Box smarter in Africa, says Bonnett

There are many opportunities for South African companies in the rest of Africa, but they need to get a foot in the door now, Duncan Bonnett, director at Africa House tells Leon Louw. 

Duncan, what are the benefits of the African Continental Free Trade Agreement (AfCFTA) from a South African perspective, and what are the chances that it will be implemented successfully? 

Although there is still a lot of scepticism about the ability of African governments to implement AfCFTA, there are several trade agreements that have already been implemented with great success. The customs union that South Africa is currently a member of, is the world’s eldest such institution. It was established in 1910 and functions effectively. South Africa is also part of the SADC Free Trade Agreement. In other parts of Africa, the Common Market for Eastern and Southern Africa (COMESA) and the East African Community both function efficiently.  

The biggest benefit for South African companies is that they will get preferential access to a range of markets that they’ve never had access to before, including critical markets in East and West Africa.

Traditionally, South African companies have operated successfully in East Africa only up to Tanzania. North of that, the cost of doing business becomes just too expensive. However, when the new trade agreement is implemented, South African companies will gain preferential access into the substantial markets of Kenya, Uganda and Rwanda in East African, and into C?te d'Ivoire, Ghana and Nigeria in West Africa.

As I understand it, the agreement will benefit other countries as well, so South African companies needs to become really competitive?

 Yes, global companies are looking at access into these lucrative markets as well, through local assembly operations. The urbanisation of young and mobile African populations, and the increased levels of wealth, will continue attracting European and Japanese automotive companies, for example. This, in turn, creates opportunities for local companies in some African countries to start manufacturing or assembling products, and therefore South Africans will have to start boxing smarter. Are South African based companies looking at tapping into global supply chains? For example, in the automotive sector, where most of the supply chains are global.

My understanding is that the South African industry is quite proactive in that sense. However, are we looking at this in other sectors of the economy? Are we simply trying to export into markets, not looking at local value addition to take advantage of trade agreements, the growing connectivity of markets and the growing size of markets?

Which countries and sectors should we focus on in the next few years? 

Energy in Africa will be the main driver of growth in the next few years, especially the oil and gas sector, but also geothermal energy, hydroelectricity and renewables like solar and wind. Estimates are that over the next decade there are opportunities worth more USD250-billion on the eastern seaboard of Africa from Mozambique all the way north of Ethiopia. Anyhow, it is an opportunity that cannot be ignored.

How does a company entrench itself into those markets?     

On the one hand a company needs to get goods into the country at a preferential rate using the trade agreements and at the other it needs to add value domestically in those countries it is selling into in order to qualify for preferential procurement and local content in those markets so that you have two bites at the same cake. Preferential-trade agreements are not simply about intra African trade. Mozambique, for example, has signed an aid package agreement with the UK, and the EU is constantly negotiating with various African groupings for more bilateral free trade, and so is America.

The tariff preferences and benefits will start dissipating over time as different countries and entities outside of Africa also negotiate with African countries. So, it is imperative that South African’s get a foot in the door first and take advantage of our proximity and our knowledge of other African markets. The free trade agreement is a great opportunity for South Africa, particularly in West Africa, where there is a burgeoning mining industry and a boom in construction.

In your experience, are South African companies expanding their footprint into the rest of Africa?

They are, but close to 85% of that expansion is purely into the Southern African Development Community (SADC) and especially into SACU and countries like Zimbabwe, Zambia, Malawi, Mozambique and the southern parts of the Democratic Republic of the Congo (DRC). It is proof that where South African companies do have preferential access, they do well. But we remain most competitive and thrive in countries close to us, where our products are well suited and well accepted, but outside of the immediate neighbours we don’t have a particularly strong footprint.

Are we still regarded as the gateway into Africa?

This idea that South Africa is the gateway into Africa is totally wrong. We might be the gateway into Southern Africa (excluding Angola) but Nigeria is the gateway into West Africa, while Ghana and C?te d'Ivoire can be regarded as gateways into certain other hubs of influence in West Africa. Kenya is the gateway to East Africa, excluding Ethiopia and Cameroon the entry point into Central Africa. 

There are several African economies that are growing at phenomenal rates. Which African country, in your view, offers South African suppliers the most opportunities at the moment? 

 Apart from the international space station, the Liquefied Natural Gas (LNG) project in the Rovuma Basin of Mozambique is the biggest investment in the world. Final Investment Decision (FID) on two of the three key projects have already been declared – and that is about USD30-billion worth of business – while there is another USD25-billion to USD30-billion which will reach FID in the first half of 2020. So, in total, that is about USD60-billion to USD65-billion worth of FID. These projects were long in the making. A lot of South African companies rushed up to Pemba and Palma in early 2010’s waiting for FID, which didn’t happen, they got their fingers burnt, and had to come back, and now they are reluctant to do it again.

Their Italian competitors, on the other hand, didn’t pack up and go home, they waited and did something else in the meantime. The province of Cabo Delgado is the epicentre of the gas development. Over the next decade, estimates are that about USD128-billion will be invested in that province, just in the gas sector. The initial USD55-billion to USD60-billion has to be spent by 2024 because these companies have off-take agreements in place to deliver gas in the next five years. The second tranche of that investment is expected in 2023/4.

In the meantime, there has been an influx of oil and gas exploration companies searching for good deposits outside of the Palma/Pemba area. A number of companies are exploring blocks near Nacala and Beira and there is even exploration as close as 100km north of Maputo, which is extremely exciting from a South African perspective.

So, is it safe to say that this is a long-term project that will create wealth and opportunity in the region for many years to come?    

This is not just a once-off project rolling out over five years. These are projects that will last for 30 to 40 years. It’s not simply about building an LNG train and then everybody goes home. There are operations, maintenance, and cities that develops around this infrastructure, there is an enormous amount of development in these areas.

Furthermore, Cabo Delgado also hosts some of the world’s biggest high-quality jumbo flake graphite deposits, and those are only about 100km from Pemba. In addition, there are great deposits of gemstones like rubies and massive agricultural and tourism potential in that area. It is really an integrated opportunity in a corridor stretching for about 400km from Pemba to Palma. There are many, many opportunities in Mozambique.

It’s not about the actual LNG infrastructure. In that part of Mozambique there is almost no infrastructure, so infrastructure like roads, power, water and sanitation needs to be put in place. There will be more than 50 000 workers on site, and they will need permanent housing and recreational facilities. It is not only about extracting and exporting gas. 

Further south, in Tete, the coal mines are starting to stir again. Vale is looking to up their coal production, and there has been talk about a couple of coal fired power stations and a few hydro powered stations. Mozambique is an exciting place right now, and South Africa is in a good position to take advantage of that.

There have been numerous reports about attacks and violence in the north of Mozambique. What is your take on the situation? 

Obviously, that is a concern. Our understanding is that the security situation is largely under control and that the key routes from Pemba to Palma are well secured by the government. Most of the attacks happened further inland. I’m not saying it’s perfectly safe, but it would appear to be pretty much under control. I don’t think that will be a great show-stopper, and certainly nobody in Mozambique thinks so. 

Which other African countries would you regard as hotspots?

The whole eastern seaboard of Africa has huge potential and could provide business opportunities for many years to come. Kenya, Tanzania, Rwanda and Ethiopia are set to grow at phenomenal rates over the next few years. Kenya and Uganda are both making concerted efforts to start delivering oil as soon as possible, and there is a healthy regional rivalry of who will deliver first. These projects are not on the same level as what is happening in Mozambique, but they are also not insignificant. The value of Uganda’s Lake Albert project is about USD10-billion and in Kenya the figures looks similar. 

In West Africa, Nigeria remains a key market, even with forex issues at present, with Cote d’Ivoire and Ghana as other key, fast growing economies. Both of these are also gateways to the newly developing mining jurisdictions in the Sahel to the north, which is also starting to attract much attention from donors and investors to stabilise and grow the area that is seen as a gateway for migrants to Libya and eventually Europe. Moreover, both Senegal and Mauritania are growing hubs for oil and gas development, with a number of large projects being developed or underway, which offers good opportunities for our companies. The numbers are not the same as those in East Africa, but the fit with our natural export profile is better.

Leon Louw is a specialist in African affairs and mining. For more about doing business in Africa and fragile states, politics, mining in Africa, and the political risk of operating in Africa, please send Leon a message.