Southern Sudan won its independence from the north, following the referendum in early 2010. The divided region is now catching the eye of some traders and investors, despite continued security problems. Nick Wadhams investigates.
To the foreign investor, there are few African nations more tantalising than Sudan and its soon-to-be-independent offshoot, South Sudan. At the same time, any foreign investor worth his bank account will acknowledge that few African nations are as frustrating and risky as the two Sudans.

It’s impossible to speak of Sudan in anything but superlatives. Half the size of Europe, it is the largest country in Africa. According to the BP Statistical Review of World Energy, Sudan is Sub-Saharan Africa’s third largest exporter of crude, at 490,000 barrels a day. Aside from oil, it exports sesame, sugar, cotton and gum arabic.

Then there are the wrong kinds of superlatives. Since 2003, the government has been waging war against rebels in its eastern Darfur region. That campaign made President Omar al-Bashir the only sitting president to be indicted by the International Criminal Court. In power for the last 22 years, Bashir announced in February that he would not stand for re-election in 2015.

The danger for economies like southern Sudan’s is that other sectors with significant potential tend to get left behind because so much attention is on oil.”

Then, there’s the south. Its people recently voted for independence – effective this July – but still bear the trauma of two decades of civil war with the north. The region has been wracked by instability since the independence vote, with clashes between the southern army and renegade soldiers. Now, the southern Sudanese must confront the fact that their fledgling nation will have almost no roads, no viable legal system, and no cadre of civil servants, administrators or bureaucrats. South Sudan’s climb to independence will be daunting, to say the least.

Nonetheless, despite all the obstacles and the risks, insurers, bankers, trading companies and investors all say both north and south are rich in investment opportunities, if only they can create the sort of environment that will be friendly to outsiders. The time might not be right now, but the potential is there for big gains five or 10 years down the line, first on the back of oil in the natural resources sector and then, later on, in areas such as agriculture and irrigation.

“I do see that there will be more companies and individuals looking at South Sudan as a potential investment destination because a lot of people do view what’s happened so far as maybe not bringing the country out of the woods but bringing it a step forward,” Stewart Kinloch, chief underwriting officer at the African Trade Insurance Agency, tells GTR. “When I was recently looking at a couple of bits of business for local insurers here, there was appetite to actually write some Sudanese business, so the political risk markets are not completely shut. But I wouldn’t say by the same token that they’re completely open and happy.”

Sudan had direct foreign investment of US$2.6bn in 2009, according to the World Bank, up from the previous two years but a sharp drop from 2006, when DFI was US$3.5bn. The World Bank says that Sudan’s GDP was US$54bn in 2009. The growth rate was 5%.

For now, South Sudan is looking for investment in pretty much everything. On a government website, investment officials suggest international investors look at anything from rain-fed mechanised schemes to farms to gum arabic, timber, pig and poultry farms, fish production, veterinary pharmacies, honey gathering, storage facilities and wild game reserves.

South Sudanese officials seem to be under no illusion about the risks of investment. Deng Alor, minister of regional cooperation for South Sudan, acknowledged as much during a recent visit to the US. As he was travelling, rebel attacks killed some 200 people in South Sudan.

There may be opportunities for free-wheeling wildcatters and risk takers, but conservative investors will almost certainly not invest there.

“The main challenge is security,” Deng said, according to The Washington Times newspaper. “Everything depends on security and stability in southern Sudan”.

The north has also said it wants to double its yearly sugar output to at least 1.5 million tonnes and become a net exporter by 2014. It is looking for US$20bn in outside investment in sugar, with the goal of sugar production at 10-14 million tonnes by 2020.

“We are moving from a net importer to a net exporter in the next four to five years,” Mulhim Eltayeb, manager of Kenana Sugar Company’s engineering arm, told Reuters last year. “We are targeting 1.5-1.6 million tonnes (output) per annum by 2013/14 – we will have a surplus for export of about 200,000 tonnes.”

There is some appetite for investment with the government, but generally speaking, because of western sanctions against Bashir and the stigma of doing business with an accused war criminal, few western investment outfits will be willing to look at the north.

Oil for now

In the meantime, South Sudan will probably rely on oil as it finds its feet, and the government there is already banking on it. In the short term, analysts expect that the biggest beneficiaries of southern Sudanese independence will be neighbouring countries in East Africa, particularly Kenya and Uganda.

Yet oil may, in its way, complicate South Sudan’s development, says Razia Khan, head of research for Africa at Standard Chartered in London, because the government will be tempted to focus entirely on developing the oil sector and neglect agriculture and other areas that could drive growth.

“The danger for economies like southern Sudan’s is the same as what we’ve seen in oil producers elsewhere – other sectors with significant potential tend to get left behind because so much of the attention is on oil only,” says Khan. “The real challenge is to sustain as diversified a growth experience as possible. Oil might be great in terms of foreign exchange but it doesn’t do well in really helping the economy.”

The logistics of oil exports will prove difficult to the south. As it stands, all the oil produced in the south flows through a pipeline that goes north. The south is talking about building a pipeline south, to an as yet unbuilt port at the Kenyan island of Lamu, but the north will almost certainly do whatever it can to keep the oil flowing through its territory.

To Adrian Lewers, head of political risks and contingency at Beazley, how they come to an agreement over that is a big issue. The north and south fought a bitter civil war for more than 20 years, and now they will have to find a solution over oil revenues that both sides think is fair.

“I think the key issue there is what kind of agreement the north and south are going to come to over the oil revenues,” Lewers tells GTR. “As things stand, South Sudan will basically control about 80% of production, but that oil has no value to the south unless they can get it to a point of export, which means a pipeline going through the north.”
“There’s a lack of trust between the parties, north and south,” Lewers says. “These are two groups which have been at war with each other for a considerable period of time, so there’s going to be a trust issue in terms of having genuine discussions.”

Agricultural opportunities

The other big opportunity for South Sudan is agriculture. Look at a satellite image of Sudan, and it becomes obvious. The north is an arid tan colour, while the south looks like it’s been dipped in green ink.

Further down the line, if South Sudan can get its infrastructure in shape, agriculture could play a major role. But first, the south will have to look after its own needs.

At present, both north and south are net food importers, and about 3% of South Sudan is cultivated. Mario Zappacosta, an economist at the Food and Agriculture Organisation, estimates that there’s the capacity to double that.

The south’s problem is that it is starting from scratch. News reports say that South Sudan has only 50 kilometres of paved roads in the entire region and agricultural infrastructure is poor. On top of that, the southern Sudanese legal system is poorly defined and even more poorly enforced. At even the most fundamental level, the south lacks any sort of bureaucratic class – very few have been trained as civil servants, judges, clerks or administrators. There may be opportunities for free-wheeling wildcatters and risk-takers, but conservative investors looking for a slow, steady growth on their money will almost certainly not have the appetite to invest there.

Could North and South Sudan become food exporters? It could happen, especially now that food security has improved. 2010 was a good year thanks to a bumper harvest. Still, in a stark testament to the south’s needs, the FAO and the World Food Programme said in January that southern Sudan might face a cereal deficit of 340,000 metric tonnes in 2011, in part because so many people returned home to take part in the independence referendum.

Zappacosta says he believes the south could become self-sufficient in “five, 10 years’ time”.

“My feeling on Sudan, and maybe talking more about southern Sudan, they have room to increase the production, but their main objective will be first to fulfil their own domestic needs before thinking to become an exporter,” Zappacosta says.

The south is still highly vulnerable to weather changes. Political instability and tension between north and south along the border could also disrupt harvests. Still, Zappacosta says that the south will also benefit from the attention of international donors, which will be eager to set the new country on its feet and invest in food security and agriculture. “I assume that there will be availability of international funds to carry out new projects,” he says.And though the north is much more arid, and assuming that investors are willing to take the political risk, they might find agricultural investment more attractive in the north for now. After Egypt, northern Sudan has more land under irrigation than any other nation in Africa, making it less susceptible to weather changes.

To hedge its bets from the loss of oil revenue with the south’s independence, the north has been looking to expand agriculture, and it’s finding willing buyers in Saudi Arabia and other nations in the Middle East. Saudi Arabia is looking to cut domestic production of crops such as wheat that rely heavily on water, and wants Sudanese cereals to fill the gap.

The managing director of a leading agricultural trading firm in the Emirates, who spoke on condition of anonymity, says there are plenty of opportunities, though Sudan is still viewed as highly risky. He spoke anonymously for fear of jeopardising ongoing business discussions with partners in Sudan.

“It’s still viewed as very risky,” the official says. “There are good opportunities in the agricultural business provided the situation on the ground improves.”

Political risks

Outside of investment weaknesses, political risk insurers say there are other challenges. Sudan currently has about US$36bn in debt, and insurers fear that neither the governments of the north nor the south can pay it all off. There is also the uncertainty that will follow Bashir’s departure. Markets will certainly welcome the exit of an accused war criminal, but no one knows what’s next.

Analysts expect that, for now, Sudan will probably follow the same storyline followed by other countries around the world.

China already buys most of Sudan’s oil and will likely look to strengthen ties. For now, risk insurers will do co-insurance with other firms, in Saudi Arabia or the United Arab Emirates, for example, rather than on their own.

“Fundamentally we are open to inquiries with regards to Sudan,” Lewers at Beazley says. “Traditionally they tend to be exports of food stuff, relatively short term. We’ll look at each investment or inquiry on its own merit with a preference for investments that make very sound commercial sense or are in a sector with strategic importance to the country.” GTR
South Sudan battles

continue to rage




Battles and skirmishes in oil producing South Sudan have continued to be fought as the country prepares for its independence in July.

Clashes in Abyei in central Sudan saw 14 people die, including civilians.

Abyei is being fought over by both the north and the south in a tussle over which nation will lay claim to the oil-producing region.

A spokesperson for the secretary general of the United Nations said in a statement: “The secretary general is deeply concerned by the continued tension in the Abyei area and underscores that the military stand-off is unacceptable. The resumption and conclusion of the negotiations on Abyei must now be a matter of priority.”

The UN estimates that fighting this year has killed 1,000 people and displaced almost 100,000.

The Sudan People’s Liberation Army is fighting ongoing battles with at least seven militia rebel groups.