Stakes are high in African investment race

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Egyptian Minister of Investment Mahmoud Mohieldin sits on a panel during the Comesa third annual investment forum in Sharm el-Sheikh, Egypt this week. Provided by GAFI

 

Joong Ang Daily | 16 April 2010

Though Korean investment in Africa is rising, it was just $320 million in 2008, when Chinese spending on the continent reached a whopping $7.8 billion.

SHARM EL-SHEIKH, Egypt - The rush to exploit Africa’s natural resources has kicked back into high gear in recent decades, with massive new investment from developing countries - especially China - desperate to feed their burgeoning industries.

That influx made the continent the only one in the world to experience significant economic growth in 2009, even if it was modest at 2 percent.

To keep the cash flowing, officials from members of the Common Market for Eastern and Southern Africa, or Comesa, and other African states gathered in this city near the tip of the Sinai Peninsula earlier this week to discuss ways to secure sustainable growth.

The group already has proven results: This year, the Comesa Regional Investment Agency is promoting 150 projects with initial investments estimated over $40 billion.

China alone spent $7.8 billion on direct investment in Africa in 2008, most of it in infrastructure, according to the Korea Institute for Industrial Economics and Trade.

By comparison, Korea has fallen far behind. Though its stake in the region has grown over the years, the country and its businesses spent only $320 million there in 2008, and the majority of that was in the information and communications technology industry. That rose substantially last year, but $388 million is still a drop in the bucket compared to China.

Martin Davies, director of the Gordon Institute of Business Science’s Asia Business Centre, said that although Korea was once near the front in the race for the African market, thanks to the efforts of Daewoo Group in the mid-1990s, today China’s influence in Africa has grown to a point where the Chinese and African economies are deeply intertwined.

“If you look at last year, China made huge investments through its export and import bank on infrastructure even during the worst financial crisis,” said Davies.

He stressed that the main reason China has been investing in African infrastructure is mainly to secure a steady supply of commodities to meet increasing domestic demand.

“Already the growth of Africa is parallel to the growth in China. The sub-Saharan region is now dependent on Chinese commodity demand, while China now needs Africa for its commodity supply,” Davies said. “One-quarter of China’s energy is imported from Africa.”

Statistics bear out this picture, with Africa’s economy dipping when China’s retreats and Africa growing when China succeeds.

As China’s presence on the continent threatens that of even Europe and the United States, the Korean government has been trying to imitate its giant neighbor’s strategy.

A China-Africa forum was held in November 2006 at which the Chinese government announced eight measures targeted at boosting investment and trade with Africa including low-interest loans to 28 African countries and financial support for 53 projects in the region. The following year, Korea held a similar summit. China plans a sequel in 2011, and experts predict Seoul will again follow its lead.

But China and Korea are not the only Asian countries interested in the African market. “Japanese investors have been making substantial investments in Africa and have been adopting strategies in targeting the growing consumer market in Africa,” said Takao Seki, director of the Japan External Trade Organization.

“We have turned to the consumer market because the middle class in Africa has been growing at a rapid pace. Also the infrastructure market is already dominated by the Chinese companies, which gives us little chance,” Seki added.

Osama Saleh, chairman of Egypt’s General Authority for Investment and Free Zones, which organized the Comesa meeting, said African countries are very interested in attracting more Korean cash.

“We are definitely looking for Korean investors, mainly because of their experience in infrastructure, general construction projects and technology. Especially countries like Egypt in northern Africa are interested in Korean technology,” Saleh said, adding that there are huge opportunities for Korean companies.

Basing an operation in Egypt not only means low-cost labor and facilities but geographical access to markets not only in Africa but also in Europe and the Middle East, Saleh said.

To strengthen Korean-Egyptian trade ties, the GAFI will send a mission to meet with Korean companies one-on-one to promote Africa next month, in corporation with the Korea Trade-Investment Promotion Agency.

“We have some major projects that are sizable,” said Saleh.

However, despite the world’s growing interest in Africa, Korean companies have been less enthusiastic. Only 22 local companies have units in Egypt, for example, including Hyundai Motor and Hyundai Mobis, which manufactures parts there.

Most are nervous about trusting African governments’ guarantees, and about complex and frequently arbitrary regulations.

A single case that may have helped chill Korean interest in Africa was that of Daewoo Logistics, which in 2008 signed an agreement with the Madagascar government to invest $6 billion to develop agricultural land in the country. After a great deal of controversy, the deal fell apart after the government changed.

“Daewoo Logistics was trying to invest in Madagascar’s agricultural market to secure commodities that could later be exported to China,” Davies from the Carbon Institute said. But it made a critical miscalculation. In Africa, Davies said, agriculture is extremely political, which results in an unstable environment that could drive foreign investors away.

Samih Sawiris, chairman of Egypt-based Orascom Development, said Africa’s biggest problem is its frequently changing regulations.

“One of the checklist items in business is how often the rules change that could hurt business sustainability,” Sawiris said. “In some parts of Africa a quick change in politicians results in a sudden change in the game.” Sawiris stressed that those sudden rule changes are the quickest way to get investors to quit altogether.

“It’s shocking to see how little effort is made to tackle such issues.”

Dambisa Mayo, economist and author of “Dead Aid,” said Africa still has four key issues it needs to solve in order to attract more investment.

First, Africa needs to enhance its transparency. “Corruption or perceived corruption drives away economic investment,” Mayo said. “Africa is one of the worst on the list, and in the past years, strikingly, there has been not much movement.”

Africa is also one of the worst performers on the world economic competitiveness index. Credit ratings are scarce and limited. “Only 19 countries have credit rating [agencies] and many countries haven’t even jumped the first hurdle,” Mayo explained.

The professor also noted that Africa always places at the bottom in the global ease of doing business survey.

Comesa members said at their meeting that they plan to establish a joint investment zone with a single set of customs, regulatory and tax policies. Saleh from the GAFI said Egypt had already begun taking steps to reform its regulations to improve the business environment, and it hopes that will lead to higher foreign investment from countries including Korea.

“Previously there were 37 ministries and authorities that a foreign investor had to go through to establish a company [in Egypt]. Now we provide one-stop service through GAFI. Also we have cut down on the time it takes to get approval for company establishment from the previous 62 days to within 72 hours,” Saleh said.

“The taxation rate including corporate tax on average has been downsized from 40 percent to 20 percent, while customs duties on average have shifted down from 14 percent to 6 percent. We are restructuring our banking industry, and liquidity in the financial industry has improved, as the loans to deposit ratio is at 52 percent.”

During one panel, Mahmoud Mohieldin, Egypt’s minister of investment, emphasized that countries like Singapore and Korea that have no resources have succeeded in sustaining exceptional growth.

“Ideas, people and other things, which could be anything from land to natural resources, are essential for economic growth. If we do not work on these three there is no development,” Mohieldin said.

By Lee Ho-jeong [[email protected]]
Original source: Joong Ang Daily
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