The rise of digital financial services in Africa will prove to be an exciting growth opportunity, although will be constrained to key consumer markets and face significant regulatory hurdles.
India has had a presence in Africa for centuries. While its commitment to the continent has been overshadowed by China, Sofia Lotto Persio looks at why Africa-India relations should not be written off as a thing of the past.
India-Africa trade is at a decade high. In 2014, India overtook the US to become Sub-Saharan Africa’s third-largest trading partner after the European Union and China, with trade flows accounting for US$62bn. Investment has grown too, leading Prime Minister Narendra Modi to boastfully declare at the third India-Africa Forum Summit (IAFS) last October: “India has emerged as a major investor from the developing world in Africa, surpassing even China.” He pointed to the outcome of previous summits as evidence: “Our lines of credit to Africa, which is cumulatively US$7.4bn from the first two IAFS, is creating infrastructure in Africa and boosting bilateral trade.”
Modi’s claim is based on Chinese statistics which indicate that the country’s overseas direct investment in Africa stood at a total of US$26bn at the end of 2013. Meanwhile, India’s investments in Africa measured US$50bn between 1996 and 2015. It is, however, fair to note that most of India’s investment has gone to the low-tax jurisdiction of Mauritius and that, despite this growth in trade and investments, China remains by far a more commanding presence in Africa – its trade flows with the Sub-Saharan countries are worth more than three times those of India. But do not let these factors diminish the growing importance of the other Asian giant to the continent’s economy. In fact, African exports matter more to India than to China. “The continent’s share of India’s trade grew to 8% in 2014 from 5.2% in 2000. In comparison, Africa accounted for 4.2% of China’s total trade in 2014 and less than 2% of the EU’s,” explains Sarah Baynton-Glen, Africa economist at Standard Chartered.
East vs West
As a 2013 report issued by the World Trade Organisation (WTO) indicates, the regional picture of trade has changed considerably over the past decade. “In 2001 Southern Africa accounted for nearly 60% of [African] exports to India while West Africa accounted for just above 16%. Fast forward to 2011, and West Africa is the largest supplier with a share of 40%, while the share of Southern Africa was 24%,” the report reads.
Having historically being more active in East Africa, with Kenya, Tanzania and Mauritius as some of the top trading partners, India-Africa trade relations have reached new horizons. “Some of India’s fastest-growing economic ties are with countries such as Ethiopia and Sierra Leone, which have small Indian communities, but high growth prospects and investment opportunities,” says Baynton-Glen. Oil-rich Nigeria and Angola have also become significant commercial partners. As mentioned on the IAFS website, India is Nigeria’s largest global trading partner and Nigeria is India’s largest trading partner in Africa.
Crude oil, commodities and raw materials make up the majority of the goods’ trade balance – almost 99% of Nigerian exports to India is in the form of oil. “Oil exports to India from the African countries, led by Nigeria, are likely to have increased as they [the African countries] seek to compensate for American exports lost to shale oil,” Gift Simwaka, Afreximbank’s regional manager for Southern Africa, tells GTR.
While East Africa remains the largest regional market for Indian goods, the region’s own exports to the country only represent 2% of the overall value of African exports. These include edible nuts, particularly shelled cashews, vegetables, iron and steel, coffee and inorganic chemicals, despite potential for value addition and intra-industry trade in sectors such as leather, apparel, beverages, diamonds, metals and ores.
The continent’s various regions also attract different kinds of Indian interest in infrastructure building projects. “Indian companies from sectors such as roads, power, including solar and thermal, project consultants and information technology prefer East Africa. Consumer-led industries like automobiles and agriculture see greater opportunity in Nigeria and surrounding countries,” says Karthik Natarajan, India lead, global trade services at FirstRand Bank. “Private sector projects like Dangote’s refinery project in Nigeria have seen many Indian corporates participating in it.”
Access to finance represents a big challenge for India-Africa trade. An Indo-African survey conducted by the Confederation of Indian Industry (CII) and the WTO found that the obstacles to trading revolve around accessing Indian buyers or African exporters, access to trade finance, poor business environment, transport and logistics costs, and informal controls and corrupt practices.
According to Ashok Dhar, head of international supply and trading at Essar Energy, part of the problem comes from the fact that African banks do not have the resources to fund large – and expensive – transactions. “The major challenge faced in general is performance of the African importers to accept the orders and making timely payment. Banks are too cautious and this delays the execution of the transaction. A trading company needs working capital which only banks can provide: no [other] financial institution. This limitation restricts trading activity,” he tells GTR. “Governments in Africa, especially countries with potential like Mauritius, have to focus on this aspect.”
Elevated transport and logistics costs also stand as a major impediment to Indian exports going to Africa. High shipping costs, political risk, country risk and the accompanying cost of insurance weigh on Indian exporters’ shoulders, which is why many have been finding various alternative mechanisms to mitigate the risks. Unlikely to find support in the traditional banking sector, they often rely on the Export-Import Bank of India’s (India Exim) backing.
In a recent deal, India Exim extended a US$87mn line of credit to the Zimbabwean government for the renovation of a thermal plant. Under the terms of its credit line, the bank will reimburse 100% of the contract value to the Indian exporters upfront, upon shipment of equipment and goods or the provision of services. “Except for the government-owned India Exim, the appetite to finance deals among Indian banks is very low,” says Simwaka.
Lowering transaction costs is crucial to enhance trade between India and Africa. “Given the high transaction costs in exports to Africa and the risk perceptions attached, Indian exporters may become risk-averse and place the burden on the buyer. Exporters insist on advance or at sight letter of credits, thereby placing the onus on the buyer. The buyer’s working capital hence is stretched,” says Natarajan.
Knowledge of the African market was also cited in the CII-WTO survey as another major impediment to Indian exports to the continent. Particularly, the SME sector requires information on the growth prospects and how their products can find a market there. This information is crucial in allowing access to different industry sectors and to an ever-growing, young market.
While China faces demographic issues akin to those of European countries, India and Africa are still young economies, with approximately 65% and 57% of their population between 15 and 64 years of age, respectively. According to Sachin Chaturvedi, director general of the think tank Research and Information System for Developing Countries (RIS), having faced similar development challenges in their post-colonial periods, the two partners share aspirations that could help them foster development and co-operation, in line with the rising ambitions of their populations.
In describing India’s strategy towards Africa, he talks about the concept of a “development compact” structured around five elements. These are: trade and investment; technology; capacity building; lines of credits; and concessional finance. According to him, such a strategy would help India differentiate itself from the essentially transactional approach with which other global players have sought to deal with the continent.
Indeed, technology is a mutually-beneficial sector that is likely to increase in importance as the regions and their relationship develop. “The technology that will help Africa transform its raw materials into especially light manufactured goods will enhance intra-African trade, with the benefits of reducing its susceptibility to global commodity price shocks, as well as job creation and economic growth. India will benefit more and more in terms of access for its goods and technology in Africa’s growing market,” says Simwaka.
The WTO report highlights India and Africa’s trade and capacity-building initiatives in this context, including India’s Pan-African e-network project, a platform offering tele-education and telemedicine solutions to over 47 African countries as well as IT centres of excellence set up by India across the continent. Also noticeable is the India-Africa engagement in the health sector, which has been growing at a rapid pace in areas such as the export of high-quality, low-priced Indian pharmaceuticals, and the setting up of manufacturing units and healthcare infrastructure facilities within Africa.
Finally, there is significant untapped potential for services trade between India and Africa. In particular, the tourism and business travel sector, which is the largest services export industry in the continent, could still leverage its attractiveness to target an increased number of travellers from India.
The potential for expanding trade relations outside of the commodities sector is big, and the fall of commodity prices and economic diversification efforts may just provide the push to move in that direction. The latest IAFS saw the highest ever representation of African countries in attendance to discuss the future of their relationship with India, suggesting that there is mutual interest in exploiting these opportunities and tackling current challenges, and proving that India-Africa trade isn’t ancient history – it is only just getting started.
Localisation requirements in emerging-markets projects are meant to be a way of giving back; an attempt at ensuring a lasting beneficial legacy for the local population of the respective country. But is this ostensibly benign endeavour offering a perfect guise for corruption and bribery? Ollie Gordon reports.
Local Content Requirements (LCRs). Anyone involved in, or in any way familiar with, the development of large capex projects in emerging markets, will no doubt have become increasingly accustomed with the term in recent years. Regulations specifying the proportion of the materials, services and labour of a project required to be delivered by its country of origin, localisation requirements were established to guard against the exploitation of emerging-markets development by richer nations.
A much-lauded example of a highly-localised emerging markets capex project was witnessed in March 2014, when South Africa’s state-owned transport company, Transnet, awarded a R50 billion ($4.16 billion) contract to four global equipment manufacturers for the construction of 1,064 diesel and electric locomotives. Part of the largest rail recapitalisation programme in the country’s history, the order and its subsequent financing were hailed internationally as representing a pivotal moment for African development. The project’s LCRs were predicted to create and sustain 30,000 local jobs, and augment the South African economy by R90 billion rand ($7.5 billion).
An African project for the sole benefit Africans, largely funded by African financial institutions and constructed by African labour: how it should work, right? A wholly benevolent endeavour that should set the standard for emerging-markets projects going forward. Well yes, but that’s certainly easier said than done.
As the old maxim goes: all that glitters is not gold. And in the case of the localisation, this seemingly magnanimous concept is in fact being increasingly bastardised by the few to form the perfect veil for a very specific form of corruption.
The brown envelope: an expiring notion
Over the past decade, national governments and supranational organisations have steadily ramped up anti-corruption regulation. Legislation such as the US’ Foreign Corrupt Practices Act (FCPA) and The UK Bribery Act have made it increasingly difficult for bribery to take place. Companies traditionally most exposed to demands for bribes are now much less likely to fold to those demands out of fear of their own domestic regulatory authorities.
Dr Robert Besseling, executive director of business risk intelligence firm Exx Africa, tells TXF: “Most companies fall under the FCPA as most bribes are paid in US dollars and therefore fall within its remit. Moreover, many companies have some form of business dealings in the US. There are also strong bribery acts in place in the UK, Singapore, Australia, Canada and other developed nations, as well some applicable OECD and UN legislation. So the brown-envelope idea is just not easily done anymore.”
So for bribery to take place these days it needs a more nuanced and indirect delivery system than simple cash-in-hand. Enter localisation. “In the development of projects in capital intensive sectors – such as commodities extraction, construction, heavy manufacturing etc – emerging market governments are coming under pressure from their local electorates to beneficiate more locally,” says Besseling. “The resultant LCRs put on projects local ownership, procurement and employment requirements that are not always easily met. And that’s created an opportunity for emerging markets governments to demand some sort of kickback but not directly in a monetary form.”
In many Africa countries at present those LCRs are manifesting in the form of project-related contracts being awarded to local service providers who are either politically affiliated or owned directly by the local political elite. Those companies then outsource the delivery of the goods or services to a foreign company for an inflated fee. “It essentially allows the local political and business elite to perpetuate the system of corruption without violating any corruption acts in foreign investors’ regulatory jurisdictions,” says Besseling.
A Mozambican example
Mozambique stands as a case in point. The country has vast natural gas reserves, which the current government wants to exploit to establish Mozambique as one the world’s largest LNG exporters. That development relies substantially on local service providers, as Mozambican legislation encourages all logistical services for oil and gas projects to be locally owned. So for a foreign company to provide services to a Mozambican gas project, they have to go through a local firm. “In northern Mozambique, companies such as ENI and Anadarko are having to contract with local – mostly politically-affiliated – holding companies that will outsource the oil and gas services to them whilst effectively still holding a monopoly on those services,” says Besseling. “Many of those holding companies are owned by former generals. Mozambique has copied the system that exists in Angola, except in Angola it’s 100% mandatory for the logistics companies to be locally owned.”
To add insult to injury, adds Besseling, the Mozambican government is attempting to sell this ‘cooperative’ model as adding value to the northern Mozambican economy. In turn, foreign companies can piggyback on the back of that spin for their own PR. And, all the while, the political elite fill their pockets and the endemic system of patronage crucial to keeping them in power is perpetuated.
“The system isn’t new, but it is replacing the simple handing over of the brown envelope,” says Besseling. “It allows the local government and the foreign investor to claim that they are adding value to the local economy in a country that desperately needs it. But at the same time, much of the money is still escaping the local economy and funds goes into the usual back channels.”
Angola, Equatorial Guinea and Mozambique are the worst offenders of this form of corruption; countries most prone to it, according to Besseling, are those in which “political stability is most dependent on political patronage”. South Africa is the exception to the rule: although one of the more developed sub-Saharan African countries, the country has seen government corruption and private sector crime become increasingly entrenched in recent years.
Part of the problem for Besseling is that the localisation requirements for African projects are unrealistic for the scenarios in many of the countries. For example, quotas to hire skilled local workers do not always match the standards existing on the ground, where there very often isn’t enough trained local personnel. That makes it easier for those politically-affiliated companies to justify outsourcing the work to foreign companies, and fill their pockets in the process. “So you’re going to damage your ideas for local economic development by putting unrealistic quotas in place,” says Besseling.
Rationalising LCRs to be more country-specific would make it harder to justify outsourcing to foreign firms and would undermine the political patronage inherent in this form of corruption.
However, it would do nothing to address the original problem of local populations receiving little long-term benefit to the development of projects on their doorsteps. And coming up with a solution for that appears to be trickier.
Setting the standard in the financing
One possible solution might come through the financing of those projects. Most large emerging markets capex projects require international financing. Many, in turn, will require the presence of export credit agencies (ECAs) or development finance institutions (DFIs) to take on market risk. The OECD Consensus, which governs the operations of most of the world’s major ECAs, already has strong regulations in place dictating how much local content ECAs can cover in a deal. Similarly, DFIs have their own set local development requirements that projects need fulfil to access funding. And one export finance banker with considerable experience in financing African projects believes the extension of both sets of guidelines could play a significant role in mitigating LCR-related corruption.
“From a financing perspective, the question is what controls and/or processes could be put in place by the agencies [DFIs], the ECAs and the OECD to encourage more localisation and, at the same time, ensure the best local counterparties are engaged to perform those local works?
“It’s conceivable that by engaging in the process the agencies could play an important role here. For instance, they could make their support of local works subject to the same competitive tender requirements that are applied to their support of the offshore contracts. Local ECAs located in those buyer markets could also play a valuable role in that process and, in addition, could also play a role in financing local content (with foreign agency support or otherwise) and thus focussing on the import (not just export) part of their mandate.”
What seems clear is that despite the limitations of the current OECD rules, Transnet managed to make its localisation requirements work and, as a result, created innumerable sustainable jobs and transferred considerable technology.
The project shows that localisation can work, but this is in large part due to the sophistication of South Africa’s Competitive Supplier Development Programme (CSDP) as well as Transnet’s treasury operation, which is relatively unique. But if emerging market development is going to be done in a sustainable manner, Transnet needs to be the standard, not the exception.
As the NGO world has learnt over the past few decades, it’s no use chucking feel-good money at a country and hoping for the best. And, in this case, there’s similarly no use in setting feel-good local development goals if they’re not going to be administered properly. Those involved in emerging markets project finance are on the frontline here, and there is real opportunity for them to make a lasting difference if they act accordingly.
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