Keep knocking on the African door

South African suppliers of yellow metal should not be blind to opportunities in the rest of Africa, writes Leon Louw.

Plant and equipment owners, more than any other suppliers, are aware of the many challenges facing them when operating across borders. Political instability, security, logistics, major delays at border posts and foreign exchange controls are just some risk factors that should be considered before sending a fleet of equipment north of the Limpopo River.

Moreover, insurance companies are hesitant to provide the necessary peace of mind when operating in often fragile environments. South African companies should not, however, be disheartened by these challenges. At a time when the South African economy is struggling to find its feet after the Zuma years, deploying part of your fleet to operate in other African countries might just offer bigger rewards than waiting for the next big tender in South Africa.

Traditionally, South African companies have focused on the Southern African region. According to Duncan Bonnett, director of consultancy firm Africa House, 85% of South African expansion into the rest of Africa has been purely into the Southern African Development Community (SADC) and especially into South African Customs Union (SACU) and countries like Zimbabwe, Zambia, Malawi, Mozambique and the southern parts of the Democratic Republic of the Congo. “It is proof that where South African companies do have preferential access though, 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,” says Bonnett.

There are three factors that might change this mindset in future: the African Free Trade Area (AfCFTA); the growth prospects in the rest of Africa and the proliferation of early stage projects in Angola and Mozambique and in East, West and North Africa, and the completion of a bridge across the Zambezi River that links Botswana and Zambia, which now makes it possible to drive from South Africa to the Democratic Republic of the Congo (DRC) and the Great Lakes region without significant delays.

Benefits of free trade

According to Mahendra Dedasaniya, Africa leader for infrastructure and capital projects at Deloitte, the African Free Trade Area (AfCFTA) will stimulate regional trade and the sharing of skills and technology across Africa. It will hopefully also make it easier for plant and equipment suppliers to get their machinery into other African countries.

 “The AfCFTA came into force this year and is expected to boost economic integration, liberalise trade in goods and services (through reducing tariff, but mostly non-tariff barriers to trade) and increase intra-Africa trade by 60% in the next three years. These developments are set to contribute towards the regional growth projection of 4% in the medium term, up from an estimate of 3.5% in 2018,” Dedasaniya tells me.

Bonnett says that there are many opportunities for South African companies in the rest of Africa, but they need to get a foot in the door now as there will be substantial competition from global suppliers to gain access to these markets. He adds that the AfCFTA will make it significantly easier for South African companies to do business in the rest of Africa. 

"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,” Bonnett tells me during an exclusive interview.

A boom up north

While the construction sector in South Africa has almost ground to a halt, the whole continent to the north of its borders are experiencing a construction boom. The lack of infrastructure linking countries has up to now arguably been the biggest constraint to developing the continent. But several countries across Africa have introduced a number of structural reforms and entered into alternative finance agreements to attract foreign investors, and the development of critical infrastructure in these regions is well underway.

“We all know that there is a clear gap in quality infrastructure across Africa. The World Bank has stated that by closing the infrastructure gap, Africa can increase its GDP per capita by more than 2% annually,” says Dedasaniya.

Research at Deloitte indicates that Africa offers one of the best returns on investment for infrastructure projects. “It is important that African countries invest more in infrastructure to attract the investment and make supply chains less complicated.

Typically, one in 10 projects goes into execution from feasibility and it is important that these numbers improve,” says Dedasaniya. Nonetheless, Deloitte tracked 450 infrastructure projects valued at more than USD50-million to compile their Africa Construction Trends 2020 report. All these projects broke ground after 1 June 2019 and are valued at an estimated total of USD497-billion. The projects are situated in 28 different countries (out of 54 countries in Africa). This is only the tip of the iceberg, as there are thousands of smaller projects ongoing in all African countries of which not much is publicly known. A quick glance at the websites of the World Bank, the African Development Bank, South African firm Africa House, and Interact Media Defined’s African Mines Online (African Mines Handbook), shows the extent of current developments in Africa. According to Dedasaniya sub-Saharan Africa continues to be the second fastest growing region (after South Asia) in the world at 6.8%.

According to Deloitte’s Africa Construction Trends 2020, Kenya, Tanzania, Egypt, South Africa and Ethiopia are the top countries by number of projects. East Africa has the largest number of projects (40.3% of projects and 29.5% of project value [USD146-billion] followed by Southern Africa (USD113-billion). The top three projects are one in the oil and gas sector and two projects in the energy and power sector. These three projects alone account for a total value of USD66-billion. The greatest number of projects fall into the transport sector (33.4%), followed by real estate (21.9%), energy and power (17%) and shipping and ports (8.4%). The energy and power sector is the most valuable sector across the continent at USD133.6-billion, almost 27%.

According to the report, governments across Africa continue to be the main owners of projects with 338 projects (75.5%), while China only owns 2.4% of these projects. African governments continue to fund the largest share of projects across the continent, financing 103 projects (almost 24%). The second largest source of funding is China. One in every five projects are funded by China, although the country funds more projects in sub-Saharan Africa than government. China continues to dominate as a builder of projects in Africa and are involved in the construction of 140 projects which is 31% of all the projects in Africa tracked by Deloitte. Very importantly though is that South African and Italian companies build close to 3.8% of all the projects across all sectors in Africa. The results in Deloitte’s report makes for interesting reading, and its shows the lacklustre attitude of South African companies when it comes to the rest of Africa.

According to Bonnett, the energy sector 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,” Bonnett says.

Getting a foot in the door

The big question is how do South African companies actually get a foot in the door? “On the one hand a company needs to get goods into the country at a preferential rate using the trade agreements, and on 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. 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,” says Bonnett.

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 take advantage of their proximity and 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,” says Bonnett.

Developments in Mozambique

Right on South Africa’s doorstep, in neighbouring Mozambique, one of the biggest developments in African history is currently taking place. 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.

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.

According to Bonnett 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 develop around this infrastructure, there is an enormous amount of development in these areas,” he says.

"Furthermore, Cabo Delgado, the province where the oil and gas finds have been made, 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,” Bonnett adds.

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.

Other hotspots in Africa

In addition, 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.

According to Dedasaniya Africa’s fastest-growing economies are centred around East Africa and mainly in Ethiopia, Kenya, Rwanda and Tanzania. Government investment in Ethiopian infrastructure projects has enabled the growth in manufacturing and other industries, and the country has become the fastest growing economy in sub-Saharan Africa. “The construction sector in Ethiopia expanded by 16% in 2018 and is the largest industrial sub-sector in the country accounting for 71.4% of the industries sector,” says Dedasaniya.

African countries will continue spending a larger percentage of their GDP to stimulate growth. On a global scale, developing countries that invest over 30% of their GDP in infrastructure, have been among the fastest growing economies in the world. Dedasaniya says that a country like Ethiopia has spent more than 31% of GDP on infrastructure for the last 10 years, which explains the country’s phenomenal growth. South African suppliers that fail to see the opportunities in the rest of Africa, will have to continue playing the guessing game in South Africa, and hope they survive. Fortune favours the brave, and South African companies are well positioned to take advantage of their geographical advantage.

Crossing the mighty Zambezi River with a ferry from Kasane in Botswana to Kazangula in Zambia, has for many years been the great bottleneck preventing proper regional trade between countries south of the river, and those in the Great Lakes region of Africa. According to reports, the new Kazangula bridge will be completed by the end of 2020, replacing the atrocious and sometimes dangerous ferry service.

According to an article in the Getaway magazine, the 923m long and 18.5m wide bridge will make it possible to drive from Durban in South Africa to Botswana, Zambia, Zimbabwe, Malawi, the DRC, and up to Dar-es-Salaam in Tanzania, forming a critical link in Africa’s North-South Corridor. So, despite dismal economic indicators in South Africa, plant and equipment owners should start knocking on the African door sooner rather than later.   

Leon Louw specialises in African affairs, mining and doing business in Africa.