A stable supply: Drivers and change in GCC-Africa investment

The push amongst GCC states to invest in Africa came about in earnest following the 2007-08 global food price crisis, and in those days targeted agricultural land and strategic commodity production. Agribusiness, sovereign wealth funds and other agri-investment vehicles were the main players at the time. Primarily state-led, the investments at that time centred on framework agreements with the host market, guaranteeing purchases and providing subsidised credit.

Fast forward and in October 2014 Dubai’s Chamber of Commerce noted that Gulf entities had contributed more than $30bn to African infrastructure development over the previous 10 years, a substantial figure when one considers the region’s relatively recent start of outreach to the continent and its origins in agriculture-focused investments.

The trend positions the GCC well for capitalising on that growth, while simultaneously providing direct positive implications for food security. Arguably of more importance, though, is the maturation of investment strategy towards the region from that early focus to more complex investments across a range of burgeoning sectors including infrastructure, construction, telecoms, and banking and financial services.

Food Security

With a less-than-hospitable environment for crop production and vulnerability to geopolitical forces affecting the region’s food supply, food security strategies amongst GCC states have historically concentrated on price controls, consumer subsidies, strategic stockholding and trade diversification. GCC states also have a growing population, with growth of around 40% expected by 2030 over 2010 figures. This has already led to pressure on food supplies, while prices are increasingly exposed to geopolitical factors and the impacts of climate change. As a consequence, GCC states import as much as 90% of their food, with the majority of states importing 60-80%.

The traditional method of averting the local impact of food price volatility and supply disruption has typically been through subsidies and wage hikes, but this is unsustainable over the long term in light of concerns over inflation and the rising cost of maintaining the welfare state. GCC governments have recognised the critical need to establish consistent supplies of staple foods such as rice and grains, with their early strategies focusing on boosting domestic self-sufficiency.

Local Attempts

Saudi Arabia’s wheat programme began in the 1970s, but the Kingdom found its aquifers being depleted as a result. As the world’s greatest importer of barley, rising meat and dairy production has also meant a growing need to import greater amounts of strategic commodities, including corn and barley, to use as animal feed – a full two-thirds of international barley exports are used by Saudi Arabia to feed its sheep. By 2008 the Kingdom had declared it would gradually end the production of wheat and concentrate on building up reliable sources abroad.

GCC states will remain dependent at least through the medium term on energy exports for importing and financing food supplies. A decline in the price of petroleum products will therefore undermine their ability to sustain this offset on costs to domestic consumers, weakening their ability to pay for the welfare model.

Saudi Arabia imports close to 70% of its food requirements and has a food import bill worth SR90bn ($24bn) annually. The Kingdom has a young and growing population (which grew at an annual rate of 2.55% in 2014), and the food sector is expected to grow by 55.3% between 2014 and 2016, according to a study by Foodex Saudi. Like other GCC nations, the Kingdom is investing overseas in farmland and agricultural infrastructure.

Strategic Sourcing

Along with sourcing from Eastern Europe and farther afield in South America and Asia, GCC investors began looking more to Africa – East Africa in particular – where available farmland was seen as a way to provide domestic populations with reliable sources of key agricultural products. Countries targeted in the first phase included Sudan, Ethiopia, Mali, Mauritania, Mozambique and Tanzania, along with the North African nations of Morocco and Egypt.

Many African investment destinations themselves, however, suffer from profound food insecurity and political risks. Indeed, the Horn and Sahel regions of the continent are the most famine-prone places on the planet. This has presented foreign investors with a steep learning curve when it comes to navigating African markets and relying on those destinations for strategic commodities. Local concerns over land rights and food security presented serious operational and reputational risks for Gulf investors. Early risks relating to land use were due in large part to the absence of adequate land ownership regulation, with Oxfam reporting that up to 90% of land in sub-Saharan Africa was unregistered, placing local residents at greater risk of being displaced for new projects.

Local Gains

Many African governments have shifted their emphasis to boosting local benefit, a trend that is likely to reach beyond agriculture. This presents new challenges for investors, but it can also offer longer-term benefits and opportunities. In a model for how this can be achieved, the UAE’s Al Dahra Holding enforces a 50:50 sharing formula, according to its vice-chairman, Khadim Al Darei, in a statement given to local media in early 2014. According to Al Darei, Al Dahra has avoided some of the problems encountered by other agriculture investors by actively creating jobs for locals and sharing its produce equally in the host country.

The current phase of GCC investment in Africa appears set to address many of the earlier structural weaknesses and, in the process, should help to develop a more viable long-term investment environment in many parts of the continent. This includes shifts on the foreign investor side, and also locally among African governments and key stakeholders. Countries like Zambia and Kenya are devising terms for land use that could help stabilise conditions on the ground.

Leases in Zambia are likely to be provided for no more than 25 years, and will come with a requirement that crops produced on the land be split up to 50:50 between exports and the local market. Likewise in Kenya, there will likely be land leases as opposed to sales.

Africa’s appetite for foreign direct investment (FDI) remains strong. FDI is more widely recognised on the continent as a way to help provide employment opportunities as well as develop ‘‘expertise technologies and capital for improving infrastructure such as roads, education and health facilities’’, as noted by the Centre for International Governance Innovation.

Local stakeholders in Kenya have shown themselves to be ‘‘willing to accept and participate in land leases, provided they include certain provisions’’, such as 15-year maximums, and that they be ‘‘renewable subject to mutual negotiation’’. This involvement would contrast with the historical trend in which landowners were typically excluded from negotiations.

Helping to ensure a greater degree of trust among local communities will provide for more sustainable investments in agriculture, and will have positive knock-on effects for other sectors as well. In Kenya, for example, public-private partnerships (PPP) received a boost in 2013 with the PPP Act coming into force, “in order to strengthen the legal and regulatory framework for PPPs… [and] remove duplication and overlap’’.

In early 2014 African representatives presented land lease and production sharing deals to GCC investors as a means to aid small-scale farmers and ensure food supplies for locals. Ghana, for its part, has offered tax-free agreements for investment in agriculture in the country’s north, with the premise of sharing part of the produced crops with the domestic market. But much is still to be done in terms of regulation. Kenya, for instance, still lacks a regulatory framework for foreign land deals, and specific guidelines on managing the leasing of foreign land are absent from policies.

Beyond Agriculture

According to the Dubai Chamber of Commerce, Africa’s infrastructure needs will require investment of $2.6trn by 2030. The chamber’s president, Hamad Buamim, has pointed out that it is not only larger firms that are set to seize opportunities in Africa, but small companies too. During the October 2014 Africa Global Business Forum held in Dubai, Buamim noted that ‘‘given the perceived risks associated with mega-projects in several African markets, smaller-scale projects have become increasingly more appealing, especially in the energy industry.” GCC investors, he added, are especially well positioned for smaller-scale projects in Africa. Underscoring the government’s confidence in the African market, the chamber had plans to open offices in Ghana, Mozambique, South Africa, Kenya, Uganda and Angola by the end of 2014. On similar lines, non-oil trade between the UAE and Africa has jumped by 141% from 2009 to 2013.

Africa’s potential for GCC telecoms is also showing signs of growth, though there have been some setbacks as well. The UAE’s Etisalat was in late 2013 the biggest player from the Gulf in Africa’s telecoms sector, taking a controlling stake in Gabon Telecom, and later that year a $5.3bn stake in Maroc Telecom. This was despite Etisalat experiencing an underwhelming year in Africa in 2013, with a year-on-year contraction of 1% by June of that year (excluding Nigeria) and a 9% contraction in Egypt alone. Smaller UAE companies at that time were pulling back their stakes: Warid Group sold off its Uganda operations, and Emirates International Telecommunications, a subsidiary of Dubai Holding, decided to offload its 35% stake in Tunisie Telecom. Saudi Telecom Company maintains its 75% stake in Cell C of South Africa. In 2010 Zain sold most of its sub-Saharan operations to Bharti Airtel for approximately $9bn. In late 2013 Zain was looking to concentrate on North Africa rather than sub-Saharan Africa, seeking a controlling stake in Inwi in Morocco, where it had a 15% stake. Qatar’s Ooredoo also operates in Tunisia and Algeria.

For Gulf investors, the unique support for the private sector from state backers is likely to be a key factor in helping investors weather further storms. Saad Khalil, the director-general of the King Abdullah Initiative for Saudi Agricultural Investment Abroad, told the World Food Security Summit in Dubai in February 2014 that the solution must now come from partnerships between the private and public sectors, with the government encouraging risk-taking through the provision of interest-free loans and partnerships with the Saudi Agricultural and Livestock Investment Company.

Thinking Long Term

Encouragingly, foreign investors and African governments alike appear to have taken heed of lessons learned. They are demonstrating increasing commitment to bolster structural mechanisms that should bring improvement to the investment environment. This applies to agriculture, but also sectors such as energy and infrastructure. Moreover, a shift towards the inclusion of landowners and local stakeholders – as well as ensuring greater and more tangible benefits for the local communities – presents the opportunity for developing a more viable and sustainable destination for the GCC’s strategic long-term investments on the African continent.

Challenges Remain

Many of the core challenges experienced in the Gulf’s earlier experiment with African agriculture and land investment will no doubt be encountered in other sectors in the future. At the top of the list of risks facing Gulf investors on the continent are operational risks, the honouring of contracts, currency volatility, political risk and the change of government policies, in particular in the midst of longer-term projects. A lack of skilled labour and technology are further hindrances for investors, as are the lack of transparency in the application of investment laws and issues surrounding taxation.

One recent example is that of Saudi Arabia’s King Abdullah Initiative for Saudi Agricultural Investment Abroad, whose goal is to ‘‘build up reserves of core agricultural commodities’’ but which in 2013 encountered problems with implementation, according to a report from the Ministry of Commerce and Industry.

The initiative, which has targeted African countries such as Sudan, Egypt, Tanzania, Uganda, Senegal, South Africa, Mali, Kenya and Niger, has faced challenges stemming from the absence of needed infrastructure, including roads and railways as well as irrigation networks, along with problems with ‘‘unreliable utilities and disjointed marketing channels’’, among other issues.