Issue 14 May - August 2003

With existing legal entities operating in Botswana, Namibia, Mozambique, Tanzania, Kenya, Zambia, and Zimbabwe, Siemens Southern Africa has extensive insight into the African business environment. The company has now turned its attention to the emerging markets of Angola and the DRC and plans to establish legal entities in both countries before the end of the year. Natalie Uhlarz spoke to Dion Goven-der, divisional director business development for Siemens Southern Africa, to find out why.

What makes Angola and DRC attractive prospects to Siemens Southern Africa?
Angola is currently the largest recipient of foreign direct investment (FDI) in Africa, largely due to its oil industry. Oil is a major driver of infrastructure and as we are an infrastructure company, we look for markets with large infrastructure requirements. Angola is therefore a natural market for us. DRC too needs to develop its infrastructure. Both countries are in the process of post conflict stability programmes – although there is still a great deal of hard work to be done in this regard, significant achievements have already been made.

The peace processes that you speak of are still in early days– how do you evaluate risk in such markets?
One needs to distinguish between perceived risk and actual risk; I believe perceived risk is high, while actual risk is negligible. The secret to doing business in countries that are perceived to be risky is to do your homework so that you can better understand the risks. We have been operating in both Angola and the DRC for a very long time without any problems. Siemens was involved in the construction of the Inga Power Station in the time of Mobutu Sese Seko when the country’s risk profile was extremely high. The project was successful and Inga 2b, which was almost entirely developed by Siemens, is the only power station still running with any degree of efficiency. There are several other examples of South African and international companies operating successfully in the DRC, for example Bateman. Bateman has been conducting business in the DRC for thirty years and, according to the company’s chief executive, they have not had a single bad debt. It is obvious that one has to be pragmatic as is the case in any market, and there are smart ways to do business, ie covering your contract pay-ments either through financial cessions or other forms of guarantees. Doing business in Angola and DRC is no different from doing business in other countries. The perception of risk is only greater due to the extended period of conflict the countries experienced.

Who are you targeting your services at in the DRC?
Typically our clients are state owned enterprises or parastatals such as the power and telecommunications utilities. Siemens recently signed a contract with the power utility – Societe Nationale d’Electricite (SNEL) – for the rehabilitation of their network in the Kinshasa city centre, as well as expansion of their domestic network through the installation of pre-paid meters. We are in the process of finalising the financial evaluation for phase 1 of this project through the Development Bank of Southern Africa (DBSA). They have pronounced the project to be extremely viable and we are now in the final stages of putting guarantees in place between Siemens, SNEL and DBSA.

What is the time frame and scope of this project?
The project was initially scheduled to begin in March but we had some set backs in a few areas such as communication. Although Vodacom has gone a long way to improve voice communications, there is still difficulty in getting faxes through etc. There is also the issue of the lan-guage barrier, and while we understand the culture, other South African organisations are still battling to grasp the way business is done in the DRC. There are certain protocols that need to be respected, specifically communication protocols. Everything is now on track for finali-sation of the loan agreement and for us to commence work in April / May. The construction phase is estimated at two years and thereafter we will enter into a service level agreement phase, which will run for a minimum of five years. The service level agreement incorporates manag-ing the system, collecting revenues, making sure that debt service accounts are topped up continuously so that DBSA’s debt service obliga-tions are met, and most importantly, putting a community awareness programme in place. This means that Siemens Southern Africa is com-mitted to the DRC – for the next decade at least. The project value is just short of USD30 million for phase one and approximately USD38 million for phase 2. As such, the combined value of the project is just under USD70 million. Although both phases have been evaluated, only financing for phase 1 has been considered for approval thus far.

Have you encountered any restrictions to doing business in the DRC?
We see significant potential for development, with the only restriction being the mobilisation of funds. It is in this area that the perception of risk needs to be addressed. Siemens is prepared to issue performance guarantees going into the DRC because we have had exposure to the market and know that there are a lot of international banks with corresponding agreements in the DRC. The financing world however still views the market with caution. We are working to overcome negative perceptions and have been engaged in discussions with the World Bank in this regard. Many companies are not aware of the fact that the IMF has a Poverty Reduction and Growth Facility (PGRF) in place in the DRC. The debt that the DRC government had with the World Bank and IMF has been settled. This means that the DRC is on an accrual status at the World Bank, a very favourable position to be in and one that offers some comfort to financial institutions. The DRC government has also taken numerous steps in promulgating new legislation that is attractive to business. Legislative changes include the independence of the central bank and allowing it to work in accordance with money supply measures, and floating the Congolese Franc. Such steps have re-sulted in inflation being stabilised. Commercial codes have also been set up and price controls have been reduced (only electricity and public transport are still price controlled). Whilst conditions appear to have worsened (for the local population) in the short term, we recognise that things generally get worse before they get better, especially in post conflict environments. A slight set back was experienced with the resig-nation of the finance minister, but I believe that there is a lot of talent and strong leadership within the DRC, and I am sure this will ensure development carries on from where the ex-minister left off. I believe that a lot of good things have happened, and there are a lot of good things still to come.

How have currency fluctuations impacted on your business?
It is a very difficult situation for us at the moment. When the Rand was depreciating rapidly against foreign currencies we were concerned, and now that the Rand is strengthening we are also concerned. If you hedge your bets in one direction and the situation moves in another you can lose revenue. We tend to price our contracts in the currency in which the majority of our costs are incurred. In sub-Saharan Africa this is generally US dollars. Whilst we account for our business in South Africa in Rand, most of our offshore costs are in USD, for instance im-porting equipment and materials into the DRC, logistics costs, etc. The Rand’s strengthening will affect us in terms of the overall value of the project. This does add an air of instability to doing business, but it comes with the territory. We have an array of financial mechanisms and policies in place to deal with this and we make use of them on a regular basis!

Where will you source supplies from for your metering project?
Although there is a great deal that we can source locally, the bulk of equipment and materials will come from outside the DRC due to the fact that this project revolves around technology. In Siemens Southern Africa we have a world class supply chain management system that pools our demand internationally and locally, and thus allows us to procure and move goods cost effectively. We intend to use South Africa as an assembly point meaning that we will be importing equipment in knock down form, assembling it in South Africa and transporting it to the DRC by either road or sea. Heavy goods will most probably travel by seafreight as there is an excellent port in Matadi, and the road between Matadi and Kinshasa has been substantially rehabilitated.

How do you ensure understanding of local market conditions?
It is good business practice in any country to get to know your client and their customs first; the business they are involved in and what proc-esses they adopt before you try and conduct any business with them. Ignorance of such issues can be very costly in the long run. We try to understand local conditions as, once we understand the local culture, we know how to react in it. Business in the DRC is certainly very dif-ferent to business elsewhere in SADC. For instance, in the DRC companies tend to require documentation prior to any meeting so that good use can be made of meeting time. We generally work with local partners to bridge the cultural gap. I have found working with partners in the DRC to be extremely easy. It is my impression that they are tired of conflict and are prepared to work as hard as possible to catalyse growth of their economy.

Who have you partnered with in the DRC?
We are partnered with a local communications and electrical company called Citilec. A number of the employees at Citilec worked for Sie-mens when we had an infrastructure in the country. We have also partnered with SNEL and the Ministry of Energy in identifying and devel-oping new prospects and projects.

Did the recent UN report on the exploitation of the DRC’s natural resources cause concern with regards to corruption?
On the contrary I saw these developments in a positive light. Some of the ministers implicated in the report were very senior government officials, and still the government took the right steps in suspending them until they could be proved innocent. This happens in any democ-racy. The fact that President Kabila was able to take tough decisions gave us a lot of encouragement. He displayed a very strong hand. There is a perception that the DRC is a very corrupt place. I have found it to be to the contrary and have found it very easy to work there once local conditions are understood.

Would you recommend that companies interested in entering the DRC market work through an intermediary?
Working through an intermediary has its ups and downs. If you pick the wrong partner it can be very damaging to your business. I would recommend that companies entering the DRC make contact with the relevant ministry. The DRC’s cabinet is made up of technocrats who have a very good understanding of what is happening on the ground, as well as the ability to identify key projects. We have also found the South Africa embassies in Africa to be extremely helpful and efficient. They can offer good insight into the local environment, trading condi-tions, etc. Most important in my opinion however is still to go there oneself and learning exactly what goes on.

Apart from energy, which other sectors will Siemens be targeting?
We have set up a detailed business plan that also covers the telecommunications industry, healthcare and the mining and industry sector. The telecommunications sector is attractive as the country currently has 10 000 fixed operational lines to service 6 million people; and the cellular network has experienced phenomenal growth. The DRC also has enormous mineral resources that need to be exploited for the benefit of the DRC economy. Siemens has significant South African experience in mining and can offer any application associated within the mining sec-tor as well as energy efficiencies such as electrical infrastructure, rolling stock, automation products, etc. The DRC’s new mining code makes conditions very attractive to prospective investors. By utilising our global relationships we are currently proactively encouraging new investment in a number of industries in the DRC and Angola.

Can you highlight any other projects you are looking at with interest?
The DRC has a wealth of mineral and energy resources. We see great potential with respect to exporting DRC’s surplus energy to neighbour-ing countries at reasonable prices. The problem in this regard up until now has been contractual. Previous contracts for export have not had enough cover for foreign currencies. We are thus trying to assist the DRC establish sound contractual frameworks. A conservative estimate says that the country could start exporting 500–600 megawatts worth of power immediately. Angola, Mozambique, Zambia and Zimbabwe all require power and all countries work off an interconnected grid. With the World Bank currently implementing upgrade programmes at Inga and on the HVDC line, the Southern African power market offers tremendous potential for energy trading. This will require proper in-frastructure, which Siemens can supply.

Siemens has identified and is currently developing energy projects throughout southern Africa, in countries such as Tanzania, Kenya, An-gola, Mozambique, Zimbabwe and Namibia

For further information, contact:
Dion Govender
Tel: +27 11 652 2072
Fax: +27 11 652 2075
Email: dion.govender@siemens.com