Tell us a bit about this company’s impressive history?
TransCentury started with a capital base of half a million dollars, and this capital base was from friends (29 entrepreneurs) who got together and contributed under 20,000 dollars each. This is all the equity that has ever gone in to TransCentury. The company started with a revenue of 3 million dollars and today has a revenue of over 200 million dollars a year, if you really consolidate all the underlying factors. How did we do this? We did this by taking the half a million and investing well. The first investment went from turning over 3 million to 50 million and the money that was made out of this was reinvested in other operations.
What we do at the company level is what we need to replicate at the country level. For example, imagine the costs to the economy without having particular critical infrastructure i.e. railway, roads, mobile phone businesses. If you go back 10 years, the mobile phone revolution had not caught on in Kenya – the mobile phone was a luxury and it was not impacting the economy in any real way. People didn’t use it as a solution in their day to day lives. In the old days, you would leave the job for 2 or 3 days to go to the village to deliver money (to your family). The cost implication would be: you would lose 3 days of work, pay for the bus fare to and from the village, just to take 20 dollars or less back to the village. Fast forward 10 years, we have invested in the telecomm sector and now everybody has a mobile phone, it doesn’t matter how poor you are. The mobile phones have Money Transfer that you can use to transfer money to the village in less than 2 minutes without having to travel home. A transaction that would take 2 to 3 days in the past today takes 2 to 3 minutes to happen. The cost on the economy and the efficiency you gain from this is massive. There are so many examples of such in Africa. The same revolutions need to happen in many other basic services that Kenya lacks for GDP growth, job creation and drive export competitiveness.
The next phase of growth is still efficiency gains, the reason why Africa is such an exciting investment opportunity is because we are an exact mirror opposite of the developed world. The developed world is struggling to find additional efficiency gains and additional opportunities to create value since they have become much more technologically advanced and have built infrastructure. Africa is the other way, we have huge demand but we don’t have an infrastructure to support it. Which is why being an infrastructure company in Africa commands much better economics than similar companies in developed markets because the alternative of not having infrastructure (e.g. Power, Railways etc) is so expensive.
The reason why a lot of these things are not happening is constraint of capital and the misguided perceptions of Africa in terms of risk and purchasing power. Africans aren’t as poor as people think and the true size of many African economies are regularly understated due to the size of the informal economy. The reason why we don’t have enough roads or power is not because we don’t have enough money or cars on the roads or enough consumers of power, because we do, but because we don’t have efficiency in terms of capital allocation, correct prioritization and execution to make sure that the glaring supply and demand imbalances are addressed.
Several keys sectors of the Kenyan economy are going through a sort of revolution at the moment which are in need of significant infrastructure development, whether it's the recent discoveries of oil and gas or Kenya’s first titanium shipment in the mining sector, do you see opportunities to invest in these sectors?
There are two renowned competing theories in terms of economic development: first, providing supporting enabling policies for Economic Development and the market will be efficient enough to decide what industries to develop. This is the traditional school of thinking. Then there is the untraditional school of thinking: because we are at a stage of our economy where resources are limited and the capacity of our population is limited, we do a much more targeted approach and pick what sectors should be driven, make a choice and drive the economy towards a particular direction. It means making a judgment and driving while the other school of thought lets the market decide.
My opinion is that making a choice is a better way to go. That’s why in Vision 2030, there was a push towards picking and we picked 6 sectors because they had the potential to impact on the driving of the GDP jobs and exports. The first two were agriculture, wholesale and retail trade. If you look at almost any African economy with the exception of potentially South Africa and some North African countries i.e. Egypt, at least 50% of the economy is still sitting in the bucket of agriculture, wholesale and retail trade. That is half the economy. It is very clear that Africa has to do something in agriculture and supply chains around agriculture and it is so ripe to do it because it has the land and every other thing going for it apart from infrastructure market structure. In theory it should be very profitable, because we have the Middle-East and countries across Europe and Asia who need it. And so if you look at the 3 filters of the GDP, jobs, exports and agriculture is already half the GDP so if you fail to grow that, you are growing off a very weak base. If you look at job creation – agriculture employs a lot of people and it doesn’t require very highly skilled labour. If you look at agricultural exports, we can produce more than we need and it’s a fantastic opportunity.
The next were manufacturing and tourism. The only way China got competitive is building its own market. By not building our own markets we are missing out on an opportunity to aggressively compete on the World stage. The whole industrialization will finally happen and countries like China will get too expensive and the Chinese way of life and lifestyle has to change. They will be less willing to do it and the jobs will move to Africa. Instead of waiting for foreign investors it’s much easier to take advantage of your own domestic demand.
Tourism: Kenyans are proud of the attractions in Kenya that draw tourists, its however important to continue harnessing this very important sector for our country to fully benefit from it, there is need to reinvest and re position the product. Tourism sector is excellent in regards to job creation, the support industry around this sector is huge, and in terms of foreign exchange it’s a good counter balance.
From a Kenyan perspective these are the four critical sectors that if Kenya doesn’t get right, we will have missed out on a huge opportunity. The next 2, which were picked were the exciting sectors for Kenya that we will spend a lot of effort building, they may not be a big contributor to GDP and Kenya’s economic growth today, but they have huge potential. One was the service industry: business services, company headquarters, I.T, medical tourism. Since we are strategically well positioned, we can be a great hub for Africa and Kenyans are relatively well educated. Second was financial services to deepen the capital markets.
The greatest weakness in Africa is we forget the 70-80% of the basic existing economy, which is really the low hanging fruit and it’s where money is going to be made. Everybody is excited about the new stuff which is much more difficult to do, it is much more long-term and challenging. The oil and gas in Kenya today, exciting as it is, is a journey as it is everywhere else in the World. If you were an investor, you would make much more money investing in some of the old sectors that are already a big part of the domestic economy, than to try to chase some of these new sectors, particularly if it is not your area of specialization.
Is that what you are trying to do here at TransCentury?
TransCentury’s investment policy is extremely simple. If you look at all our businesses we have exactly the same dynamics. The first dynamic is called under penetration – a fancy way to say that we are always involved in sectors where there is more demand than there is the ability to supply today. For example, if you look at Kenya’s power it’s about 1.6 gigawatts and if you look at South Africa it is about 45 gigawatts with the same population. For industrialization, you can never explain the difference between the two – it’s too big. That’s why someone would say our power growth needs to grow by the GDP growth rate of the country because there has been demand over the last 20-30 years that is so big. One of the companies that Transcentury has invested in is a Cable manufacturing company with two factories in Kenya, we have never had a day where we produce cable for stock, because it’s so much in demand. When we started the cable business, there were 500,000 people connected to power in the country, this has grown to 4 times. But even with the 2 million connections, only 25% of Kenyans are connected to power so you can imagine the head room left to grow.
Another example is the railway, it is doing 5% of the cargo because 1.5 of the 20 million tons is out there. Customers pay ahead of time to use the railway and whoever paid ahead of time is given priority. A 2-hour difference in payment would mean a 2-day difference in moving the cargo.
The second concept is inefficiency; we are always going into a business where we recognize or understood some of the inefficiency but more importantly we usually have a point of how we can change it. For example, when we bought a company in 2004, it employed 300 people and had a turnover of over 3 million dollars, today it has a turnover of over 50 million dollars and employs 100 people. This will be the same with the railway, when we started it had 7,000 people and did 1.5 million tons, when we finish it will be employing 1,000 people and doing 10 million tons.
If you look at the TransCentury business, it is businesses or technologies that have been in existence but we come in with efficient execution to make sure we take out the inefficiency to meet the demands
How do you achieve all this?
It all comes down to 2 things: capital and management. We have made choices to be involved in a few areas. When you look at Africa, there is so much opportunity, but at the end of the day you only have so many hours in day and so much capacity. From TransCentury’s perspective, we’ve picked 3 businesses; power, transport and engineering. We are building teams around the 3.
We also learnt to get into strategic partnership that help us build our teams and expertise. On the power side we initially had a collaboration with Nexans – the largest European player – and General Cable, the largest American player. We built our team on their technical expertise so that we could be following global best practice. On transport we’ve collaborated with a Brazilian company – ALL (American Latino Logistica) owned by a group of Brazilian entrepreneurs. Today the company is mix of Kenyans and Brazilians but in 5 years’ time it should be a Kenyan team.
Beyond management, you also need capital. Part of the reason why we are achieving these efficiency gains is investment in equipment and technology. If you visit our cable factory, the machines and the technology you will see is world class. When we bought the factory, the machines then were installed in the early 60’s and were second-hand from the UK. We have since replaced them with the world class machines. The railway too was run the same as it was 100 years ago, which was the train moving and stopping in every single railway station, now we can sit in a room with huge computer screen and know where every locomotive is.
One thing that investors overlook is the skills and technology. The only way to manage the complexity of African businesses is to put in technology.
Is TransCentury also looking to pioneer in renewable energy?
We are big in renewables because we believe in geothermal power. This is because of four reasons.
First, the big challenge of Africa is it needs base load power. You can’t rely on solar and hydro energy because it is not base load power. Geothermal runs at 98% load factor. Secondly, you want to make power as cheap as possible, and the way to make it cheap is to have the lowest levelised cost of productions. Levelised cost is the trade-off between the capital costs of building the plant and the operating costs of running the plant. With geothermal power, capital costs are high and the operating costs are incredibly low, once you’ve built it there is nothing else. Thirdly, in Kenya it is right by the road sector. It is very close to Nairobi, approximately 50 and 100 km from where most of the power is being consumed. So you don’t have to worry about huge transmission lines and huge power evacuation problems. Lastly, it can be relatively quick but it does take time to scale out. If the drilling programme work is done correctly, then there is a lot to be had. In Kenya today, we have done more drilling than doing power stations, today we have more wells than the power station. So the challenge is building the power stations.
The African population just like the rest of the world is more informed and exposed to all that the world has to offer, making expectations from the population even higher. The only way to meet the power demand in Kenya is to build based on power stations, it could be coal, gas etc. This is what is going to lift Kenyans, make our industries competitive and change the lives of people. In my view, I see the next big thing in the power sector will come from disruptive technology equivalent to the mobile phone revolution, at some point in time which will be a distributed power solution. There will be something that people will put in units on a much smaller scale in many different locations to provide power in small clusters, as compared to providing it en masse for the whole country with a huge infrastructure to do it. If I was to come back in 100 years I will be expecting Africa to have a few big coal and nuclear plants, but not to the level of America.
When we met and interviewed Mr. Oigara (the CEO of KCB) yesterday, he stressed the importance of Kenyan companies partnering with leading international companies such as GE to push Kenya to the next level of development, do you believe this is true for TransCentury?
As earlier noted, our cable business produces cables for power lines, buildings etc. We do all the low voltage cables, however we do not do medium and high voltage cables. We would never go into high voltage cables because it’s a different market, it takes a lot of RND, you’ve got to be on the cutting edge, if you get something wrong, it takes a lot of expertise and costs to correct it and also our market is too small and we can never justify the amount of capital and the amount of RND to run a business like that here in Kenya. So, in such a case we do partnerships with the big boys in the world – the global leaders who do this. However, on the other side of things, Africa often pays above the odds, because it lacks the confidence to do things i.e. we were going to build a 100 megawatt thermal power station in Cairo running on heavy fuel – diesel. We were getting the engines from Germany which is the biggest part of the cost and when we put the total of the whole project cost it was coming to 1.4 million dollars per megawatt. But I knew that in India they would be doing between 600,000 and 800,000 dollars per megawatt. And the question was, why such a big difference? What the Indians did was, they would go to Germany and tell them all they needed were the engine and give them options of where else they can buy them like in Korea or somewhere else, so they are given a reasonably good price. We Africans don’t have the confidence and most of the time those who fund the projects are not African banks. Since our financiers are strict, we do a lot of subcontracting to international EPCs and add our margins on top of their margins and if you look at this cycle and how it works it becomes huge. Fortunately, in Africa, the demand is so high, the margins are so thick, so it will always correct itself all the time, but if you are in the business of making money, then you really have to be clear where you really have the confidence and if you have to do it yourself.
What advice would you give to the American investors who are looking to invest in the Kenyan economy?
If you can’t understand what the business does in 5 minutes probably you shouldn’t invest in it, because all African businesses are simple and it has been proven time after time. The reason why Dangote is now the richest African is because he is running a simple business. Generally, this is a very important rule.
The second rule is, as exciting as a business looks and exciting as your idea looks, it will fail if you don’t have the execution behind it. Africa is all about execution and very rarely about the idea. You need to understand if you really have a team, a company that can execute on your idea.
Recently you were interviewed on BBC. You are probably the most prominent young entrepreneur in Africa. What leadership attributes would you say have allowed you to succeed, or what advice would you give to other young professionals who aspire to have the same level of success you have enjoyed?
I’ve always believed that you really have do something that you are passionate about because in the end if you are not passionate about it, then you can never be good at it. And generally be honest with yourself and enjoy what you do by having fun doing it. It should not just be about making money.
Patience is very important. The world is moving so fast that a lot of people get very impatient expecting things to happen immediately. If you look at the big American companies most of them were not built as quickly as the African companies have been built. There will always be bumps along the road. Things will not always work out as you are predicting so you ought to have the patience to be resilient and take it through and have a long-term view.
Also try to do something that you can look back on and see what you have achieved. The exciting thing that is happening now is that if you look at the Kenyan entrepreneurs, they are real entrepreneurs with real businesses For example, James Mwangi with Equity Bank; it’s an amazing success story. It’s hard not to look back and admire something like that.
At times we forget about looking to the future; we become too quick to look for shortcuts and how to get there. All in all take your time, you need to be resilient and do something that you can look back on without having to go through the shortcuts.
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