Using policy to develop a BPO industry in Africa

Prof. Bitange Ndemo ANALYSIS ICT

With a bulging youth population and comprehensive Information and Communications Technologies (ICTs) infrastructure, it is surprising that so many African countries are faced with such high unemployment levels. They should instead be leveraging recent home-grown technological innovations to create jobs and boost economic growth. Outsourcing, or business process outsourcing (BPO), as it is commonly known, is an underutilized solution to the unemployment challenge on the continent and represents a prime opportunity to leverage recent ICT expansion.

As defined by Gartner, Inc., an American information technology research and advisory firm, BPO “is the transfer of business processes through ICTs to an external provider that, in turn, owns, administrates and manages the selected processes based on defined and measurable performance metrics”. Some of the pioneering countries in the BPO sector include India, Philippines, Indonesia, Malaysia, and a number of countries in Central and South America.

The International Data Corporation estimates global market size of the BPO industry to hit $209.4 billion by 2017, up from $143 billion in 2013. Call centres constitute the largest category of BPOs around the world. In most cases, these industries evolve to higher-value, non-voice functions such as accounting and finance operations, human resource and administrative services, and transcription services.

BPO investment in Africa

Over the last 15 years, BPO services have become increasingly attractive to a number of sub-Saharan African (SSA) countries. Job creation was one of the chief driving forces behind the growth of ICT infrastructure on the continent, as were cost-saving opportunities.
In the same vein, the investment climate in much of Africa also has many appealing features. While population aging is affecting the entire developed world, the majority of African nations’ populations are youthful, with high education levels and fluency in English. In many countries, such as Kenya, English is a national language that is widely spoken with a fairly neutral accent. Labour costs in Africa are also globally competitive. These factors combine to position the continent as highly attractive to organizations interested in outsourcing non-core services to foreign countries.

In the case of Kenya, the Government and the Rockefeller Foundation both conducted feasibility studies in 2010 to establish whether the country was capable of exploiting global BPO opportunities. Both reports recommended that activity around this area start with low-end BPO services such as call centres, back-office operations and data entry, precipitated by an initial investment in human resource education and training and more affordable and accessible broadband services.

Barrier to entry: the high cost of broadband

Despite these clear investment opportunities, the cost of broadband on the continent has, to date, prevented early-stage BPO investment like that in India, Philippines and other parts of the world.

In 2013, the Alliance for Affordable Internet, the world’s broadest technology sector coalition (of which the author was the founding Chair), produced its first ever global affordability report. As part of this, the Alliance looked at the true cost of broadband for the millions of people who live on less than $2 per day. The results were not surprising and rather sobering: for those living on less than US$2/day, entry-level broadband costs an average of 40% of monthly income, and in many countries, exceeds 100%. In the case of Zambia, more than 10 million people live in extreme poverty and have to spend 35% of their income to afford mobile broadband services or 135% of their income to access fixed broadband.

Expanding access to and lowering the cost of broadband

Given these costs, it was easy to pitch the idea among the top policy makers that the governments and industry leaders in Africa needed to invest in ICT to lower the cost of broadband and create employment for Africa’s young and educated population. East Africa, and Kenya in particular, soon became the epicenter of the drive to build high-capacity broadband infrastructure and create jobs in the BPO sector. In 2006, there were very few BPO operations in the region.

Elsewhere on the continent, only Egypt and South Africa had a substantial number of people working in the sector. In an early effort, Egypt created the Smart Village in order to attract BPO investment early 2000. From its website, the Village ‘offers special incentives, including tax exemptions and reductions for ICT industries; special reductions on land prices for investors in the ICT sector; easing of export and import regulations; training programs for professionals in the ICT industry that investors intend to recruit; training in IT, communications and networks according to investors’ standards and specifications, all at the government’s expense, and assigns a government official to facilitate interaction with government organizations’. Morocco, too, offers almost similar incentive including simplified tax systems for investors in the sector.

Several Kenyan teams visited the Smart Village in Egypt to learn what was needed to set up a BPO community. It was here they realized that the problem in Kenya was consistent with the Alliance’s findings: the high cost of broadband.

By the end of 2009, Kenya had built an undersea fibre optic infrastructure that drastically lowered the cost of broadband. And by 2012, several other cables had landed and covered the entire continent. High-capacity broadband was now widespread (see Figure 1) and Africa, for the first time, was becoming a global competitor in terms of cost of access.

Other East African countries, particularly Uganda and Rwanda, were in regular contact with Kenya on the development of infrastructure and training, and took keen interest in the BPO industry. These land-locked countries also needed affordable broadband. Through the East African Communication Organization (EACO), the East African countries harmonized national policies enabling the region to work together to secure cheap broadband. Southern Africa, through the Southern African Development Community (SADC), also benefited from a regionally effective telecommunication policy.

With the adequate policy environments in place, the New Partnership for Africa Development (NEPAD) promoted the building of extensive terrestrial fibre optic networks across the continent and by 2012, most of the continent was connected.

Incentivizing investment

Clearly, the feasibility of a viable BPO industry in SSA relies on competitive broadband and a supportive regulatory environment. African countries must therefore make every effort, through policy and regulations, to ensure affordable and widespread access. Incentive schemes for investment are a second and vital component. Compared to the countries leading in the BPO sector, African nations have much to learn in terms of creating an attractive investment environment.

India, which is perhaps the biggest outsourcing destination in the world, offers attractive financial incentives to companies that set up call centres in smaller cities. The strategy helps spread employment to rural India, which in turn helps to stem migration into big cities where pressure on resources has peaked. State governments have set up special-purpose vehicles to encourage expansion of the BPO industry into rural areas by increasing broadband penetration to cover all areas.

Philippines, which is one of the fastest-growing BPO destinations globally, also boasts a number of attractive incentives. The Philippines Zone Authorities (PEZA) lists many of these incentives, including: ‘easier visa processing for expat employees, tax holidays of up to four years, a simplified tax such as the special 5% tax on gross income, permanent residency for foreign investors (upon an initial investment of $1.5 million to any sustainable, local enterprise) and other payment exemptions’. However, the country requires businesses under this special tax treatment to be located within a special economic zone.

In order to be competitive, African countries must offer comparable incentives such as those offered by leading outsourcing destinations. The best technologies in the world cannot drive progress if they are held back by regulation and policy. It has been shown ‒ and Kenya is a case in point ‒ that by creating the conditions for open, competitive and innovative broadband markets, regulatory and policy reform can leverage very large increases in internet access.
Unfortunately, even after solving the infrastructure challenge through the cable investment, a number of African countries continue to undermine these initial goals through heavy taxation on broadband. They have also failed to invest in human resource development that would spur the industry.

Furthermore, several Africa countries created export processing zones, but these zones are failing and the incentive structure is not as competitive. Few countries have modified their incentive programs under special economic zones that would offer more competitive incentives. Some, like Kenya, are creating new legislation that would manage these new zones. A certain amount of the outsourced services require that the outsource destination develop new legislation around data protection in order to secure foreign data. Many countries in SSA have not developed these laws, making it difficult to access businesses from many parts of the world.

Immigration laws in many SSA countries are so inflexible that in most cases it is difficult for foreign workers to access work permits. Some immigration offices are riddled with corruption, which is a major stumbling block to developing a vibrant BPO industry. There is a need to emulate the Philippine model in managing foreign experts that will transfer knowledge to the local people.

Through policy and regulatory frameworks that encourage greater penetration of affordable broadband, and by offering more incentives like in India, jobs can flow into rural areas where the problem of unemployment is much more severe, and curb rural-urban migration. It can also drive economic expansion: as the lower-end activities are pushed into rural areas, some urban areas are evolving to more advanced activities known as Knowledge Processing Outsourcing (KPO).

Looking inwards to build capacity

In addition to creating an enabling policy environment, to competitively provide services that meet these global standards, African countries must start local outsourcing services and build the experience and discipline that the international market requires. Digitizing content in developing countries, especially in Africa, has multiple benefits besides building capacity for international jobs. These include greater domestic efficiencies and the minimizing of corruption. For example, when the Kenyan government automated the banking section of the Ministry of Lands, the revenues jumped from Kenya shillings (Ksh) 800 million to over Ksh 9 billion within a six-month period. There are plenty of other registries that should be digitized as a strategy for greater efficiency, transparency and capacity building.

A growing number of BPOs focus on local enterprises, especially the telecommunications sector and large enterprises. There are also several small, below-the-radar BPOs, either on sub-contract work, or direct jobs from small enterprises in foreign countries. These enterprises thrive where broadband is affordably accessible. But since broadband in many African countries is extremely expensive, broadband penetration in some countries is still very low.

Developing a vibrant BPO industry in Africa

Africa must begin to market itself as a prime business-outsourcing destination. It must build affordable housing as well as office blocks as a strategy to create an ICT ecosystem where new and more advanced activities can be undertaken. For example, Kenya has become known as an innovation destination owing to the successful mobile applications that have gained global renown. Some countries in Africa could easily become KPO destinations while the others could build the BPO sector from the base.

After several years of focusing on the supply side of broadband, Africa must now focus on building the demand side. There is urgent need for many countries on the continent to start investing in human resource capacity, making it part of the incentive for prospective firms looking to outsource. Of equal importance is the removal of taxes, not just on broadband, but from all ICT equipment to enable those below the radar to grow and become viable small enterprises.

It is evident that for sub-Saharan Africa to succeed in the BPO industry, the region must emulate countries that have succeeded in the sector. Many of the traditional outsourcing destinations such as India and the Philippines are moving up the ladder to more lucrative areas such as support services in the Information Technology-enabled services (ITES), including software development and application, IT-enabled services, content-development for the internet and other forms of media, and IT research development. This presents a great opportunity for African countries to enter the now open lower end of the BPO sector and begin building into more advanced services over time.

Written by

Prof. Bitange Ndemo is an Associate Professor of Entrepreneurship at the University of Nairobi’s Business School and is a board member of several local and international organizations. A technology enthusiast, Prof. Ndemo's research centres on inclusive innovations and how ICTs influence economic development. He is the immediate former Permanent Secretary of Kenya’s Ministry of Information and Communication in Kenya, where he facilitated many transformative ICT projects. He now champions the demand side of broadband in Kenya and promotes sustainable models of innovation hubs. He holds a PhD in Industrial Economics from the University of Sheffield in the UK and a Bachelor’s degree in Finance and Accounting from the University of Minnesota. He is an Open Data/Big Data evangelist.