AFRICA

The role of cities in Africa’s rise

kpmgafrica.com

Cities are…the cause

of the good life. They are the

centres of wealth creation, creativity,

innovation, and invention. They’re the

exciting places. They are these magnets that

suck people in.

– Geoffrey West

The world today is

more about cities than countries.

– AT Kearney, 2012 Global Cities Index

1 | THE ROLE OF CITIES IN AFRICA’S RISE

New dynamic markets around the globe are offering boundless opportunities. Firms are gravitating towards new markets in the south and the east, where the inflow of foreign direct investment (FDI) are resulting in returns on investment (ROI) far exceeding those of mature markets in Europe and North America.

Africa is widely regarded as the next frontier of growth and opportunity where firms across a range of sectors are enjoying exponential returns. With a population over a billion and an economy likely to double from US$2 trillion to US$4 trillion before 2025, Africa has quickly emerged as the next great economic hope for the global economy.

With 54 countries and over 1000 spoken dialects across the continent, Africa is perhaps the most diverse region of all, and certainly one of the most complex investment destinations. While the bullish sentiment around Africa’s rise is well-founded, grasping the nuances and realising the opportunities is essential. This goes beyond country-by-country assessments and digging deeper into the economic energy and growth, that being Africa’s emerging cities. The nature of the business environment in Africa will demand a far more city-centric orientation toward investment decisions and

day-to-day business practices.

The Urban DriftThe rise of cities and their role in economic development is a global phenomenon. Today, over half the world’s population are urban dwellers, generating, in some cases, up to 80 percent of a country’s national production and income. By 2025 cities will house over 4 billion consumers, a significant increase from 1 billion in 1990. Over 2 billion of these consumers will be in emerging market cities.

This shift from rural to urban centres is the largest migration in human history. Africa will be leading the charge for the coming decades in a similar way to China’s economic transition since 1980.

By 2030 Africa will have more than 50 percent of the population living in cities. Over 60 percent of Africans will be living in cities by 2050.

Global growth in urbanisation will be almost exclusively in Africa and Asia over the next 40 years. Together, these two regions will account for 86 percent of the world’s urban population growth, which, as Geoffrey West, the theoretical physicist and scholar of city systems, insists bodes well for

‘wealth creation, creativity, innovation, and invention’ – and ultimately economic prosperity.

Africa is still faced with unprecedented challenges around jobs, housing and infrastructure, scarcity of water and other resources, and the impact this will have on the environment, health and safety.

Source: www.unhabitat.com

THE ROLE OF CITIES IN AFRICA’S RISE | 2

Africa Population 1950 – 2050 (millions)

1950 1960 1970 1980 1990 2000

Year

2010 2020 2030 2040 20500

200

400

600

800

1000

1200

1400Urban

Rural

3 | THE ROLE OF CITIES IN AFRICA’S RISE

The Emergence of the African cityCities are the highest form of social organisation and are often associated with

advancing human development. Cities incorporate an intense combination of economic, cultural and political factors, in concert with varying degrees of urbanisation and infrastructure, defined by geography and history.

In Africa, the emergence of cities is no exception. From the coastal estuaries of Lagos in Nigeria, which has boomed and sprawled from 300,000 inhabitants in 1960 to over 17

million today, to Kinshasa, which was established on the banks of the powerful Congo river, nearing 15 million, and Johannesburg, reputedly the largest city that is not located

strategically on a river, port or coastline – but which boasts some of the richest mineral deposits the world has ever seen. These cities are forged by their history and geography,

and exude truly unique cultural traits that influence their national geographies well beyond the city limits.

Africa’s rate of urbanisation and the development of cities have been slow. The rise of African cities has coincided with the continent’s growth and rejuvenation over the past decade. Cities

have emerged as the epicentres of growth, representing a new era of economic modernisation with new market opportunities.

Africa will have the largest work force on the planet by 2040, and consumer spending in these urban centres is expected to triple by 2030, reaching US$2.2 trillion.

On the cusp of an economic boom, there are two key features altering the course of economic development for Africa’s future: a rich demographic dividend and urbanization, which together will

drive modernisation and increase connectivity across the continent. These are essential prerequisites for sustained economic progress on the continent. Cities are at the centre of these new determinants of

economic prosperity.

With over 60percent of Africans under the age of 30 – a figure

that surges well above 70percent in more populous countries like

Nigeria and Ethiopia – Africa’s youthful population is behind

the urban migration to cities and the economic revolution that is leapfrogging new technologies

in telecoms, driving consumerism and enticing entrepreneurship and

diversification. This is bringing with it an increase in investments, deeper labour

markets, higher per capita incomes, small-scale industrialisation, and much-

needed improvements in infrastructure and better services.

Source: www.unhabitation.org

THE ROLE OF CITIES IN AFRICA’S RISE | 4

2025 est

2010

Cairo

0 5 10 15 20

Lagos

Kinshasa

Luanda

Alexadria

Abidjan

Johannesburg

Nairobi

Cape Town

Kano

Dar es Saalam

Casablanca

Africa’s most populous cities (millions)

Africa’s ‘Megacities’ and the next tier of urban driversOnly three African cities – Lagos, Cairo and Kinshasa – fall within the true definition of ‘megacities’, a category of cities boasting 10 million people or more. The growth of African cities will push at least another six cities – Johannesburg, Luanda, Nairobi, Addis Ababa, Casablanca and Khartoum - into the ‘megacity’ class within the next 20 to 30 years, not to mention a long list of others, from Maputo to Dakar, that may fall short of the head count but carry just as much vibrancy as their ‘megacity’ counterparts.

With an estimated population of over 17 million people, boasting a consumer spending around US$25 billion, Lagos in Nigeria is one of the best examples of why a city-specific understanding or strategy may prove more useful in understanding growth prospects and business opportunities in one of the fastest growing nodes of Africa.

Lagos has a per capita income of just US$1,400 per year (compared to Johannesburg’s US$7,500), but its population growth rate is nearly three times that of South Africa. This is a city that is still relatively un-banked and underserviced, but with a vibrancy and energy unparalleled on the African continent. Most visitors and Nigerians themselves would agree, there is no place on earth quite like Lagos. This is precisely what is driving change and growth in Lagos., Lagos has made great strides in improving the work and living environment through improved mobile connectivity, services and infrastructure in an effort to become the ‘go-to’ business capital of the continent.

An interesting observation around consumer behaviour vis-à-vis Lagos and the rest of Nigeria is in the culture of smoking. There seems to be very few (at times, if any) local smokers in Lagos. One might think that Nigeria, in general, is not a smoking nation. But just outside Lagos and throughout the country, and especially in the north, there is a vibrant smoking culture. The remaining 160 million-strong population is therefore a potential consumer market, which could be neglected if one were just visiting Lagos with a view of understanding consumer behaviour across Nigeria in general.

This is just one illustration of how the consumer behaviour and operating environment from country-to-country and city-to-city in the broader African context can vary so drastically.

While megacities like Lagos and Kinshasa have captured the world’s attention through their size and impressive rates of growth – both will overtake Cairo to become the two largest cities in Africa within the next few years.

Apart from Africa’s megacities, a next generation is emerging quickly. Cities like Luanda, Nairobi and Addis Ababa are some of the fastest growing cities on the continent, driving dynamism and progressive change for their countries and Africa as a whole. These are the new investment locations and centres of innovation that are inspiring the next phase of exponential growth in Africa.

Mining towns like Lubumbashi in the Democratic Republic of Congo (DRC) and Tete in northern Mozambique are reportedly the fastest growing economic nodes on the continent. But apart from the virtues of growth, they carry the true characteristics of a frontier town, including significant social problems and stubbornly high levels of poverty.

Meanwhile, capital cities like Luanda in Angola and Maputo in Mozambique are growing at such a rate and attracting investment for buildings and infrastructure that their urban landscape is literally transforming overnight.

Addis Ababa in Ethiopia is another example of a second tier growth dynamo. It has emerged as the so-called administrative capital of Africa, hosting the African headquarters of every major multilateral organisation and Non-Government Organisation (NGO) in the world, including the African Union with its sleek new headquarters donated by China.

More established cities like Cape Town, Nairobi, Accra and Dakar are reinventing themselves and building their competitiveness in an effort to benefit from and contribute toward Africa’s rise.

Nairobi is arguably the best-connected city on the continent in terms of Information Communication Technologies (ICT) – and especially mobile phones – but is still severely restricted by poor road and rail infrastructure. Efforts are underway to improve this area of the city’s infrastructure as Nairobi positions itself as the epicentre of regional integration in East Africa and champions Kenya as an African hub for Asian business and investment.

Accra in Ghana was recently flagged by Mastercard as the African city with the highest growth potential. Currently at the centre of one of the most progressive growth stories on the continent (in Ghana), Accra is seen as a safe-haven investment hub for the rapidly growing West African region and an ideal springboard into the lucrative Nigerian market.

Clearly, while megacities like Lagos and Cairo are impressively exciting destinations with enormous investment prospects for the future, other emerging cities are showing encouraging signs of growth and demonstrating exciting new dynamics. Some of the future prospects from this next tier of leading African cities include:

City Estimated Population*

Addis Ababa, Ethiopia 4.5 million

Luanda, Angola 6 million

Dakar, Senegal 7.2 million

Douala, Cameroon 3 million

Kampala, Uganda 2.5 million

Maputo, Mozambique 3 million

Lusaka, Zambia 2.5 million

Lubumbashi, DRC 2 million

Brazzaville, Republic of the Congo 3.3 million

Abidjan, Cote D’Ivoir 5 million*Estimates based on research by the Centre for Dynamic Markets,

the Gordon Institute of Business Science (GIBS).

5 | THE ROLE OF CITIES IN AFRICA’S RISE

Key challenges in cities and rising urbanisation

While cities bring great economic growth prospects and coordinated development, and urbanisation is often associated with rising incomes and better living standards, a lack of resources, inadequate infrastructure and poor planning or management pose enormous challenges to city life.

Today, over 72percent of urban dwellers in Africa live in slums with living conditions and safety far worse than in rural areas. This figure is around 40percent in other developing regions. Africa’s enormous infrastructure deficit requires close to US$100 billion a year to service adequate growth and service delivery – and to catch up with other regions of the world. Most of this infrastructure investment is needed in cities.

The rate of growth of urban centres, as is anticipated for Africa, puts enormous strain on resources, institutions and overall living conditions. As Africa grows and industrialises, the demand for resources will intensify.

The demand for water, for example, is expected to triple or even quadruple over the next 20 years as Africa’s urban population doubles. This is a much faster rate than any other region in the world. Such demand will bring increased competition from agriculture and power generation for scarce supplies of water, exacerbating existing socioeconomic and political challenges cities are already facing.

Africa’s greatest challenges around the emergence of cities are epitomised in the growth of urban slums. In Nairobi, for example, sprawling slums make up around a quarter of the total population, and they are growing. This growth is a result of the fact that African urbanisation has traditionally run counter to the general theory that urbanisation provides better access to jobs, basic services and social safety nets, but is rather a ‘push’ from rural degradation and a history of rural conflicts. Cities need an urgent boost in industrial growth and serious investment in infrastructure to address the influx of people and associated challenges.

The usual challenges of health, safety, jobs, housing and public services are that much more acute in the confined spaces of cities and under the pressures of urban development.

Concluding RemarksCities in Africa are at the heart of the continent’s economic reconfiguration and are an integral part of unlocking its future potential. Cities encapsulate exciting new growth prospects around demography – and the booming, youthful population, urbanisation and the burgeoning middle class, all of which bodes well for consumer spending, investment and a growing labour force. Cities also encourage modernisation, openness and connectedness which are important pre-conditions of sustained economic success.

While cities are the most advanced form of collective living, they are also highly complex structures and systems, which are amplified in the context of Africa where underdevelopment, economic inequalities and social challenges prevail.

The rate of urbanisation may bring unprecedented challenges in Africa’s new rise, but the opportunities are enormous and will no doubt contribute toward the effective management and development of these rapidly expanding cities.

If the likes of well-established cities like Lagos, Accra and Nairobi, or the rapidly growing and increasingly dynamic Luanda, Lusaka and Maputo, along with the new dynamos of Lubumbashi and Tete are anything to go by, exciting prospects for African cities lies ahead.

The shape of a city changes faster, alas,

than the desires of the human heart. – Charles Baudelaire

THE ROLE OF CITIES IN AFRICA’S RISE | 6

kpmgafrica.com

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.© 2012 KPMG Africa Limited, a Cayman Islands company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. MC10187

Written in collaboration withDr Lyal WhiteDirector: Centre for Dynamic MarketsGordon Institute of Business ScienceM: +27 84 522 0022E: whitel@gibs.co.za

For more information contact our team:

KPMG Global Africa Practice teamAnthony ThunstromChief Operations Officer M: +27 83 700 8862E: anthony.thunstrom@kpmg.co.za

Katherine MilesSenior Manager M: +27 710 7408E: katherine.miles@kpmg.co.za

Shelley AlbertsManagerM: +27 82 710 9807E: shelley.alberts@kpmg.co.za

KPMG Infrastructure teamDeBuys ScottHead Infrastructure Africa M: +27 82 551 3345 E: debuys.scott@kpmg.co.za

Kobus FourieGovernment Advisory ServicesM: +27 82 777 9407E: kobus.fourie@kpmg.co.za