Elizabeth Stephens, head of credit and political risk analysis at JLT Specialty, discusses the key factors impacting investment and funding sources in Central Africa.


When Joseph Kabila campaigned for re-election in 2011 he did so from the air. He flew to the significant towns spread out over the Democratic Republic of Congo’s (DRC) vast landmass for his ‘meet and greet’ with some of the nation’s 65 million people. His access to aircraft gave him a significant advantage over his opposition, not only in terms of time saved – the DRC is the size of Western Europe – but because there are virtually no roads. Driving round the DRC is nigh on impossible and about half of existing infrastructure assets are in need of rehabilitation. Even before the civil conflict, the lack of basic infrastructure made it difficult to knit together the country’s disparate economic and population centres. The country’s vast geography, low population density, extensive forestlands, and crisscrossing rivers further complicate the development of infrastructure networks.

In this regard the DRC is not alone. Landlocked Chad and the Central African Republic (CAR) are blighted by the same curse; underdeveloped physical infrastructure and reliance on third-party transit countries for access to port facilities.

While Africa’s central region is awash with reserves of metals and minerals, those seeking to exploit them must build the infrastructure to support their operations; a huge upfront cost that leaves investors vulnerable to having their fixed assets seized by a host government at a later date. To exploit oilfields near Doba in southern in Chad, the Chad-Cameroon petroleum development and pipeline project involved the construction of a US$2.5bn, 1,070km pipeline, to transport crude oil from three fields in southwestern Chad to a floating facility 11km off the Cameroon coast. Plus a further US$500mn in road projects and offshore facilities to support the pipeline.

Compared to the CAR, the DRC and Chad are performing well. The CAR has no rail network and only 280 miles of the 15,535 miles of roads are paved. Links to port facilities vital for trade are inadequate. Some of Bangui’s commercial cargo has travelled down the Ubangi River to Brazzaville and by rail to Point Noire, but while the CAR has over 2,485 miles of waterways only 621 miles are navigable. Civil unrest in the Congo has forced the CAR to divert its commercial traffic towards the Cameroonian port of Douala, highlighting the importance of multiple transit routes for landlocked countries.

It is no coincidence that Angola, with its offshore oil fields, has made the greatest progress in the exploitation of its natural resources. Oil reserves are entirely offshore – unlike natural resources in Chad, the DRC and CAR – which insulates investors and supplies from political instability in host or third-party transit countries and reduces the amount of infrastructure development required in support of the projects.

Despite the challenges, there is hope for the future. The region has abundant hydro-electric resources. The DRC is endowed with the largest hydropower resources in Africa and, along with the CAR has the potential to harness more water resources to provide efficient and cheap energy for domestic and industrial consumption and to export energy to neighbouring countries.


Contract certainty

Physical infrastructure isn’t the only challenge. The lack of robust legal and regulatory regimes often presents a greater threat to foreign investors and can have catastrophic consequences in the event host governments change underlying contracts or seek to expropriate assets. What may come as a shock to investors is that even the governments of impoverished nations that may appear to be in the most desperate need of financing are prepared to take pernicious action to increase local content provisions.

The Chadian government has repeatedly demonstrated its determination to assert sovereignty over the oil sector despite its need for foreign investment and technical expertise. The government renegotiated contractual terms with Chevron and Petronas in 2006 over claims of late tax payments and simultaneously passed a law that revised the terms of World Bank financial assistance for the construction of the Chad-Cameroon pipeline. A bold move when dealing with an international institution wielding the influence of the World Bank.

With Chinese investors waiting in the wings, the Chadian government has exerted significant leverage in its negotiations with western investors. But Beijing’s honeymoon period came to an abrupt end in 2012 when the government closed down the China National Petroleum Corp (CNPC) refinery for 10 days after a dispute concerning CNPC’s decision to set pump prices for refined products without considering end costs within Chad.

In contrast, the government of dos Santos in Angola adopted a more sophisticated approach to enhance the terms of its dealings with foreign investors with the passage of a new law that mandates the ‘onshoring’ of international oil company (IOC) financial transactions through the local banking system, requiring local expenses to be denominated in kwanza, the local currency, although some exemptions will be granted. The law is part of an attempt to de-dollarise the oil sector and the broader economy. Over time the reforms should improve liquidity and balance sheets of domestic banks, while in the short term the immature nature of the banking sector means that IOCs will face higher transaction costs and potential supply chain delays.

Investor challenges in the DRC, the world’s largest cobalt producer, are reflective of the tribal divisions that undermine national cohesion and the tension between the central government and the states. These conflicts are played out in the investment environment with arbitrary taxation and the risk of unilateral changes to investment contracts exacerbating the challenges confronting mining companies.

Earlier this year, the central government announced a ban on unrefined copper and cobalt concentrate exports, in an effort to raise revenue by forcing companies to process their ore in-country. Katanga copper-rich province’s governor, Moise Katumbi, announced that as the region lacks sufficient electricity for the processing plants, he would not enforce the restriction announced by the central government. Instead Katanga will continue to collect tax revenue from the export of unprocessed ore.


Political violence

If the most direct correlation between outbreaks of political violence is elections, Central Africa has much to be concerned about, particularly as well-established leaders in DRC and Chad lose their luster and the reliable and pragmatic dos Santos celebrates his 34th year in power. Elections are commonly used to legitimise the rule of a strongman with authoritarian tendencies, as the removal of constitutional restrictions on term limits creates the opportunity for monarchical style presidencies.

The DRC’s Joseph Kabila took over the reins of government following the assassination of his father in 2001 and has since been elected to five-year terms in 2006 and 2011. The trend of falling public support for long-term leaders that has occurred in Angola and Chad has also hit Kabila, as his ruling PPRD party lost 40% of their parliamentary seats in the 2011 election. The fragility of the DRC as a state is likely to have played a role in this, as continuing uncertainty over the security environment takes its toll.

Chadian President Idriss Deby faces an increasingly volatile security environment, amidst rising ethnic tensions and growing dissatisfaction amongst segments of the population with his rule. Presidential term limits were removed in 2005 paving the way for his re-election in 2006 and 2011. Recent political protests resulted in further violence and damaged the ruling Patriotic Salvation Movement (PSM) party, reflecting a broad feeling of discontent.

Politically, the CAR is the most unstable Central African nation. The country is plagued by coups, the most recent perpetrated in March 2003 when the Séléka rebel alliance came to power following the ousting of the government of Francois Bozizé, leader of the African nation since an earlier coup in 2003. Rebel leader Michel Djotida was sworn in as interim president and confronts the challenge of holding the deteriorating state together.

Djotida swiftly announced his intention to review oil and mining contracts awarded to Chinese and South African companies by former President Bozizé. In a bid to tap the country’s under-exploited mineral wealth, Bozize had awarded CNPC rights to explore for oil at Boromata, in the country’s northeast near the border with Chad. South Africa’s DIG oil is also prospecting in the southeast of the country, near the town of Carnot.

Djotida has expressed a preference for working with the US and EU going forward. Although the CAR has deposits of gold, diamonds, oil and uranium, these remain largely untapped, and the coup-prone nation is one of the poorest on earth.


Sovereign wealth funds

As the CAR struggles with poverty, Angola launched a sovereign wealth fund last year and is keeping it in the family. President dos Santos’ son Jose Filomeno was appointed to head the new US$5bn fund, established to ensure oil revenues are effectively invested, which also signals the continuing diversion of oil revenues for elite patronage. There are virtually no safeguards or oversight outside of the presidency and this creates the opportunity for Filomeno to raise his international profile and funnel patronage to ruling MPLA cadres and for public works projects. Rumours abound that a filial succession is in the offing as the 71-year-old president completes his 34th year in power.

Such a move will be deeply unpopular with the public and will divide the MPLA. At present, any candidate dos Santos trusts to take over the presidency lack sufficient party support which means the president may stay in power, health permitting, for the foreseeable future, avoiding the chaos of the CAR and conflict in the DRC. While flouting democratic credentials, dos Santos’ grip on power offers political and economic stability and that is the preferred environment for foreign investors at least.