Piracy, never-ending conflicts, and a severe lack of law enforcement would probably be sufficient enough to ward off even the most adventurous from trading and investing in around Eastern Africa. Such dangers are even more unpalatable in the current risk-averse environment. Yet trade and investment from the Middle East continues to flourish, driven in part by concerns in the Gulf over food security, writes Zoe Alsop.
In November, last year the United Arab Emirates’ Lootah Group announced plans to support a US$3mn port project in the northern Somali city of Bossasso. A consultant with Lootah called Somalia a country of “tremendous potential”.
People in Europe and the United States, if they have heard of Bossasso at all, likely know it as the site of mega-mansions and imported cars belonging to the purveyors of Somalia’s most notorious economy: piracy.
But, when it comes to how and where companies invest in Sub-Saharan Africa – whether it’s a Bossasso port, mirage-like massive farming ventures emerging from the semi-arid plains of Sudan, or über-luxurious desert resorts – it’s all about perspective.
Where countries in the west see arid moonscapes, inscrutable conflicts and interminable wars drowning out all but the most profitable enterprise, countries in the Middle East look across a narrow band of water to the shores of a continent that was once joined to their own.
Today that same shoreline is a prime example of how Middle Eastern trade with Africa, which has traditionally focused on northern Africa is expanding southward into Sudan, Somalia and Kenya, building on geographical proximity, as well as historic economic and cultural ties to access resources as well as growing markets in Sub-Saharan Africa.
“There is that affinity that comes with doing business with people who have ancestral, geographic, cultural and historical ties and it only makes sense to exploit that,” says Johnson Weru, head of economics and trade in Kenya’s ministry of foreign affairs.
Though each East African region represents only a tiny percentage of trade with the other, the implications of growth between Sub-Saharan Africa and a major logistics hub like the Middle East could serve as a template for how African trade will be done in the future and the growing prominence of partners in the Middle and Far East.
“The Middle Eastern countries are looking for investment opportunities within the continent,” comments Timothy Armitage, Sub-Saharan Africa economist with the London-based Global Insight. “It’s definitely an important trend… They have some of the largest sovereign wealth portfolios and the Middle East is a trade link between the East and Africa and, if the East continues to grow and Chinese exports continue to grow, the relationship with the Middle East will continue to grow.”
Ties are longstanding. A thousand years back and further, Africa traded slaves, cotton and fish for prized indigo textiles and porcelain from the Middle East. These days the terms have changed somewhat, though each side still holds what the other lacks. Where Africa needs capital and technology, countries in the Middle East, goaded by spiking food prices, are desperate for arable land. Where Africa has thousands of kilometres of white sand beaches and stunning vistas, the Gulf states have a jet-set in search of the latest in luxury resorts and the know-how to build them.
A scramble for food
Perhaps the most controversial trend in trade between the two regions has been the development of enormous agri-business schemes in Sudan by countries like Saudi Arabia, Jordan and the United Arab Emirates, where a global food shortage has driven prices sky high.
Saudis have seen their food expenditures quadruple, a trend that forced leaders to find means of acquiring food production facilities in order to ward of potential hunger-driven social and political instability.
News of the cultivation of hundreds of thousands of hectares of land for export to the Middle East in countries like Sudan and Ethiopia, where famines driven by drought, flooding and war drew vast quantities of international food aid each year, has raised eyebrows in the West.
But Sudan has served as a source and conduit for African trade with Gulf states for centuries, and this trade relation remains intact today.
Between 2003 and 2006, imports to the UAE from Sudan rose from US$90mn to US$227mn, while trade in the other direction rose from just US$7mn to US$86mn, according to Armitage.
Strong political ties stand at the foundations of these growing trade volumes.
“Historic trading routes and shared culture of governments is important,” comments Carl Atkin, head of research for the UK-based Bidwells Agribusiness, which advises investors on agricultural investment. “Where some of these decisions become subjective is when you are looking at economic and political stability.”
Plenty of investors have bypassed Sudan, striking deals to produce agriculture on millions of acres across the continent. Often with explicit government backing, firms from the Gulf states have bought land, leased it, or formed local partnerships in Kenya, Uganda, Tanzania, Mozambique and Malawi among others, according to AD Ganesh, managing director and regional head of Standard Chartered Bank’s commodity traders and agribusiness for the Middle East and Africa.
Ganesh says Middle Eastern interest in African agriculture is here to stay.
“If there is nothing for people to eat, the government is in trouble,” comments Ganesh.
“Everybody is looking at food security – it is there. It is not a sort of seasonal topic.”
While the Sudanese ministry of foreign affairs wasn’t available for comment, the country’s Kenyan neighbours are pragmatic about the deals. Trade officials there say they have much to gain from such deals.
“We have entered into bilateral and multilateral agreements that guide the operations,” says Weru in Kenya. “Our main interest as a country is to acquire technology and pass it down to farmers.”
Another government official pointed out that land tenure is an extremely volatile issue across the region. In Kenya, grievances over land helped fuel post-elections clashes early last year. If local farmers are not involved and satisfied they’ve gained enough from deals, the political risk is a real concern.
Lost in the controversy is just how hard and unprecedented large-scale agribusiness projects are in Africa.
Most African agribusiness success stories have been family-run ventures – ones that have taken generations to develop and where owners live on site and are intimately acquainted with crops and the region’s typically temperamental soils. While there are examples of successful vast corporate-run farms run on this model in the former Soviet Union, such businesses are largely untested in Africa, where most countries are still net importers of food.
In the end, Bidwell’s Atkin says management will be the deciding factor.
“It will all come down to how successful guys are on the ground,” Atkin says. “The absolutely fundamental thing is whether a business plan can be executed and whether the right calibre management and structures can be put in place to grow the yield, and keep bringing more land in through land improvement. It’s really a challenge to do all those things in tandem.”
The seriousness of Middle Eastern intentions with regard to trade in the region is perhaps most evident in the upswing in large-scale infrastructure projects. In recent years, dozens of infrastructure projects backed by the likes of DP World of the UAE, Qatar and Saudi Arabia’s Bin Laden group, have emerged, suggesting the underpinnings of a long-term relationship.
“When you talk about the Middle East, it is a bit more strategic than opportunistic in Africa,” comments Tom Vis, a senior risk management officer with the World Bank’s Multilateral Investment Guarantee Agency (Miga). “You see a few projects here and there which are very large, substantive projects.”
The global financial crisis, which has driven some away from investments considered “exotic,” as is almost any project in Sub-Saharan Africa, has threatened many of the public-private type partnerships used to finance infrastructure projects in the region. But sovereign wealth funds from the Middle and Far East, which are often less susceptible to the credit crisis, have been able to partially fill that void.
“In Africa, we are seeing a greater willingness of these funds to take positions in these projects – the dominance wasn’t there a few years ago,” Vis comments. Part of the reason they have been able to do this is that “they rely on an incredibly different basis on which to raise capital than a bank, which would have to go to the market.”
In Djibouti, Miga has issued US$427mn in guarantees to cover investments in a new container terminal.
Almost all trade with land-locked Ethiopia, another target for agri-business investors, flows through Djibouti.
“What makes these projects work is tremendous amounts of debt financing”, says Vis. “Standard Chartered Bank, West LB, Dubai Islamic Bank – those are main ones. These are very large projects, which are structured and syndicated.”
DP World, which will be building the Doraleh terminal, has years of experience in Djibouti. The company’s Dubai World Group has already spent US$1.2bn in Djibouti, including a nearly decade-long project to overhaul and expand the main port in Djibouti City, construction of a chain of luxury hotels and the creation of a free zone.
The Binladen Group, which is part of a conglomerate tasked by the Saudi government with securing land internationally for food production, has even grander plans for the tiny Red Sea nation. In July last year, the group signed a deal with Djibouti to use 500 square kilometres as part of a US$200bn plan to build twin tax-free cities on either side of a 28.5kilometre bridge spanning the Red Sea and joining Djibouti to Yemen.
That trend is hardly limited to Djibouti.
Senegal’s government worked hard to catch the attention of cash flush Gulf States, sinking millions into sprucing up highways and building shiny hotels at breakneck speed before hosting last year’s 57-nation Organisation of the Islamic Conference in March.
And that effort seems to be paying off. Senegal’s main port in Dakar, the western-most on the continent, has for decades been operated by the French conglomerate Bollore. Though, a US$600mn project to transform Dakar into the biggest port in the region went to DP World instead.
The company has already spent US$300mn in Senegal and another US$100mn on a port project in the southern African port of Maputo.
Middle Eastern investment has also gone to dozens of other, smaller projects to build regional ports.
Kenya recently discussed a proposal for a port in the northern town of Lamu with the government of Qatar. The project would be meant to alleviate pressure on Kenya’s overcrowded Mombasa port, which serves a handful of landlocked neighbours in the region, and includes plans for an oil pipeline traversing the Africa’s Horn and refinery at the port.
“The port of Lamu is basically designed to serve our neighbouring countries, so we will see growth in Ethiopia, Southern Sudan, and the eastern Democratic Republic of Congo,” Weru comments.
“We expect that, as the African economies pick up in terms of growth, you will see increased trade from the African hinterland.”
Farther up the pirate-plagued coast, in Somalia’s Bossasso, politicians were skeptical of Lootah Group’s prospects, citing corruption in the current leadership of the semi-autonomous state of Puntland.
“The current government has done a lot of talk and negotiated a number of deals with investors on public infrastructure,” comments Nuradin Dirie, a frontrunner in the race for the Puntland presidency. “The problem is we do not know the specifics of what they have done and I think it is not transparent enough for us to follow through on those agreements.”
Recently, war and corruption in Somalia has had ramifications for global trade as well.
Costs of piracy
Since the beginning of 2008, Somali pirates have attacked more than 100 ships passing from the Suez Canal to the Indian Ocean. As of mid-December, 20 ships were being held, including the Saudi-owned Sirius Star oil super-tanker, which was nabbed over 400 kilometres from the Somali coast.
According to the UN, as much as US$120mn was paid in ransoms last year.
So who foots the bill?
One man familiar with how these costs are allocated is Duncan McDonald, a partner at the UK-based international law firm, Stephenson Harwood, who has been hired by a number of owners of hijacked ships. Pirates are shrewd enough to demand ransoms from owners that are capable of paying, McDonald says.
“Depending on the size of the vessel, the size of cargo, and the particular group of hijackers – most of the figures seem to put the range of ransom between one to ten million dollars,” McDonald says.
“On top of that there is something for the negotiator and lawyers are paid their usual fees.”
Sharing out the ransom costs is often the biggest concern of the firm’s ship owner clients. To answer that question, lawyers look at what is commonly accepted in the maritime community and relevant case law looking back at examples from centuries ago, in times where piracy plagued seas across the world.
The idea is to determine whether or not ransom might be considered a general average event – that’s maritime legalese for a cost incurred at sea which must be divided among cargo owners and a ships charterer in addition to ship owners.
“There is a very broad consensus that paying a ransom is a general average event,” McDonald says, though he adds that the firm has seen cases where cargo interests have rejected that conclusion and refused to pay, driving up costs for the ship’s insurer,” McDonald says, though he adds that the firm has seen cases where cargo interests have rejected that conclusion and refused to pay, driving up costs for the ship’s insurer.
The hijackings have led many to choose to avoid the Suez, skirting around South Africa and adding weeks and thousands of kilometres to their journey. They’ve taken a toll on trade in the region, raising concern across the border in Kenya.
“When your neighbour’s house catches fire, you should take notice,” says Weru. “The overall effect has been an increase in insurance and definitely there are costs associated with longer routes. In terms of time taken for products to reach market it is definitely affecting us.”
Experts are hopeful that a recent change in the rules of engagement, allowing an international naval task force more aggressive action against the pirates, may help neutralise the problem. But, as long as the situation on land remains chaotic, those ships that are hijacked don’t have many choices.
“Because Somalia is such a lawless place, the only option at the moment is either to pay the ransom or suffer the possibility of the crew being killed and the cargo being sunk or damaged,” McDonald explains.
“There’s no legal agency and no law enforcement in Somalia which can help them once the ship enters Somali waters.”