Sunday, February 15, 2009
Saturday, February 14, 2009
Energy - Kibera and other Slums the New Saudi Arabia
Kibera is an informal settlement in the heart of Nairobi City Center the size of Central
Park in New York City. Population estimates range from 700,000 to over 1 million
people living in this space. Population growth estimates project a doubling in population
by the year 2020.
Being an informal settlement with such a large population, infrastructure is very limited
and there is very little if any urban planning. This results in huge challenges in sewer and
garbage disposal.
Currently, there are youth groups involved in a project called “Taka ni Pato” that collect
household garbage and use it to make compost. The compost is sold for modest amounts
of money in the ksh 10 to ksh 30 ( $.14 to $43 ) per kilo to farmers. Any plastics
collected are sold to companies who recycle the material.
The sewer infrastructure constitutes of:
* Pit Latrines: These are owned and operated by landlords, local NGOs or CBOs
that allow Kibera residents to use them for a fee.
* Bushes along the River: For those residents who cannot afford the modest fee
($.07), they use the bushes along the river at night.
* Septic Tanks: Some more formal buildings have septic tanks that serve as
reservoirs for sewage.
We propose a comprehensive waste to energy solution for Kibera. The goal would be to
provide portable toilets (Porta-Jons) spread out throughout Kibera where residents would
have the opportunity to use them for free.
We would develop hand driven equipment for emptying the toilets at specific intervals
depending on volume of usage. In the USA, Port-a-jons used on construction sites are
emptied by modified trucks that ensure sanitation for the worker. The waste collected
from these would be delivered in a biogas digester that we would use to generate methane
gas. Using this methane gas and reciprocating engines, we would generate electricity to
feed into the grid. While the current feed-in-tariffs are not attractive on their own, by
leveraging the community infrastructure component, carbon credits and monetizing the
compost, the project would effectively generate positive cash flows and be sustainable.
We propose movable toilets as the government is in the process of upgrading the slums.
That said, we anticipate the process to be slow and therefore feel that there is large
enough a population base that will continue to need this service.
Implementation:
For the project to be successful, we must work with the community, its leaders, existing
solution providers and the government.
Already trained and formed groups such as the “Taka Ni Pato” group would work on the
emptying and cleaning of the toilets in exchange for income pegged on volume,
cleanliness of their Port-a-jons and other incentives. By incorporating energy generation,
the youth will have an additional revenue stream.
We must not deprive existing solution providers of their revenue. So a careful analysis of
how best to incorporate them in the project or help generate alternate revenues will be
key to the success of our project.
Revenue Steams:
Fee from the Govt. for sanitation services:
While we will be providing a key service to the community, we anticipate a long drawn
out discussion with government on if they will pay a fee for our services and what that
fee will be. So while this is a possibility, it shouldn’t be required in establishing the
viability of this effort.
Electricity generation through biogas
Using Biogas digesters, we will generate biogas to power engines that generate
electricity. Kenya currently has a feed in tariff of $.07/kWh for biomass energy
generation.
Biogas sales
Whenever possible, we will site our digesters in proximity to biogas off takers such as
industries that can use it for boilers or other uses that need thermal power. Currently,
such industries utilize diesel or Heavy fuel oil.
Compost sales
Due to the inclusion of human waste in the composting, we will need to identify non food
farmers who are willing to purchase the compost.
Biodiesel Production
Alternatively, we are also looking at growing jathropa plantations for biofuels. Farmers
near our plantations will also be invited to grow the same on an “out grower”
arrangement. Since we will be targeting marginal agricultural lands, revenues from
growing jathropa will essentially exceed the current low to no yield on such lands for the
farmers. This model has the added possibility of generating employment for the biodiesel
plant while increasing the income of the small farmers. Additional opportunities exist to
monetize the carbon offsets through jathropa propagation.
Electricity generation through biomass gasification:
For the 15% to 20% trash that will not be suitable for biogas digestion including plastics,
tires etc, we will utilize biomass gasification to generate electricity. While we would get a
better value for this through gasification to fuel, the technology isn’t as well developed.
Park in New York City. Population estimates range from 700,000 to over 1 million
people living in this space. Population growth estimates project a doubling in population
by the year 2020.
Being an informal settlement with such a large population, infrastructure is very limited
and there is very little if any urban planning. This results in huge challenges in sewer and
garbage disposal.
Currently, there are youth groups involved in a project called “Taka ni Pato” that collect
household garbage and use it to make compost. The compost is sold for modest amounts
of money in the ksh 10 to ksh 30 ( $.14 to $43 ) per kilo to farmers. Any plastics
collected are sold to companies who recycle the material.
The sewer infrastructure constitutes of:
* Pit Latrines: These are owned and operated by landlords, local NGOs or CBOs
that allow Kibera residents to use them for a fee.
* Bushes along the River: For those residents who cannot afford the modest fee
($.07), they use the bushes along the river at night.
* Septic Tanks: Some more formal buildings have septic tanks that serve as
reservoirs for sewage.
We propose a comprehensive waste to energy solution for Kibera. The goal would be to
provide portable toilets (Porta-Jons) spread out throughout Kibera where residents would
have the opportunity to use them for free.
We would develop hand driven equipment for emptying the toilets at specific intervals
depending on volume of usage. In the USA, Port-a-jons used on construction sites are
emptied by modified trucks that ensure sanitation for the worker. The waste collected
from these would be delivered in a biogas digester that we would use to generate methane
gas. Using this methane gas and reciprocating engines, we would generate electricity to
feed into the grid. While the current feed-in-tariffs are not attractive on their own, by
leveraging the community infrastructure component, carbon credits and monetizing the
compost, the project would effectively generate positive cash flows and be sustainable.
We propose movable toilets as the government is in the process of upgrading the slums.
That said, we anticipate the process to be slow and therefore feel that there is large
enough a population base that will continue to need this service.
Implementation:
For the project to be successful, we must work with the community, its leaders, existing
solution providers and the government.
Already trained and formed groups such as the “Taka Ni Pato” group would work on the
emptying and cleaning of the toilets in exchange for income pegged on volume,
cleanliness of their Port-a-jons and other incentives. By incorporating energy generation,
the youth will have an additional revenue stream.
We must not deprive existing solution providers of their revenue. So a careful analysis of
how best to incorporate them in the project or help generate alternate revenues will be
key to the success of our project.
Revenue Steams:
Fee from the Govt. for sanitation services:
While we will be providing a key service to the community, we anticipate a long drawn
out discussion with government on if they will pay a fee for our services and what that
fee will be. So while this is a possibility, it shouldn’t be required in establishing the
viability of this effort.
Electricity generation through biogas
Using Biogas digesters, we will generate biogas to power engines that generate
electricity. Kenya currently has a feed in tariff of $.07/kWh for biomass energy
generation.
Biogas sales
Whenever possible, we will site our digesters in proximity to biogas off takers such as
industries that can use it for boilers or other uses that need thermal power. Currently,
such industries utilize diesel or Heavy fuel oil.
Compost sales
Due to the inclusion of human waste in the composting, we will need to identify non food
farmers who are willing to purchase the compost.
Biodiesel Production
Alternatively, we are also looking at growing jathropa plantations for biofuels. Farmers
near our plantations will also be invited to grow the same on an “out grower”
arrangement. Since we will be targeting marginal agricultural lands, revenues from
growing jathropa will essentially exceed the current low to no yield on such lands for the
farmers. This model has the added possibility of generating employment for the biodiesel
plant while increasing the income of the small farmers. Additional opportunities exist to
monetize the carbon offsets through jathropa propagation.
Electricity generation through biomass gasification:
For the 15% to 20% trash that will not be suitable for biogas digestion including plastics,
tires etc, we will utilize biomass gasification to generate electricity. While we would get a
better value for this through gasification to fuel, the technology isn’t as well developed.
Monday, June 16, 2008
Aid vs Enterprise
On Emeka's blog, Africa Unchained he mentions an article by Thilo Thielke on Der Spiegel. Thilo's position is that aid to Africa causes more harm than good. While it is difficult to talk in absolutes, there is anecdotal evidence to both support and discredit his position.
After the post election violence, I had an opportunity to visit with quite a few NGOs that were involved in the peace effort in some way or another. I was really impressed with the caliber of people working in these organizations. From a entrepreneur standpoint, I made a mental note to recruit from the NGO World next time I am hiring.
NGOs in Kenya, particularly the well funded "Multinationals" have access to the best talent in Kenya. They renumeration structure is based on Western salary scales. This means that they can afford to hire the best talent in the country, talent that would be a great resource to the private industry. The are some industries such as the mobile phone and the name brand accounting firms that are able to compete, but based on a conversation with an HR manager of one of the multinational car companies in Kenya, hiring and retaining top employees is a huge challenge in Kenya. One might argue that when the best brains are working for NGOs and are interested in alleviating the problems in the country, then they are talent is being applied in the best possible way.
At a conference at Stanford University, Larry Brilliant, Executive Director of Google.org presented on Google.org's work around the World. After the presentation, an Engineering Student at Stanford University who is originally from Ethiopia, approached him and mentioned that Google.org had funded a NGO to provide market data from poor farmers to vendors in the City in Ethiopia. While the idea was noble, there was an existing entrepreneural venture that was already providing the data and hoping to expand nationally. The entrepreneural venture was faced by the unfair competition that was the donor funded NGO. Larry Brilliant was careful to indicate that his organization was not involved and works very hard to ensure that they don't step on small enterprises. This example however, illustrates the risk that a donor funded organization might outspend a local entreprise and nip its success in the bud.
I think that both Aid and private enterprise have roles to play in development. I believe that where possible, private enterprise should be encouraged because it is more sustainable. Aid should come with an expiration date and a clear path to sustainability so that the work and investment done during the "project" doesn't go to waste once the funding runs out.
After the post election violence, I had an opportunity to visit with quite a few NGOs that were involved in the peace effort in some way or another. I was really impressed with the caliber of people working in these organizations. From a entrepreneur standpoint, I made a mental note to recruit from the NGO World next time I am hiring.
NGOs in Kenya, particularly the well funded "Multinationals" have access to the best talent in Kenya. They renumeration structure is based on Western salary scales. This means that they can afford to hire the best talent in the country, talent that would be a great resource to the private industry. The are some industries such as the mobile phone and the name brand accounting firms that are able to compete, but based on a conversation with an HR manager of one of the multinational car companies in Kenya, hiring and retaining top employees is a huge challenge in Kenya. One might argue that when the best brains are working for NGOs and are interested in alleviating the problems in the country, then they are talent is being applied in the best possible way.
At a conference at Stanford University, Larry Brilliant, Executive Director of Google.org presented on Google.org's work around the World. After the presentation, an Engineering Student at Stanford University who is originally from Ethiopia, approached him and mentioned that Google.org had funded a NGO to provide market data from poor farmers to vendors in the City in Ethiopia. While the idea was noble, there was an existing entrepreneural venture that was already providing the data and hoping to expand nationally. The entrepreneural venture was faced by the unfair competition that was the donor funded NGO. Larry Brilliant was careful to indicate that his organization was not involved and works very hard to ensure that they don't step on small enterprises. This example however, illustrates the risk that a donor funded organization might outspend a local entreprise and nip its success in the bud.
I think that both Aid and private enterprise have roles to play in development. I believe that where possible, private enterprise should be encouraged because it is more sustainable. Aid should come with an expiration date and a clear path to sustainability so that the work and investment done during the "project" doesn't go to waste once the funding runs out.
Saturday, June 7, 2008
Redefining Cash Crops
What is a cash crop? According to Wikipedia, a cash crop is any crop that is grown for money. In Kenya, Coffee, Tea, Pyrethrum etc are the main cash crops. Our grandparents raised our parents on these crops, educated them and built concrete floors using cash crop proceeds. But according to my grandfather who passed away last year, his coffee farm no longer provided cash but rather consumed it. Being a practical guy, I spend very little time following discussions at the World Trade Organization or a gazillion other organizations that seek to level the playing field on farm subsidies etc. I believe these discussions are a critical part of the overall solution, but I also think there needs to be some "hard ball" play so to speak.
How many Kenyans drink coffee? Besides the Java Coffee shop enthusiasts who pay $3 for a cup of Coffee in Kenya, there is a very limited audience for coffee ( happy to take corrections). Most people I know drink tea. So why do we produce such a vast amount of coffee? Because at one time, it was a great crop. It still is, but relative to other crops, its lost is caffeine. I propose we clear 80% of our coffee farms and grow a "real cash crop". Jathropa.
At the risk of simplifying this too far I'll attempt to illustrate; the farmer makes very little money on coffee, spends a fortune on pesticides, fertilizers and labor and gets $.50/lb for his coffee. Per hectare, a coffee farmer's best case scenario is $732 net assuming a conservative 40% cost of fertilizer, labor and pesticides. In contrast, Jathropa is $900 net. The key would be to modify all the local coffee processing plants into jathropa into biodiesel processing plants. The infrastructure exists. Each area near a processing plant has matatus, tractors, lorries, generators and SUVs, all of which would be ready customers for biodiesel and would pay cash for it. No 3 to 6 months waiting period for the farmer to get paid.
These are not scientific figures, but they certainly raise the question of what should we consider a cash crop. And this would have a lot of positive consequences. Suppose the supply of coffee dropped by 80%, those who chose to stay in it could get a better price at the market, they would be calling the shots. Diesel prices would either have to come down from their current ksh 100+ to compete with biodiesel ( Ministry of energy estimates Biodiesel at ksh. 45/litre, I think that is a tard aggressive) or seek customers elsewhere.
And food insecurity would not be an issue for the Kenyan coffee grower.
To put the issue of cash crops in context, a couple of years ago, when the oil price per barrel was at the bargain basement price of $60 per barrel, my company's shipping costs for fresh fruits and vegetables to Paris were 50% of the total delivered value of the shipment in France. I hate to think what that ratio looks like today.
If you are growing coffee for sentimental reasons, like my mother who keeps a couple of cows for the same, or the California guy in Los Altos Hills who has a 20,000 square ft home and 10,000 s/f vineyard, then keep the coffee. If you are interested in a revenue stream, rethink the whole coffee as a cash crop thing.
How many Kenyans drink coffee? Besides the Java Coffee shop enthusiasts who pay $3 for a cup of Coffee in Kenya, there is a very limited audience for coffee ( happy to take corrections). Most people I know drink tea. So why do we produce such a vast amount of coffee? Because at one time, it was a great crop. It still is, but relative to other crops, its lost is caffeine. I propose we clear 80% of our coffee farms and grow a "real cash crop". Jathropa.
At the risk of simplifying this too far I'll attempt to illustrate; the farmer makes very little money on coffee, spends a fortune on pesticides, fertilizers and labor and gets $.50/lb for his coffee. Per hectare, a coffee farmer's best case scenario is $732 net assuming a conservative 40% cost of fertilizer, labor and pesticides. In contrast, Jathropa is $900 net. The key would be to modify all the local coffee processing plants into jathropa into biodiesel processing plants. The infrastructure exists. Each area near a processing plant has matatus, tractors, lorries, generators and SUVs, all of which would be ready customers for biodiesel and would pay cash for it. No 3 to 6 months waiting period for the farmer to get paid.
These are not scientific figures, but they certainly raise the question of what should we consider a cash crop. And this would have a lot of positive consequences. Suppose the supply of coffee dropped by 80%, those who chose to stay in it could get a better price at the market, they would be calling the shots. Diesel prices would either have to come down from their current ksh 100+ to compete with biodiesel ( Ministry of energy estimates Biodiesel at ksh. 45/litre, I think that is a tard aggressive) or seek customers elsewhere.
And food insecurity would not be an issue for the Kenyan coffee grower.
To put the issue of cash crops in context, a couple of years ago, when the oil price per barrel was at the bargain basement price of $60 per barrel, my company's shipping costs for fresh fruits and vegetables to Paris were 50% of the total delivered value of the shipment in France. I hate to think what that ratio looks like today.
If you are growing coffee for sentimental reasons, like my mother who keeps a couple of cows for the same, or the California guy in Los Altos Hills who has a 20,000 square ft home and 10,000 s/f vineyard, then keep the coffee. If you are interested in a revenue stream, rethink the whole coffee as a cash crop thing.
Renewable Energy
I have been spending a lot of time looking at different renewable energy technologies being developed both in the Bay Area and around the World, and it is quite clear that the revolution is underway and. This is particulary important in the Africa context because of two main reasons, distributed generation and low barrier of entry (specifically in biofuels).
Why is distributed generation important? Because just as the cell phone industry has had rapid adoption, power will leap frog traditional central production and distribution models. Why are low barriers of entry important? Because they ensure viral (sic) adoption.
Why is distributed generation important? Because just as the cell phone industry has had rapid adoption, power will leap frog traditional central production and distribution models. Why are low barriers of entry important? Because they ensure viral (sic) adoption.
Some of the biofuel technologies I like include Amyris - developing a similar fuel to traditional biodiesel using yeast, cane juice and a ton of money in capital investment. If I were Mumias, I would track these guys down. Coskata - makes ethanol from garbage including municipal waste. With Kenya mandating ethanol blending, there is an opportunity for an enterprising individual with access to capital to adopt this technology. The biggest advantage would be the opportunity to clean up Kibera and Mathare while making money doing so. In low barrier of entry, while I haven't seen this myself, I have learnt that there are communities growing jathropa, have developed oil press equipment and are making biodiesel that is being used for Kerosene lighting.
Some of the solar thermal energy companies I really like are eSolar
- makes modular solar plants that start at 33MW and are scalable. While this is primarily a utility connection plant, it is a great solution because it is relatively quick in installation and can help bridge the power supply deficit that Kenya currently has. Sopogy is an interesting twist on eSolar. Its plants are much smaller at 200kw and would be an ideal system for rural electrification. Solar thermal is a great technology because it is more efficient than PV and provides a certain level of energy storage. Since land isn't very expensive in most cases, it makes a lot of sense. In urban areas where land is limited, PV plants are a good alternative.
In March, the Kenya Govt. issued guidelines on a Feed in Tariff for renewable energy. Feed in tariff (FIT) is the price that KPLC will pay a power producer for connecting to the Grid and supplying power. FITs have been credited for the phenomenal growth of the solar industry in Germany.
Clearly, what works in the West cannot be photocopied and implemented in Africa. However, innovative business models ( copied from other successful industries such as the mobile phone industry), innovative finance and knowledge. I would love to hear thoughts on a game plan to implement these in Africa ASAP. Engineers, financial engineers, policy experts etc, I am all ears.
Some of the solar thermal energy companies I really like are eSolar
- makes modular solar plants that start at 33MW and are scalable. While this is primarily a utility connection plant, it is a great solution because it is relatively quick in installation and can help bridge the power supply deficit that Kenya currently has. Sopogy is an interesting twist on eSolar. Its plants are much smaller at 200kw and would be an ideal system for rural electrification. Solar thermal is a great technology because it is more efficient than PV and provides a certain level of energy storage. Since land isn't very expensive in most cases, it makes a lot of sense. In urban areas where land is limited, PV plants are a good alternative.
In March, the Kenya Govt. issued guidelines on a Feed in Tariff for renewable energy. Feed in tariff (FIT) is the price that KPLC will pay a power producer for connecting to the Grid and supplying power. FITs have been credited for the phenomenal growth of the solar industry in Germany.
Clearly, what works in the West cannot be photocopied and implemented in Africa. However, innovative business models ( copied from other successful industries such as the mobile phone industry), innovative finance and knowledge. I would love to hear thoughts on a game plan to implement these in Africa ASAP. Engineers, financial engineers, policy experts etc, I am all ears.
Thursday, March 13, 2008
Points to think about when considering investing in Africa
This post is primarily for those of us in Diaspora. There are a lot of attractive opportunities to invest in Kenya. One should think about whether they want to be a passive investor or an active investor.
If a passive investor, I recommend real estate and stocks. While I have very little confidence in the NSE and CMA, it is still possible to get attractive returns primarily on momentum rather than fundamentals. However, following the numerous scandals in the last couple of years, CMA might acquire some teeth which are critically needed as an oversight body for NSE and the listed companies. The beauty of the NSE is that the money and the assets remain in your name. You might appoint a manager you trust to trade on the account if your doesn't allow, but they won't have the ability to withdraw funds. Real Estate is ideal if you can do the due diligence yourself and plan to sit on the property for while before offloading it. Appreciation alone gives a more attractive return than treasuries and savings accounts in the West. With no capital gains tax and the possibility to develop the land in the future, it makes sense. However, cannot emphasize enough on location and due diligence.
For the active investor here are some additional thoughts. By active investor, I mean someone who is looking to find an opportunity to either buy an existing business, start a new business or partner with someone else to start a business.
1. Barrier of Entry: Kenyans are smart, hardworking, knowledgeable and well capitalized - to a point. So, if you start a business that even appears to be profitable, there will will be a gazillion other people starting similar businesses. And if you've been in the west for any period longer than 24hrs, you do not have the skills to "hustle" on the level that your competition does. On capitalization, all you need to do is look at Kengen and the amount of money that came from "under the mattress" to buy those shares. As for competition - think about the matatu industry for example. These are industries that "seem" to make money and attract a lot of people. So you are competing with someone who knows how to "talk" to the police, who knows where to repair their vehicle at a more competitive rate and who drives their own matatu. You have a driver. Your overheads are obviously higher than theirs. Talking about the matatu business, City Hoppa has been successful ( I guess it is important to define success) because the owners had a lot of experience with KBS. They were also capitalized enough that in order to compete with them, one needs $2m in initial investment. They also positioned themselves not as a matatu but as a luxury shuttle. That positioning allowed them to charge a premium and not destroy their vehicles through the "hustle" that other matatus are involved in. They invested in developing the brand. The guy who buys a single matatu expects dinner, rent, fuel and school fees from that matatu from the get go. So there is no money to maintain the vehicle, to develop a brand etc. City Hoppa had those resources.
So, look for opportunities that allow you to position yourself differently from the guy on the street. This will help you sell your offering not on price (which you cannot compete) but on positioning. Also, make sure you have a significant amount to invest. This will eliminate a large portion of the competition.
2. Sweat Equity doesn't work. In the US, a lot of companies are founded on sweat equity before angels, VCs and capital markets. In Kenya, for the most part, this doesn't work. This is primarily because very few people if any, have credit cards, savings accounts, trust funds, student loans, mom and pop loans etc that help pay for their living expenses while they found their company. So if you are going to start a company with partners in Kenya, make sure you offer them competitive salaries right from the get go. That allows them to focus on growing the business rather than on survival tricks which more often than not, are at the expense of the venture you are starting together.
3. Lawyers. A lawyer, accountant and security guard are important people to have. Your accountant should be your best friend. A lawyer should be someone you talk to before any major transaction. That said, all contracts, however strongly worded, are no excuse for due diligence and getting things right the first time. This is because enforcing those contracts is very expensive in cash and time. So do the contract thing with your lawyer, but make sure you have all the necessary safeguards yourself. For example, if you are renovating or building a house, pay based on performance. No deposit or very minimal deposit, then pay as milestones are achieved. This calls for much more engagement, but that is what it takes to keep your money.
4. Once money leaves your pocket ( or bank account or mattress) it is very difficult if not impossible to get it back. So set things up so that money never leaves your control. If its acquiring assets, pay for them from your account rather than issuing cash to a said third party to buy and deliver these.
5. Local knowledge is critical. Find people you can trust and get different perspectives on issues relating to your business. If there are discrepancies, walk. Local knowledge however, should only be a small component of your due diligence. Anecdotal evidence on the potential of a particular opportunity should only be a first step, never the premise on which an investment decision is made. Get data. In my experience, correct data is the difference between a viable investment and a black hole for your money.
6. Availability and time commitment. Any new business, whether in the West or in Africa, requires a tremendous amount of time to get right. Having been in the West, you offer a different perspective that could be the difference between a scalable business and a barely breaking even mom and pop shop.
7. Talking of scalable - If you are making an income in dollars, you should consider investments that have the potential to compensate you on the same level whether in Kenya or wherever. Think about it from a time invested perspective. And no, life in Kenya isn't cheaper than in the West. You are used to a certain lifestyle which comes at a premium in Kenya. Two movie tickets at the village market are $15 to $20. Gas is 2 to 3x more than in the US and housing in most places is $400 to $1000 a month. A year 2000 corolla will cost you around $10k, and no, financing isn't an option - the interest rates just don't make sense. And we're not even talking about Runda. That said, there are enormous advantages to being in Kenya. So when structuring the business, find a business that will throw off enough cash over time to allow for an income equivalent to or higher than your income in the USA. Particularly since there is a risk premium associated with being in Africa - actual or perceived.
There are people who have moved to Africa and after going through their savings, returned to the West. There are those who have gone back been very successful and stayed. And there are those who split their time between Africa and the West. I think it would be interesting to interview these people and learn from their experiences................
If a passive investor, I recommend real estate and stocks. While I have very little confidence in the NSE and CMA, it is still possible to get attractive returns primarily on momentum rather than fundamentals. However, following the numerous scandals in the last couple of years, CMA might acquire some teeth which are critically needed as an oversight body for NSE and the listed companies. The beauty of the NSE is that the money and the assets remain in your name. You might appoint a manager you trust to trade on the account if your doesn't allow, but they won't have the ability to withdraw funds. Real Estate is ideal if you can do the due diligence yourself and plan to sit on the property for while before offloading it. Appreciation alone gives a more attractive return than treasuries and savings accounts in the West. With no capital gains tax and the possibility to develop the land in the future, it makes sense. However, cannot emphasize enough on location and due diligence.
For the active investor here are some additional thoughts. By active investor, I mean someone who is looking to find an opportunity to either buy an existing business, start a new business or partner with someone else to start a business.
1. Barrier of Entry: Kenyans are smart, hardworking, knowledgeable and well capitalized - to a point. So, if you start a business that even appears to be profitable, there will will be a gazillion other people starting similar businesses. And if you've been in the west for any period longer than 24hrs, you do not have the skills to "hustle" on the level that your competition does. On capitalization, all you need to do is look at Kengen and the amount of money that came from "under the mattress" to buy those shares. As for competition - think about the matatu industry for example. These are industries that "seem" to make money and attract a lot of people. So you are competing with someone who knows how to "talk" to the police, who knows where to repair their vehicle at a more competitive rate and who drives their own matatu. You have a driver. Your overheads are obviously higher than theirs. Talking about the matatu business, City Hoppa has been successful ( I guess it is important to define success) because the owners had a lot of experience with KBS. They were also capitalized enough that in order to compete with them, one needs $2m in initial investment. They also positioned themselves not as a matatu but as a luxury shuttle. That positioning allowed them to charge a premium and not destroy their vehicles through the "hustle" that other matatus are involved in. They invested in developing the brand. The guy who buys a single matatu expects dinner, rent, fuel and school fees from that matatu from the get go. So there is no money to maintain the vehicle, to develop a brand etc. City Hoppa had those resources.
So, look for opportunities that allow you to position yourself differently from the guy on the street. This will help you sell your offering not on price (which you cannot compete) but on positioning. Also, make sure you have a significant amount to invest. This will eliminate a large portion of the competition.
2. Sweat Equity doesn't work. In the US, a lot of companies are founded on sweat equity before angels, VCs and capital markets. In Kenya, for the most part, this doesn't work. This is primarily because very few people if any, have credit cards, savings accounts, trust funds, student loans, mom and pop loans etc that help pay for their living expenses while they found their company. So if you are going to start a company with partners in Kenya, make sure you offer them competitive salaries right from the get go. That allows them to focus on growing the business rather than on survival tricks which more often than not, are at the expense of the venture you are starting together.
3. Lawyers. A lawyer, accountant and security guard are important people to have. Your accountant should be your best friend. A lawyer should be someone you talk to before any major transaction. That said, all contracts, however strongly worded, are no excuse for due diligence and getting things right the first time. This is because enforcing those contracts is very expensive in cash and time. So do the contract thing with your lawyer, but make sure you have all the necessary safeguards yourself. For example, if you are renovating or building a house, pay based on performance. No deposit or very minimal deposit, then pay as milestones are achieved. This calls for much more engagement, but that is what it takes to keep your money.
4. Once money leaves your pocket ( or bank account or mattress) it is very difficult if not impossible to get it back. So set things up so that money never leaves your control. If its acquiring assets, pay for them from your account rather than issuing cash to a said third party to buy and deliver these.
5. Local knowledge is critical. Find people you can trust and get different perspectives on issues relating to your business. If there are discrepancies, walk. Local knowledge however, should only be a small component of your due diligence. Anecdotal evidence on the potential of a particular opportunity should only be a first step, never the premise on which an investment decision is made. Get data. In my experience, correct data is the difference between a viable investment and a black hole for your money.
6. Availability and time commitment. Any new business, whether in the West or in Africa, requires a tremendous amount of time to get right. Having been in the West, you offer a different perspective that could be the difference between a scalable business and a barely breaking even mom and pop shop.
7. Talking of scalable - If you are making an income in dollars, you should consider investments that have the potential to compensate you on the same level whether in Kenya or wherever. Think about it from a time invested perspective. And no, life in Kenya isn't cheaper than in the West. You are used to a certain lifestyle which comes at a premium in Kenya. Two movie tickets at the village market are $15 to $20. Gas is 2 to 3x more than in the US and housing in most places is $400 to $1000 a month. A year 2000 corolla will cost you around $10k, and no, financing isn't an option - the interest rates just don't make sense. And we're not even talking about Runda. That said, there are enormous advantages to being in Kenya. So when structuring the business, find a business that will throw off enough cash over time to allow for an income equivalent to or higher than your income in the USA. Particularly since there is a risk premium associated with being in Africa - actual or perceived.
There are people who have moved to Africa and after going through their savings, returned to the West. There are those who have gone back been very successful and stayed. And there are those who split their time between Africa and the West. I think it would be interesting to interview these people and learn from their experiences................
Sunday, March 9, 2008
Real Estate
With the crisis in Kenya having land as one of the underlying issues, one should be concerned about making real estate investments in Kenya. However, the risks involved can mitigated by due diligence and exercise of extreme caution.
My experience has been both on very successful property investments and a couple that ended up disastrously and taught me invaluable lessons on buying land in Kenya.
The successful deals involve acquiring large tracks of land, 10 to 100 acres, outside Nairobi and near urban centers such as college towns. This size of land usually belongs to a family that has owned it for a couple of generations. Acquiring land that has previously been owned by a family reduces the potential for fraudulent transactions because in addition to the due diligence one has to do at the Lands Office, one can also get oral evidence of who owns the land from the community.
After buying the land, we subdivided them into .1 of an acre. By subdividing the land into these small portions, developing dirt roads and producing share certificates, we provide a very affordable piece of land for a family. The client usually builds a structure over time and moves in as soon as they can. This helps them move away from paying rent to actually investing in something they own. Depending on the client, we provide 3 to 6 months financing. Once they complete paying for the property, we issue them a share certificate for that plot.
The challenge in this projects is ensuring that the land transaction is not fraudulent. We do that by retaining an attorney who verifies ownership of the land with the ministry of lands. This however, is not a guarantee (as I will explain shortly) that the land belongs to whoever the lands office says it belongs to. Once this step checks, the next step is to interview people who have lived in that neighborhood for a couple of generations to see who the community believes owns the land. If there is the slightest doubt or inconsistency, the best policy is to walk - nay - run.
The other challenge is that the customer buying a .10 acre, while best intentioned, has limited control of their income. If their business has a bad month, they will default on their payment. So we build in a certain amount of room for late payments. If one's fortunes change irreversibly - for example, the bread winner dies, we return the client's money to the family and resell the land to someone else. While this may seem as charity, it also makes business sense as the land is consistently appreciating and we are often able to get a higher price than we had originally agreed on the piece of land. This especially so if other people who had bought neighboring plots have started construction on their land.
Identifying suitable land to acquire is also important. Here comes the cliche - location, location, location. Land closer to the highway, to urban centers, to economic centers such as colleges, plantations etc, always sells faster and at more attractive prices. The ideal situation is to acquire land closest to the highway as possible, and before selling this land, acquire the neighboring land. This ensures that when development of the initially purchased land starts, the appreciation in neighboring pieces is captured as it is already in our portfolio.
Land in Nairobi: So I do not invest in Nairobi. This is because it is very difficult to verify ownership. Again, the rule of land that has been in one family for generations is a good first step. But these are few and far between.
A few years back, buying half an acre to .75 of an acre in Nairobi suburbs such as Kileleshwa, Lavington etc was all the rage. Acquire the land for ksh. 10m to 16m. Build an apartment complex of 16 to 24 units with a pool, gym and parking. Add a concrete fence and voila, you have a neighborhood. The apartments were selling out before construction was completed. Banks over the last 5 years, while still eons behind banks in the West in issuing mortgages, have been consistently improving on their offering. Purchase, construction and selling of the development could be completed in 18 to 24 months for a return of 40% of leveraged capital.
Based on this assessment, I set out to acquire a piece of land in Kileleshwa. Through an attorney who has done business with my father for ages, we verified the land ownership. However, as I came to learn millions of shillings later, the seller of the land had colluded with officers at the ministry of lands. Every inquiry made on this particular piece of land was routed to a specific officer who gave a consistent story. I had my suspicions and used different lawyers to double check the land ownership, I personally went to the lands office and met with "some commissioner" in a big fancy office. During this due diligence phase, there was numerous complaints in the media on fraudulent land transactions at the lands office, so I stalled on completing the payment for the land I was buying. During that period, a bunch of people were fired from the lands office. So when I engaged a different attorney to double check on the land ownership, she found that the land didn't belong to the gentleman who was selling it to me. And that the story had always been carefully managed by a team at the lands office who each stood to make some money from the fraudulent transaction. I of course, sued everyone I could. But unfortunately, this is usually a waste of valuable time and money. It is always best to avoid the courts by getting the transaction right the first time.
I should of course, have listened to my instincts and walked. However, I did learn some valuable lessons.
The opportunities to develop neighborhoods exist. There is a shortage of housing in Nairobi. With an improving economy, a growing middle class and better managed fiscal spending which diminishes the attractiveness of TBills, the banks are actively developing mortgage lending. There are opportunities to get funding for such development from the US - will discuss this on a different post.
There are professional contractors that do exceptionally good work on time and on budget. There are really good quality architectural firms that are capable of maximizing the utilization of land in a development. However, like everywhere else on earth, it is your project, your investment and its success is directly related to the amount of time you spend on it. I highly discourage remotely managed projects.
Some of the related industries that are growing in this space include: Earth moving and construction equipment rental businesses, Sand and Quarry businesses, Paint and finish businesses and financial service firms.
My experience has been both on very successful property investments and a couple that ended up disastrously and taught me invaluable lessons on buying land in Kenya.
The successful deals involve acquiring large tracks of land, 10 to 100 acres, outside Nairobi and near urban centers such as college towns. This size of land usually belongs to a family that has owned it for a couple of generations. Acquiring land that has previously been owned by a family reduces the potential for fraudulent transactions because in addition to the due diligence one has to do at the Lands Office, one can also get oral evidence of who owns the land from the community.
After buying the land, we subdivided them into .1 of an acre. By subdividing the land into these small portions, developing dirt roads and producing share certificates, we provide a very affordable piece of land for a family. The client usually builds a structure over time and moves in as soon as they can. This helps them move away from paying rent to actually investing in something they own. Depending on the client, we provide 3 to 6 months financing. Once they complete paying for the property, we issue them a share certificate for that plot.
The challenge in this projects is ensuring that the land transaction is not fraudulent. We do that by retaining an attorney who verifies ownership of the land with the ministry of lands. This however, is not a guarantee (as I will explain shortly) that the land belongs to whoever the lands office says it belongs to. Once this step checks, the next step is to interview people who have lived in that neighborhood for a couple of generations to see who the community believes owns the land. If there is the slightest doubt or inconsistency, the best policy is to walk - nay - run.
The other challenge is that the customer buying a .10 acre, while best intentioned, has limited control of their income. If their business has a bad month, they will default on their payment. So we build in a certain amount of room for late payments. If one's fortunes change irreversibly - for example, the bread winner dies, we return the client's money to the family and resell the land to someone else. While this may seem as charity, it also makes business sense as the land is consistently appreciating and we are often able to get a higher price than we had originally agreed on the piece of land. This especially so if other people who had bought neighboring plots have started construction on their land.
Identifying suitable land to acquire is also important. Here comes the cliche - location, location, location. Land closer to the highway, to urban centers, to economic centers such as colleges, plantations etc, always sells faster and at more attractive prices. The ideal situation is to acquire land closest to the highway as possible, and before selling this land, acquire the neighboring land. This ensures that when development of the initially purchased land starts, the appreciation in neighboring pieces is captured as it is already in our portfolio.
Land in Nairobi: So I do not invest in Nairobi. This is because it is very difficult to verify ownership. Again, the rule of land that has been in one family for generations is a good first step. But these are few and far between.
A few years back, buying half an acre to .75 of an acre in Nairobi suburbs such as Kileleshwa, Lavington etc was all the rage. Acquire the land for ksh. 10m to 16m. Build an apartment complex of 16 to 24 units with a pool, gym and parking. Add a concrete fence and voila, you have a neighborhood. The apartments were selling out before construction was completed. Banks over the last 5 years, while still eons behind banks in the West in issuing mortgages, have been consistently improving on their offering. Purchase, construction and selling of the development could be completed in 18 to 24 months for a return of 40% of leveraged capital.
Based on this assessment, I set out to acquire a piece of land in Kileleshwa. Through an attorney who has done business with my father for ages, we verified the land ownership. However, as I came to learn millions of shillings later, the seller of the land had colluded with officers at the ministry of lands. Every inquiry made on this particular piece of land was routed to a specific officer who gave a consistent story. I had my suspicions and used different lawyers to double check the land ownership, I personally went to the lands office and met with "some commissioner" in a big fancy office. During this due diligence phase, there was numerous complaints in the media on fraudulent land transactions at the lands office, so I stalled on completing the payment for the land I was buying. During that period, a bunch of people were fired from the lands office. So when I engaged a different attorney to double check on the land ownership, she found that the land didn't belong to the gentleman who was selling it to me. And that the story had always been carefully managed by a team at the lands office who each stood to make some money from the fraudulent transaction. I of course, sued everyone I could. But unfortunately, this is usually a waste of valuable time and money. It is always best to avoid the courts by getting the transaction right the first time.
I should of course, have listened to my instincts and walked. However, I did learn some valuable lessons.
The opportunities to develop neighborhoods exist. There is a shortage of housing in Nairobi. With an improving economy, a growing middle class and better managed fiscal spending which diminishes the attractiveness of TBills, the banks are actively developing mortgage lending. There are opportunities to get funding for such development from the US - will discuss this on a different post.
There are professional contractors that do exceptionally good work on time and on budget. There are really good quality architectural firms that are capable of maximizing the utilization of land in a development. However, like everywhere else on earth, it is your project, your investment and its success is directly related to the amount of time you spend on it. I highly discourage remotely managed projects.
Some of the related industries that are growing in this space include: Earth moving and construction equipment rental businesses, Sand and Quarry businesses, Paint and finish businesses and financial service firms.
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