New frontiers: A revamped approach aims to increase investment and diversification

Côte d’Ivoire’s industrial sector has a long and storied history as one of the most developed in the sub-region, but as with many parts of the economy, it is recovering from the adverse impact of a decade of unrest. As a result, the country’s productive capacity fell to levels below that of the 1990s – an upbeat period marked by price and market liberalisation – as much of the foreign-owned industrial base moved elsewhere.

Resolution of the political crisis in 2011 however, and the recovery that it sparked, has started to bring about improvements. As such, the secondary sector increased its contribution to national GDP to 30% in 2011, compared to 27% in 2010, according to figures from the Ministry of Industry and Mines (Ministère de l’ Industrie et des Mines, MIM). While rising global prices of natural resources, such as oil and gas, which accounted for 21% of the sector in 2011, have been a key factor, an uptick in agro-industrial activity in cocoa, palm oil and rubber has led to higher output in the nation’s processing plants. Other factors were public works and energy, which accounted for 9% and 3%, respectively.

Government Input

The increased activity is in part a result of high levels of public spending, which have increased domestic consumption. One of the hallmarks of the administration of President Alassane Dramane Ouattara has been the introduction of a $19bn investment plan in large-scale public infrastructure under the auspices of the Presidential Emergency Programme. A third bridge spanning Abidjan’s lagoon opened at the end of 2014, while works are ongoing on the extension of the country’s highway network, international airport and container terminal in the port of Abidjan.

Meanwhile, power generation capacities are set to be ramped up from 1600 MW in 2013 to 3000 MW by the end of 2020. This is impacting local supply chains and likely to attract new industrial investments.

Subsector Indicators

Figures from the MIM show that overall sector growth reached 12.8% in 2012. An evident beneficiary was the construction materials segment, which experienced annual growth figures of 56.5%. Other segments include local food production, which went up by 20.4%, textiles and shoes (29.8%), the chemical industry (30.9%), and the automotive industry (18.9%). The first quarter of 2013, the latest period for which data was available at the time of writing, showed similar progress. The sector as a whole grew by 6%, with particular peaks in paper, rubber and plastics, encouraged by the rise in both public works and national consumption levels. Food and beverage production also continued its 2012 rise, reaching 5.7% in the first quarter of 2013. The figures are supported by growth in industrial investments, jumping from 8.8% of GDP in 2012 to 10.3% in 2013, according to the IMF. The same period also saw a rise in the creation of businesses in the construction and public works sector, as well as food products and extractive industries.

Industrial Policy

The government has a stated ambition of increasing the share of the industrial sector in the national economy to 40% by 2020. In order to guide these efforts, a new four-year industrial programme was launched in March 2014, known as the National Enterprise and Restructuring and Upgrading Programme (Programme National de Restructuration et de Mise à Niveau, PNRMN). Backed by the UN Industrial Development Organisation, the plan has set a target of attracting 150 industrial players (see analysis).

Under the scope of the initiative, more than CFA152bn (€228m) will be invested in traditional industrial segments, including agro-processing and textiles, along with less-established but equally promising subsectors.

According to the MIM, 17.5% of the total budget will come from private industrial players, 60% from the banking sector and 18.5% from foreign development partners, leaving the government with minimal financial participation of 0.6%. Among the plan’s targets is the development of light manufacturing such as information technology hardware and consumer goods, including plastics, generic medication and semi-processed timber for furniture production. The policy is also banking on the development of other industries further up the supply chain to boost local content in the domestic construction and public works segment, particularly the cement and chemical industries.

The policy follows previous initiatives to alleviate costs and bureaucracy of the business environment (see Economy chapter). In the 2012 Investment Code, for example, machinery and equipment purchases are exempted from value-added tax (VAT) for those who invest a minimum of CFA500m (€750,000), and from all taxes for those who invest more than CFA2bn (€3m). In addition, tax breaks apply to companies that operate facilities in the country’s preferred industrial zones, while small and medium-sized enterprises (SMEs) benefit from a reduction on utility costs and accelerated and subsidised land access.

Moreover, the implementation of single-window registration desks has allowed a significant acceleration of the processing of public procedures such as business registration, land access and export licences leading to fewer bureaucratic delays and a reduction in fees. Also, a Commerce Tribunal was set up in 2012 dedicated to handling commercial conflicts. The combination of measures has enabled Côte d’Ivoire to improve its rating on the World Bank’s 2015 “Doing Business” report, which ranked the country 147th, up 11 places on 2014, above Senegal (161) and Nigeria (170), but below the sub-Saharan African average (142).

Agro-Industries

Côte d’Ivoire’s global agricultural participation is defined first and foremost by its exports of cocoa, accounting for 40% of global supply based on 2014 figures, followed by palm oil (371,000 tonnes), coffee (300,000 tonnes) and rubber (256,000 tonnes) (see Agricultural chapter). Global demand trends are strong in each of these segments, in particular cocoa and rubber, leading to higher margins for local producers as well as increased domestic processing activity. To date, the country counts 16 rubber-processing facilities and ranks first in Africa for natural rubber exports, at 250,000-300,000 tonnes for 2013. With automotive assembly and production going through growth spurs in nearby markets, such as Nigeria, this situation is likely to remain in the medium term.

Growing consumption in Western markets is providing sound market fundamentals for the growing and processing community in Côte d’Ivoire. Cocoa production jumped to a record 1.7m tonnes in 2014, up from 1.47m tonnes in the 2012/13 season. In addition, since 2012, Ivorian producers enjoy locally guaranteed prices and renewed quality control mechanisms giving the right to a country-of-origin label. As is the case in many cocoa producers, the bulk of the crop is exported raw, but 30% of annual output goes through a primary processing stage which is dominated by multinationals including Barry Callebaut, Cargill, ADM and Olam.

The strength of the cocoa sector has helped it ride out some recent regulatory revisions. Since 2012, an export tax break for processors was replaced by a rebate of mid-crop beans. The reforms raised concerns from the processors, with various multinationals putting temporary halt on their expansion plans. Meanwhile, small grinders which have entered the sector in the past few years, largely attracted by the tax breaks, are struggling to compete at the international level. As many of them have yet to fully pay off their investments, reduced revenues and high debt repayments may well lead to their exit from the market.

Palm

Another key commodity for local producers is palm oil. Domestic production reached 425,000 tonnes in 2013, according to Ecobank figures, placing it in second position in ECOWAS after Nigeria, with all processing taking place domestically. Côte d’Ivoire is Africa’s biggest exporter of palm oil, a position it is likely to hold on to given soaring demand levels in the West African region. The segment is dominated by two domestic firms, Palmci and Sania, both majority-owned by SIFCA, a local diversified agro-industrial group, along with Olam and Wilmar, both based in Singapore. As per 2014 African Economic Outlook figures, these firms conduct up to 90% of their business in the sub-regional market, particularly in Burkina Faso, Mali and Nigeria.

Additional industrial opportunities also exist in tropical fruit processing, such as cashew nuts, with the country producing a total of 450,000 tonnes annually, the most in the region, according to data from the 2014 African Economic Outlook.

A possible challenge to growth prospects in the agriculture sector, in particular for palm oil, is limited access to land. A lack of secure long-term farmland ownership rights undermines investment appetite and, subsequently, size and yield of plantations (see Agriculture chapter). This impacts the sector’s competitiveness, given that production in Asian markets is already up to seven times more efficient.

Textiles

Although Côte d’Ivoire’s once flourishing textile industry has – as with so many other large textile exporters around the continent – been impacted by the growth in Asian production, a rise in demand for higher-quality fabrics and a crackdown on counterfeits has given local producers reason for optimism. Merely 6% of the printed tissue segment – the only industrial application of textiles in the country – is in the hands of Ivorian companies, including Uniwax, Vlisco and Woodin. The rest is largely made up of Chinese imports. “A large chunk of this is counterfeit or fraud,” Jean Louis Menudier, CEO of Uniwax, told OBG, “Counterfeits enter the country at a margin of the cost of formal production and are therefore undercutting local producers.”

After five years of private sector lobbying, efforts to increase the fight against counterfeits bore fruit in December 2013 when an anti-counterfeit law was signed. While implementation is ongoing, the legislation is set to give more powers to Customs and police to investigate and seize suspected counterfeit shipments. Private producers are also currently forming an industrial association to support these efforts and impose whistleblowing initiatives. Competition from smaller players in the informal sector is also an ongoing issue, although this poses less of a challenge than foreign counterfeits, due to market segmentation.

Boosted in part by improved regulatory enforcement, textile producers are also strongly positioned to capitalise on a number of promising domestic and regional opportunities. These are being driven by population growth and urbanisation, along with preferential trade treatment within the Union Economique et Monétaire Ouest-Africaine (UEMOA) and ECOWAS. Further, access to the European and US markets provides opportunities to serve premium markets such as dressmaking, household textiles, interior decoration, and traditional embroidery and luxury handicrafts.

However, there is scope for improvement in the supply chain. A lack of cost-competitiveness has undermined the profitability of Ivorian cotton plantations leading to a shift from domestic supplies to a dominant reliance on imports from Benin, Ghana and, to some extent, China. In 2014 the government announced efforts to help encourage domestic production levels through fiscal incentives and discounted rates of access to land and utilities. It has also set out to restructure the Ivorian Cotton Company, which handles much of the downstream market and specialises in processing.

Decreasing sales and difficult access to credits has led to the company’s decline since 2002. The government has now commenced with initiatives looking to attract private capital into the entity, accompany its ongoing debt restructuration, and embark on negotiations with its employees in a bid to raise its competitiveness going forward.

Mining

The country’s mining industry is considered a key asset for a revival in secondary sector output, and given the success of neighbouring Ghana in developing mining revenues, there is some cause for optimism (see Mining analysis). According to the MIM, annual potential revenues are estimated at some CFA800bn (€1.2m), as Côte d’Ivoire includes sizable gold deposits, along with estimated reserves of 4bn tonnes of iron ore, 40m tonnes of nickel and 18m tonnes of manganese. As of late 2014, 140 exploration permits and 11 production licences had been issued.

Thus far, mining has remained largely limited to smaller-scale projects focused on gold and manganese, contributing around 1% to national GDP. However, with political stability gaining hold and a new Mining Code under implementation, domestic and foreign investors are gradually exploring their entrance (see analysis). The government foresees national gold production to reach 25 tonnes by the end of 2015, up from 14 tonnes in 2012, and half that in 2010.

The first signs of that came to light in the early part of 2014 when British company Amara Mining announced the discovery of a gold deposit of “exceptional quality”, as declared by Jean-Claude Brou, minister of industry and mines, at the event’s official announcement to local media. The reserves, located close to Yamoussoukro, are estimated at some 6.3m oz as of early 2015, and will require significant investment, with the economic benefits of the project to be outlined in a feasibility study to take place in early 2015.

Another key development in 2014 was the inauguration of the Agbaou mine, located in the country’s centre and operated by Canadian group Endeavour Mining. The mine can produce 3 tonnes of gold annually, raising the nation’s total output by almost 20%, and has an estimated lifecycle of 10 years. Agbaou joins the existing gold mines of Tongon, Ity and Bonikro.

The country has also benefitted from compliance with the guidelines of the Extractive Industries Transparency Initiative since 2014, and in April of that year the UN Security Council voted to lift the export ban on Ivorian diamonds due to progress made on the implementation of the Kimberley Process Certification Scheme and better governance of the sector.

Industrial Zones

Dedicated economic zones first appeared as part of Côte d’Ivoire’s industrial landscape since the early 1970s. Since that time, a number of dedicated areas have been established, particularly in and around Abidjan where Vridi, Koumassi and Yopougon house most of the city’s medium- to large-scale manufacturing firms. However, issues of under-investment, exacerbated by years of unrest, have limited their development and, in many cases, created adverse conditions in surrounding road and utility infrastructure.

Over the past few years, the government has tried to address the problem and create sustainable measures to improve the existing and newly planned zones. In May 2013, the government adopted legislation paving the way for the creation of the Agency for the Management and Development of Industrial Infrastructure. The agency currently oversees the development of existing and new industrial zones, which are increasingly financed and managed in close collaboration with private operators. At the same time, the National Fund for the Development of Industrial Zones, established through contributions from within the industrial sector, was set up to provide public funding for new zones.

Costs

Inception of the new management agencies however, comes at a cost, with an increase in rental fees paid by tenants of the existing industrial zones. Rental fees have remained unchanged since the zones’ establishment in 1972, allowing tenants to pay some of the region’s lowest fees. By comparison, annual averages per square metre in Senegal and Ghana lie at CFA2000 (€3) and CFA1500 (€2.25), respectively; fees at the industrial zone of Yopougon were fixed at CFA165 (€0.25), while those of Vridi and Koumassi were CFA100 (€0.15) and CFA65 (€0.10), respectively.

In late 2013, the government announced a change in these charges and, shortly thereafter, published new brackets ranging from CFA2000 (€3) to CFA15,000 (€22.50) for Abidjan-based zones, while that of surrounding agglomerations lie at around half of that. The announcements led to criticism from industrialists, who were unhappy not only with the high level at which the rates have been increased, but also the lack of consultation prior to their implementation, which left little time for planning. The government has since compromised by delaying necessary payments of the new fees until mid-2014 at discounted rates. The new structure was put into force beginning from 2015.

Notwithstanding, this alone will likely be insufficient to underwrite wider needed upgrades. Required investments for their improvement are estimated at some CFA30bn (€45m), according to the state-owned National Bureau of Technical Studies and Development (Bureau National d’Etudes Techniques et de Developpement, BNETD). However, annual revenues from tenants only generate up to CFA1.5bn (€2.25m) at best.

New Zones

The government has also stipulated plans to develop additional zones in various parts of the country, operating under public-private partnership. At the time of writing, there were media reports of plans on the table for an industrial park in Bouake, north of Yamoussoukro, dedicated to export-oriented industries such as textiles. “Industrial zones constitute critical support for exporting industries, but our hopes are for locations that are well connected to overseas markets, such as Europe and the US; the south of the country remains ideal in that regard,” Menudier told OBG.

The potential Bouake zone would join a new industrial park on the outskirts of Abidjan, titled PK24 in reference to its distance from the city centre, which is on the drawing table. By July 2014, the government had closed international submissions for a private partner to design, co-finance and manage the zone.

The park will stretch over a surface of 940 ha, one of the country’s largest, with a capacity for as many as 300 firms. The initial stage will target a total area of 200 ha. Earlier in 2014, the BNETD, the body in charge of the zone’s feasibility study, announced that the cost of building the zone ranges from CFA2bn (€3m) to CFA5bn (€7.5m) per square metre. The project is expected to alleviate some of the excess demand for dedicated industrial zones. “We have over 70 requests from industrialists pending,” Brou told local media when announcing the project in March 2014.

Challenges

The government has made the secondary sector – and manufacturing and mining in particular – a focus for the country’s broader recovery plans, in part thanks to their multiplier effects on employment and consumption, as well as the current account. However, investors must still be prepared to grapple with constraints that can dampen growth forecasts over the short and medium term. One example is the buildup of government arrears on tax returns, in particular VAT on exported items. By early 2014, the government had accrued arrears dating back 48 months with little indication as to how it intends to resolve the matter. Given the country’s financial deficit and the government’s determined drive to continue high public spending on large-scale infrastructure, the need to ensure fiscal discipline has become a pressing matter. Energy constitutes another challenge (see Energy chapter). The industrial sector remains largely dependent on the national power grid, but a shortage of gas supply and low rainfall have crimped generating output, with demand outstripping production. Although much better performing than other parts of the region, power supplies are rising in price in part owing to the removal of power subsidies – a result of the government’s efforts to improve the fiscus. “In Côte d’Ivoire 90% of the power cables are produced locally, but it costs about the same price to import them,” Jean-Maurice Ibrahim, managing-director of local group Distribution de Materiels Electriques Industriels et Batiments, told OBG. “The only advantage of producing them locally is that they are available upon demand,” he said.

The limited role local small businesses play in the industrial value chain is also a concern. According to the 2014 African Economic Outlook, local capacities in areas such as packaging, marketing and distribution are too small to win new business and generate funds for reinvestments and growth. The report suggests the creation of a government-run fund for access to credit, as well as an SME development agency to help SMEs boost capacity and quality levels which will make them eligible for export and sub-contracting activity of the country’s biggest domestic and foreign industrial actors.

Outlook

Côte d’Ivoire’s public investment campaign has bolstered the recovery of industry, through the expansion of ancillary and dedicated infrastructure, and various policy support mechanisms. The economy’s broader return to health is also helping to strengthen consumer confidence. This should not only help existing consumer-orientated manufacturers, such as fast-moving consumer goods firms, but also new and higher value-adding industries including assembly of household electronics and pharmaceutical production.

As a member of UEMOA and ECOWAS, Côte d’Ivoire benefits from the free movement of goods and services in the region. On the back of developing regional infrastructure plans – a railway connection with Burkina Faso and Benin being one example – investors have the chance to tap into neighbouring markets at a competitive cost. Further, preferential access to European and US markets for niche products, such as textiles, is raising perspectives to diversify Côte d’Ivoire’s export portfolio, currently dominated by coffee and cocoa, which can be volatile. The private sector is also set to play a role in projected industry growth, in terms of capital and broader participation. At the same time, sustained reforms at the level of the local business environment are needed. While the 2012 Investment Code and the new industrial policy are steps in the right direction, there is scope for more improvement. The country’s points of entry, where financial resources continue to be lost on informal procedures, are key.

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The Report: Côte d'Ivoire 2015

Industry & Mining chapter from The Report: Côte d'Ivoire 2015

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