtel, Ghana Telecom, Telkom Kenya and Algeri Telecom are all set for or are currently undergoing privatisation.

The majority of Africans will never own a fixed-line telephone. The lack of a fixed-line infrastructure (either non-existent or destroyed by poor conflict management) has seen wireless technologies become dominant throughout Africa. Currently, mobile users constitute around 85% of all African telephone subscribers – a higher mobile-to-fixed ratio than on any other continent. While relatively inexpensive and quick to deploy, mobile is not the ultimate solution to Africa's critical infrastructure woes.

Much of Africa remains unconnected to global fibre backbones, particularly Africa's east coast. This means operators rely heavily on limited and expensive satellite connections and existing fibre networks. Compounding this problem is that cartels of monopoly telecommunication operators (for example SAT-3) own much of the existing fibre and have little incentive to offer competitive prices.

A spate of new sub-marine cable projects such as EASSY, TEAMS and SEACOM is under way to help relieve capacity shortage. In addition, Africa's numerous landlocked countries will need access to the sub-marine capacity that is currently being laid as well as addressing national transmission capacity shortages within their own borders.

Unsurprisingly, the major telecoms vendors are focusing intently on Africa, especially Chinese vendors such as Huawei and ZTE, which have a history of pursuing opportunities in emerging markets.

Foreign investment

The scarcity of new licence and privatisation-related opportunities in the developed telecommunications regions of the world such as Western Europe and the US (characterised by diminishing average revenue per user and increased market saturation) has triggered a scramble by international operators to acquire telecoms operations in Africa. African telecoms is a hot investment destination.

Early movers to Africa include European firms such as Millicom of Luxembourg (seven African countries) and Vodacom (five African countries), a joint venture between the UK's Vodafone and Telkom of South Africa. France Telecom and its mobile subsidiary have operations in seven countries across Africa. Portugal Telecom has also recently shown its increasing interest in the telecoms markets of sub-Saharan Africa.

Middle Eastern petro-dollars have also poured into Africa's telecoms market over the last four years. Kuwait-based MTC invested some $3.4bn (£1.7bn) to acquire 85% and 15% of Celtel in 2005 and 2007, respectively. United Arab Emirates (UAE)-based Etisalat acquired interests in seven West African mobile operations through acquiring a 70% stake in Atlantique Telecom. Saudi-based House for Integrated Technology Systems (Hits) has earmarked some $1bn (£489,000) for African telecoms investment.

Private equity firms using increased liquidity in the market, especially in the Middle East, are also taking an increasingly aggressive approach to Africa's telecoms markets – in some cases pursuing licences in their own right. For example, UAE-based Middle East and African Investment Company (MEAIC) and Mubadala Development Company recently acquired operating licences in Uganda and Nigeria, respectively, and are looking for more licensing opportunities in Africa.

Given the economics of much of Africa, it is easy to understand the efforts of major players such as MTC, MTN, Telkom SA and Etisalat to rapidly expand across the continent to boost subscriber levels and generally build scale across their operations. It is likely, therefore, that continued consolidation by African operators, Africa's regional operators and the major international operators such as Vodafone and France Telecom will become an increasingly common feature of Africa's telecoms landscape.

First-world investors in African telecoms must go into the market with their eyes wide open. More so than in any other region in the world, thorough due diligence is required. High on the list of major investment risks is the frequent lack of telecoms regulatory certainty, particularly in Africa's less democratic markets. Associated problems include:

l ineffectual or biased regulators;

l the risk of licence revocation or modification;

l an aggressive regulator approach to quality of service-related penalties, often to gain revenue;

l a significant incidence of spectrum re-allocation;

l onerous local ownership/partner requirements;

l unclear universal service obligations; and

l unclear processes for conversion to unified licences.

Substantial government shareholdings in a country's incumbent operator can also create investment risks for new market entrants. Such problems include:

l less than fully independent regulatory authorities;

l incumbent monopolisation of international gateways;

l preferential treatment of government-linked operators; and

l state-owned incumbent operators not paying interconnection fees.

The extent of Africa's poverty requires a business plan adapted to the risks and challenges of third-world economics. Such risks and challenges include:

l significant corruption at all levels of government in many countries;

l unpredictable decision-making processes in many African states;

l high taxation on the importation of telecoms equipment and handsets, as well as on airtime/revenues in some countries;

l some of the world's lowest disposable income among subscribers;

l heavy reliance on prepaid small denomination voucher subscribers;

l high incidence of network asset theft and destruction, as well as internal revenue assurance issues;

l the lack of access to much required low-cost handsets;

l difficulties in assessing market demand for Africa's staggering informal economy; and

l the uptake of Voice over Internet Protocol (VoIP) across the continent is likely to erode basic voice markets.

Recent studies suggest that investors from developing countries are less risk-averse and more adaptable to Africa's operating conditions. It is significant that the Investment Climate Facility for Africa boss, Omari Issa, has recently called for Africa to do more to accommodate existing telecoms sector investors as opposed to trying to attract new investors who may well be scared off by Africa's investment climate.

There are undoubtedly many opportunities in African telecoms, given a 25% telephone penetration rate in a continent of 800 million people. Most African telecoms markets will require foreign investors (particularly Western investors) to assume previously unimaginable investment risk profiles that lawyers will need to creatively seek to mitigate. Despite the risks, and even while continued conflicts endemic across the region will make investments in the industry relatively risky, it is difficult to see how Africa's telecoms sectors will be other than one of the most lucrative and exciting sectors to be involved with in Africa for at least the next decade. n

Matthew Glynn is a partner and head of telecoms for the Middle East, South Asia and Africa at DLA Piper.