Urban development in Tanzania and Ethiopia reflect trends typical of populations moving to cities throughout history. Unique observations were apparent, however, between the distinct centralized planning model used in Ethiopia versus the decentralized approach in Tanzania.
Three insights – detectable in most scenarios of rapid growth and urbanization – are immediately apparent in both Addis and Dar. The severity of these issues has been exacerbated by lack of resources, extreme poverty, and limited opportunities for upward mobility. First, despite considerable sprawl, there is a lack of physical space to accommodate the masses of people who are moving to cities in both countries. In most cases, migrants are relocating in search of jobs. They live in overcrowded apartments while leaving their families behind, or live outside the city and commute for hours to work each day. In this system of development, suburban planning is important, especially in terms of creating long-term solutions for families to live together in productive communities. Relatedly, traffic gridlock and lack of efficient means of public transit are major detractors from worker productivity, especially with the advent of suburbs and continued urban sprawl. While transportation is outside this team’s scope of research, it is apparent in both Addis and Dar that infrastructure beyond city borders is crucial for connecting communities and freeing available working hours among employees.
While Ethiopia and Tanzania share many infrastructure challenges, differing policies between the two countries also result in markedly divergent observations. In Addis Ababa, the development state model allows for a consistent economic plan to be articulated and carried out. Both public and private players are able to coordinate efforts toward a shared vision, the GTP II. In Dar es Salaam, policy is playing a less productive role when it comes to suppliers for housing development. For materials such as concrete, wood, and fixtures, the market is seeing a disparity between the cost of domestically-produced goods relative to competitive global rates. The failure of the market, in this case, drives up prices for the end-user, with the unfortunate impact of housing prices that are too high for low-income families.
Although Addis has structured programs to support the growing housing need, there remains a significant deficit and therefore, opportunities for the private sector. One opportunity for the private sector to contribute to the development of housing in Addis is to partner with IHDP and other government agencies. Another recommendation is for developers to partner with the growing manufacturing sector through joint ventures with companies. Developers can support the housing needs of the manufacturing workforce by constructing housing near the manufacturing sites. A benefit of partnering with manufacturing companies is that it helps lower the risk of investing in workforce housing.
The public sector can support the private sector in development of workforce housing in several ways. We believe the most effective mechanism for the government to encourage workforce housing is to offer incentives such as subsidies and reduced-price land to encourage private companies to invest in permanent, apartment-style housing. Private companies would then work with developers to actually construct the units and also provide guarantees for their employees to attain mortgages. Government incentives could also lead to Ethiopia becoming even more appealing for manufacturing investment as housing could help retain well-trained employees.
Dar es Salaam
The core challenges in Dar around access to financing and high costs of production influences many of our recommendations related to the development of workforce housing. Developers can increase their access to financing through pre-sale contracts where future residents pay partially or wholly for units before construction. This allows developers to secure capital upfront to fund the future development and construction costs. Another recommendation for the private sector is to form partnerships between developers and employers to verify creditworthiness and guarantee mortgage payments of employees. Employees of these companies would more easily be able to qualify for a loan and possibly receive a better interest rate, as the banks would face a lower risk of default for these individuals.
The private sector should work to develop the raw materials industries that are currently driving up the cost of construction across Tanzania. At present, quality materials produced domestically are significantly more expensive than imported goods, leading to a vicious cycle in which domestic industries fail to develop. We argue that developers can vertically integrate into related construction materials industries and use these materials in their housing production.
Consider the potential for private finance and delivery of your sector of infrastructure in each city over the next decade. What are the main opportunities? What are some of the key challenges?
Opportunity: Institutionalized Mentorship for the Next Generation of Entrepreneurs
There is a general lack of private sector-led business management training and development, which compromises the next generation of entrepreneurs’ ability to gain access to competitive sources of funding and establish sustainable businesses. Many currently successful entrepreneurs were foreign educated and/or employed and have leveraged their skills and experience to succeed locally. This generation can help the next by formalizing mentorship and skill development.
Incubators and innovation hubs are a primary model for institutionalized mentorship. IceAddis, an incubator in Ethiopia, and Buni, an innovation hub in Tanzania, are good examples of organizations providing a forum for new entrepreneurs to receive advice on their projects, tap into the existing entrepreneurial network and learn how to make their businesses financially sustainable in the technology sector. There is opportunity for the development of incubators in additional sectors, such as agro-processing, and for less formal “connectors” focused on practice sharing and gaining access to market. Other organizations, such as merchant banks and trade associations may also be positioned to take advantage of this opportunity as a means to gain access to new customers/members. Finally, large and multinational companies may be motivated to provide mentorship and support in exchange for a stake in new ventures to bolster their industry or enter the market.
A challenge encountered with institutionalized mentorship models within these cities was a lack of interest by entrepreneurs to pay for advice and consultation. There is also generally limited interest in sharing company ownership with another party. There is potential however, to improve how such services are valued as success stories are realized and the services mature.
Opportunity: Fill Gaps in the Value Chain
There is tremendous opportunity for private sector investment and entrepreneurial endeavors within the value chains of strategic national sectors, such as agriculture, energy, and telecom. Businesses can be created to complement the government in providing innovative products or services that the government is incapable of providing or that have not been prioritized. Great examples of this model in Ethiopia include Kifiya, which provides mobile banking services to the rural masses and promotes financial inclusion, and Winsol Green Power, which designs solar-powered mobile chargers that are fitted to farmers’ hats. Examples of infrastructure innovation also exist in Tanzania, like Juabar, which sells solar-powered charging kiosks to budding entrepreneurs for their own businesses, or Recycler, a waste management company. Though opportunities for opportunism are less apparent in Tanzania relative to Ethiopia, which has a clear top-down strategy.
Opportunity: Establish Risk Profiles to Increase Access to Loans
Financial institutions in both Ethiopia and Tanzania are highly risk averse and are not incentivized to lend to riskier small and micro business owners or entrepreneurs. Given the lack of reliable credit reporting, banks are forced to require collateral as a means for borrowers to secure their loans. Small and micro business lending is available at several banks in both countries, but the collateral requirements still present a major hurdle for young entrepreneurs.
A key opportunity for banks to reduce collateral requirements is to leverage microlending via mobile banking platforms as a means for creating a credit risk profile for individuals. As the credit profile is established loan amounts can be increased, creating a virtuous cycle. This opportunity can be readily seized by banks operating in Tanzania, but not so for Ethiopia as mobile banking platforms have just recently been permitted to operate there. Ultimately, by engaging in the discussion of how to create alternative risk profiles, financial institutions in both countries will not only provide greater access to loans but will also engage these individuals in the formal financial sector more broadly.
Last, a general and common challenge to Ethiopia and Tanzania for prospective investors is the limited availability of large scale investment-worthy businesses. Without larger scale businesses, it is difficult for institutional investors to deploy enough capital to meet return expectations and be worthwhile.
Cooperatives (Ethiopia). Cooperatives are the primary vehicle for many Ethiopian farmers and business owners to gain access to financing and share resources. These coops utilize membership fees in addition to loans and grants to provide financing for members. Savings and Credit Unions, such as the Oromia Cooperative Bank, have also been formed to provide financing to individuals and business owners. Looking forward, cooperatives may present the best opportunity for investors to achieve the scale necessary for meaningful investment.
Incubators (Ethiopia & Tanzania). In addition to providing new and aspiring entrepreneurs with access to a professional network and advice on building and growing a business, incubators provide access to funding sources. For example, in 2015, iceAddis hosted venture capital firm 1776 for a venture competition in which 12 local startups competed. The incubator not only provided access to such a funding opportunity, but also training and preparation for entrepreneurs to demonstrate and articulate their business models.
Merchant Bank Services (Tanzania). The KCB Foundation has provided advisory services in addition to financing for small and micro business owners for several years and is planning to launch a new program that lowers the barrier to access funding for early-stage entrepreneurs. The new financing product will consist of a grant in addition to a term loan. The intent is to bolster these entrepreneurs at the earliest, most risky stage so that they can become self-sufficient and ultimately a bankable potential customer.
Skills Training (Ethiopia). The Economic and Commercial Office of the US Embassy conducts regular, invite-only skills training for local entrepreneurs. The sessions can accommodate up to 40 proven entrepreneurs and are often led, if not attended by, successful entrepreneurs who share best practices and lessons learned. Subjects addressed in the often over-subscribed workshops include digital marketing, establishing continuous improvement (kaizen) in operations, and establishing quality control systems. This program is further helping to reinforce Ethiopia’s community of entrepreneurs by channeling communications about programming through existing organizations, like the Young African Leaders Initiative (YALI) and the African Women’s Entrepreneurship Program (AWEP).
Role of Financial Institutions. Financial institutions can play a large part in supporting local entrepreneurs by relaxing some of their lending criteria. This can be especially helpful for growth-stage entrepreneurs with few government relationships. Microfinance institutions lend to the base of the pyramid, while traditional banks lend to larger companies and wealthy individuals based on collateral. Typically, these banks require 100-150% of collateral for any loan. This precludes many middle-income entrepreneurs from accessing financial markets. There is room for a new bank to lend on metrics that are based only partially on collateral.
Enabling Network and Cluster Formation. The private sector and local business leaders must also formalize mentorship and support for next generation of entrepreneurs. The successful entrepreneurs must get involved in supporting up-and-coming businesses that can help develop the broader economy. There are a few specific ways to do this. First, it would be useful for both nations to create additional incubators (private and government-funded). The incubators must align selection criteria of innovations with funders’ development agendas to increase access to seed funding.
Trade Associations. Leading business people should push forward the development of trade associations for their industries. An incubator is an ideal place to meet entrepreneurs in related industries or of a similar mindset. As a larger unit, trade associations will have additional bargaining power when negotiating with the government, and younger entrepreneurs will benefit from the knowledge of senior leaders. These formal networks will facilitate knowledge transfer and allow for shared learning. As the formal networks develop in Ethiopia and Tanzania, the opportunity for cluster formation grows.
Complement Government Activities to Fill Gaps in the Supply Chain. Some of the most successful entrepreneurial ventures in developing nations are those that complement government activities. By developing relationships with the government and jointly financing the plant, an entrepreneur is helping to fill a major gap in municipal governments. There are many more opportunities to serve governments via entrepreneurship in both Ethiopia and Tanzania. Our recommendation to private players is to invest the time and energy to get to know local governments and create businesses that solve a desperate problem for the nation. Once a private player has identified an opportunity, the key to success rests on an innovative financing model that allows for the appropriate amount of risk and reward sharing. This will be one of the biggest challenges to entrepreneurs and foreign investors in the nation – modeling the financing and support for projects that are necessary for the growth and development of the nation.