Exclusive Analysis underscores the key risks for financiers and enterprises doing business in Sub-Saharan Africa.
If President Zuma is re-elected in 2014, populist pledges are likely to be abandoned, although risks of unfair competition are likely to increase.
The ruling African National Congress (ANC) party is due to hold its elective congress in December 2012, where incumbent President Jacob Zuma is likely to be re-elected as head of the party and as the ANC’s presidential candidate for the 2014 national elections (which the ANC will very likely win). There is a low probability that Zuma will still face a challenge from a rival candidate, most likely backed by the ANC’s allies such as the powerful Congress of South African Trade Unions (Cosatu) and the South African Communist Party (SACP), which are the two other partners in the governing Tripartite Alliance. Zuma has increasingly alienated Cosatu for failing to implement key policy changes demanded by Cosatu, such as higher social spending commitments, labour policy reform and the revision of inflation targeting policies, which aim to keep inflation within a 3% to 6% target.
However, it is becoming increasingly unlikely that such a rival candidate will be fielded in time for the elective congress. The lack of a viable alternative to Zuma and the expulsion from the ANC of key Zuma critic Julius Malema, the former head of the ANC Youth League, further limits the probability that Zuma will face a successful challenge to his re-election. The most popular replacement for Zuma, Deputy President Kgalema Motlanthe, has so far not sought support for a bid to unseat Zuma. Potential rivals to Zuma also include Fikile Mbalula and Tokyo Sexwale.
In order to secure the support from Cosatu and the ANC Youth League, Zuma is likely to make increasingly populist promises to appease the party’s allies. In August 2011, three government ministries appealed the competition commission’s approval of US-based Wal-Mart’s acquisition of local retailer MassMart. In the same month, the government publicly disapproved of several centrist ministers’ rejection of labour policy reforms, which is a key demand by unions and the SACP.
Zuma also announced a commission of enquiry into corruption allegations as part of a 2007 arms deal and enacted a number of high-level suspensions aimed at toughening his stance on corruption, including the resignation of police commissioner Bheki Cele. Such populist tactics are likely to increase ahead of the conference in December 2012.
However, a radical shift to the left is unlikely in the lead-up to the 2014 elections. Instead, Zuma is likely to steer an economic middle course throughout his probable second term, limiting risks of contract frustration or arbitrary taxation to investors. Companies with strong affiliation to the Zuma government are likely to receive preferential treatment in the awarding of contracts, thus heightening the risk of unfair competition. The rise of powerful business ‘oligarchs’, such as Tokyo Sexwale, also increases the risk of unfair competition, although expropriation is unlikely.
There is a trend towards greater resource nationalism as the government responds to demands for a greater share in the benefits from natural resources.
Growing pressure by the opposition and civil society to increase the state’s share of revenues derived from the extractive sector is likely to heighten risks to contracts over the next year. In 2009, revenues from the minerals sector accounted for only US$40mn (2% of total government receipts). The government is likely to renegotiate mega projects with private investors in the mining, energy and manufacturing sectors. The move is targeted at reducing ‘generous’ fiscal benefits afforded to firms such as Sasol and BHP Billiton. However, plans to revise the mining law, entailing changes to ownership and taxes, are unlikely to lead to contract revisions with Vale, Rio Tinto, Baobab and Kenmare Resources. New mining contracts risk protracted delays due to poor government capacity, affecting predominantly Indian coal firms and licence speculators such as ENRC. Licence development periods vary from two to 10 years depending on the mineral.
The main focus of the mining legislation changes will centre on reducing the timeframe of mining licences, increasing contract frustration risks as it imposes more stringent performance requirements on companies. Under proposed amendments, prospecting and research licences for both semi-precious and precious metals and minerals will be brought in line with conditions for surveying licences, reducing their validity from five to two years and making them non-renewable. Mining activities will also be required to start within two rather than three years of obtaining an environmental licence.
The new law further stipulates that the sale or transfer of mining rights will have to take place in-country, after a public call for offers, and with the payment of a tax. This will increase opportunities for national investors, and in particular business elites linked to the ruling Frelimo party, to acquire stakes in the mining projects, exposing joint venture partners to political interference and demands for kickbacks. Mining code revisions are also likely to strengthen local content provisions, such as the introduction of 5% to 25% local share ownership requirements, the obligation to procure goods and services via tender to local companies and the introduction of requirements for the hiring and training of national workers.
Discriminatory behaviour in non-strategic business sectors, such as telecommunications, (luxury) retail and property development, is becoming more likely, as is forced business partnerships with elite-run state enterprises and kickback payments to key party figures. New state-owned phone operator Movitel is likely to be privileged in public tenders, promoting dumping practices aimed at benefiting the Frelimo-linked elite, and new investors are likely to face pressure to contract Movitel’s services for their operations.
Elections, ICC charges and excessive police responses are likely to trigger violence, although security forces are likely to prevent it from spreading.
Elections in 2012 will significantly increase the risk of violent protests and ethnic violence, particularly in major cities as well as Rift Valley. It is likely that the elections will again be held on ethnic lines. Armed militias, reactivated in the post-election violence, have yet to be demobilised. Mungiki, the mostly Kikuyu sect, which is engaged in racketeering and extortion, has increasingly turned violent. Violence in April 2009 between local villagers and the Mungiki in Karatina and Gathaithi, in Central Province, caused the deaths of around 49 people.
The Mombasa Republican Council (MRC), which demands equitable distribution of land, natural resources and representation for the coastal Mijikenda community, has become more vocal in the last three months, demanding that the government provide employment and improve infrastructure. The MRC normally holds peaceful protests, but the deployment of riot police, given their routine heavy-handedness, is likely to provoke a violent reaction. On April 24, 2012, an MRC protest turned violent when riot police and the paramilitary General Service Unit used excessive force to disperse a 100-strong crowd, leaving one protester dead. Despite this, it is likely that the expected rapid deployment of security forces will prevent unrest from spreading countrywide and from reaching the intensity of the 2007/08 post-election violence.
Delays in establishing a tribunal to prosecute the suspects of post-election violence, proposed by the Waki Report in October 2008, led to the matter being handed over to the International Criminal Court (ICC). In December 2010, the ICC delivered indictments against six leading officials, and pre-trial hearings started in April 2011. If the ICC issues formal charges and a particular ethnic group feels targeted, the risk of political violence will increase. Both President Kibaki and Justice Minister Kilonzo have suggested that a judicial overhaul envisaged by the new constitution should remove the need for the ICC.
The risks of politically motivated protests will be tempered by the approval of the new constitution in August 2010. The governing coalition between the President’s Party of National Unity and Prime Minister Odinga’s Orange Democratic Movement has been boosted by the ‘yes’ vote in the constitutional referendum and is unlikely to disintegrate before the elections, due to be held in late 2012. However, the implementation of the constitution is likely to be stalled by election preparations.
The likelihood of economically motivated unrest is increasing due to a decline in wheat and maize production after the lack of long rains in 2011. Given that shortages of these staples regularly lead to riots, the government will probably mitigate risks of unrest by maintaining suspension of import duties on the staples to encourage imports from neighbouring countries, particularly Tanzania, which have had bumper harvests.
The government’s drive to attract foreign investment is likely to improve regulatory and contract risks in the 10-year outlook.
On June 11, 2012, the maiden meeting of the New York Forum Africa ended in Gabon’s capital, Libreville. The government announced plans to host the next meeting in 2013. President Ali Bongo plans to position the country as a safe haven for FDI in Central Africa. This position is likely to result in business opportunities, mitigating though not eliminating risks for foreign businesses.
Opportunities are most prominent in the agribusiness, mining (iron ore and manganese) and project finance sectors.
The country issued a US$1bn Eurobond in 2007. Since succeeding his late father in 2009, President Ali Bongo has been pursuing pro-business policies to diversify the country’s economy away from the oil and gas sector. Policy continuity in the 10-year outlook is likely in view of President Bongo’s high chances of not only seeing out his seven-year term, but also winning another term in office in 2018. In addition, the government’s withdrawal of a revised mining code, which was criticised for its relatively high tax on profits, is indicative of its disposition not to hurt foreign business operators, and of the decreasing risk of tax increase and arbitrary tax demands.
The government has allocated over 65,000 hectares of land in Franceville for the purposes of agribusiness. Investors are currently guaranteed a 10 to 25-year tax break, which is expected to be replaced by a 10% tax at the expiration of the tax break. Multi-billion dollar projects in infrastructure, rail, energy and public services are underway under the management of US engineering firm Bechtel. The government has established two economic zones in Nkok and Port Gentil. The US$200mn economic zone in Nkok (about 20km east of Libreville) is part-owned by Singaporean firm Olam, which is also planning to invest in palm oil and a fertiliser plant.
Though the contract and regulatory risks are mitigated, risks to foreign firms include bribery and corruption in the public service as well as high costs of doing business in Gabon. There are risks of review and renegotiation of contracts with more than 20-year tax breaks as well as projects that have been dormant or underdeveloped for the last three to five years. But outright expropriation or contract cancellation is very low. Current contracts (especially those in the iron ore and manganese mining sectors) with tax breaks of over 20 years are likely to face risks as opposition and civil groups pressure the government to renegotiate.
The erosion of pirate attack capability is likely to limit their range, but also increase violence and onshore kidnap risks.
On June 18, 2012, local media in the northern semi-autonomous region of Puntland reported that pirates were attributing the recent decline in their activity to their attrition and lack of funding sponsorship, as well as targeted operations against their bases. According to EA data, Somalia-based pirate attack rates for 2012 have been considerably lower than in the previous two years, with historical lows reached in April and May reflecting decreases of 68% and 75% in attacks year-on-year. The key determining factor behind reduced attack capability has been the attrition of mother ships.
Under pressure, pirates are likely to concentrate activities in familiar environments with heavy traffic, namely the greater Somali Basin, Gulf of Aden and Arabian Sea. They are less likely to venture further afield, such as south of the Seychelles. With limited resources and a restricted operating environment, the few groups which launch attacks are likely to be more willing to use violence, due to their desperation for ransom. Less-experienced pirates are likely to redirect activities onshore, targeting NGOs and to a lesser extent, oil operations for extortion, kidnap and ransom.
Onshore, pirates’ land access to bases in Puntland’s Bari, Karkar and Nugal regions has reduced, following recent operations by the Puntland Marine Police Force (PMPF). Such operations are likely to become more frequent, as the political patrons behind pirates are likely to withdraw support in order to establish territorial control and secure a more stable revenue from oil. Oil exploration activity has gathered pace with Horn Petroleum, a subsidiary of Canadian-owned Africa Oil, currently exploring blocks in Bari and Nugal with Australian firms Range Resources and Red Emperor Resources. The more hostile environment in southern Puntland is likely to lead to pirates moving southward to Hobyo and Haradheere in the neighbouring Galmudug region, the two remaining principle piracy bases where hijacked vessels are held.
Pirate attempts to resettle in Galmudug are likely to be frustrated by the March 2012 extension of EUNAVFOR’s mandate, authorising the engagement of pirate targets onshore with stand-off weapons. Pirates are likely to respond by dispersing their assets. However, increased competition for control of remaining hubs is likely to result in fighting among rival groups. The shift in al-Shabab’s centre of gravity from southern to south-central regions is also likely to restrict pirates’ freedom of movement.