Download Africa: Constraints on FDI in the Sub-Sahara

Africa: Constraints on FDI in the Sub-Sahara
Sub-Saharan Africa’s geography determines its politics, economics and industry, in
particular by limiting foreign investment and constraining the directions in which foreign
capital flows.
Summary
The rugged terrain of Sub-Saharan Africa prevents industrialization and modern
infrastructure from taking hold and engenders chronic political instability. As a result,
most foreign investment goes to resource extraction, especially offshore projects
protected from the disruptions that are rife on land.
Analysis
Foreign direct investment (FDI) into Africa has grown -- albeit irregularly -- in the 21st
century, nearly doubling from 2002 to reach $36 billion in 2007, primarily because of the
international search for natural resources at a time of high commodity prices.
Simultaneously, however, Africa’s share of global FDI has fallen from 5 percent in the
1970s to about 2 percent today as capital flows elsewhere outpace FDI in Africa. During
the same period, Africa’s share of total FDI into developing countries fell from about 25
percent to 5 percent. These investment patterns bode ill for the continent’s economic
growth and standard of living -- especially since many African nations have bad credit
and, unable to access international capital markets, depend on FDI more so than other
developing economies.
The limitations on foreign investment in Africa derive from the intractable realities of the
continent’s geographical and political landscape. North Africa differs from the rest of the
continent in this regard because it is closer to Mediterranean civilization and trade. SubSaharan Africa, on the other hand, suffers from extreme natural conditions that make life
inherently precarious for its inhabitants. Crucially, the geography of Sub-Saharan Africa
resists economic development and industrialization and drives away foreign investors
whose capital is necessary for both. The divide persists. On average, North African
Islamic nations draw twice as much FDI as the rest of the continent combined.
Plateaus, Rainforests, Rivers
To describe Africa’s geography is to identify the major impediments to its development.
The bulk of the continent consists of raised plateaus. Escarpments lie close to the coasts,
allowing only narrow coastal plains for human habitation and rendering the construction
of road and rail extraordinarily difficult. The narrow and rocky continental shelf makes
for few natural quays (compared to Europe for instance). Tectonic activity creates
extensive rifting and fault-lines in East Africa. The world’s largest desert gives SubSaharan Africa its name and its northern border. South of the Sahara, the impenetrable
tropical rainforests of the Congo Basin extend through Cameroon, Gabon, Congo and
Zaire, filling the center of the continent and obstructing the regular passage of people and
goods.
Rivers provide the best means of transportation through stretches of inhospitable
territory, but in Africa the major rivers are unreliable for commerce, in great part because
the continental escarpment generates rapids. The Niger River, Africa’s longest, carries
ships and barges with food, fuel and other basic goods, and supports roughly 100 million
people in its valley, though it flows slowly and irregularly and often floods. The Congo
River transports people and goods through the expansive rainforests, but it is surrounded
by the densest of forests. To the south, one of the most commercial friendly rivers, the
Zambezi, flows through Zambia into the Mozambique Channel, but a series of rapids and
cataracts, such as Victoria Falls, and hydroelectric dams interrupt the river’s course,
making it navigable only on certain stretches. South Africa’s Orange River is entirely unnavigable, while the Limpopo, forming South Africa’s border with Zimbabwe and
Botswana, is accessible by steamship only at high tide and navigable for a mere 130
miles inland.
In short, Africa’s waterways are treacherous and frequently obstructed. Some rivers are
entirely navigable, such as the Volta River and the Benue, both in West Africa. But the
number of side channels, dams, locks and weirs that developers would have to construct
to make the continent’s entire river system dependable for 21st century economies of
scale would require one of the greatest and most expensive infrastructure projects in
human history. Such a project will not happen any time soon.
Infrastructure, Investment
Given Sub-Saharan Africa’s geography, it should be no surprise that infrastructure is
generally poor. African governments have proved unwilling to reinvest in infrastructure
built by European colonists. Moreover, foreign direct investment needed for <link
nid="108015">infrastructure projects</link> and renovations is limited mostly to a
handful of countries with reserves of extractable commodities. South Africa, Nigeria
and Angola alone make up for 55 percent of FDI in the region south of the Sahara, with
most funds flowing into the petroleum extraction sector only, while the bottom 24
countries account for only 5 percent. Add in Sudan and Equatorial Guinea to account for
about three fourths of total FDI. Of these five countries, South Africa is unique -- its
stands above the rest of Sub-Saharan Africa economically and joins France, the
Netherlands, the United Kingdom and the United States in providing FDI for African
countries.
Foreign investment in Sub-Saharan Africa -- totaling approximately $36 billion in 2007 -falls under three major categories. The first is investment in infrastructure for distributing
basic commodities and manufactured goods. Africa imports almost everything except raw
materials, and foreign companies help build the <link nid="110696">supply
chains</link> necessary to deliver goods to market. The second category is investment in
infrastructure for resource extraction, such as minerals and metals -- essentially, this is
the foreign capital that sustains each point in the chain running from mine to railroad to
port. This category also includes onshore petroleum production and pipelines. The
final category of investment is offshore oil and natural gas production -- by far the most
profitable sector for investors, not only because of the high value of fossil fuels but also
because of the buffer that the ocean affords against violent disruptions on land.
FDI in the first category -- distribution infrastructure -- mostly takes the form of crossborder mergers and acquisitions. Foremost is the food, drink and tobacco sector, at a total
of $1.1 billion FDI in 2006. Next is the metals and metal products sector, at $783 million,
followed by automobiles at $13 million and electronics at $8 million. Zambia,
Mozambique, Ghana and the Democratic Republic of the Congo receive the most FDI for
manufacturing and distribution. Foreign producers of manufactured goods also
contribute to building the bare minimum of infrastructure -- roads, bridges, etc. -- to get
their wares to market.
The second FDI category -- infrastructure for extracting natural resources on land -includes the means of transporting minerals and metals such as gold, copper, diamonds
and platinum directly to an export center. Africa possesses great mineral wealth, and lines
that run from mine to railroad to port are vital for many African countries’ survival. The
prominent producers of minerals and metals are Angola, Democratic Republic of the
Congo, Mozambique, Nigeria, Botswana, Namibia, Zambia and South Africa, but
investors also support exploration in Ethiopia, Somalia, Uganda, Ghana, Kenya and
Mauritania. Exportation of minerals and metals depends on railway links. Foreign
investors provide the capital for this transport network, but only to connect the mines to
the ports. There is no effort to build national, much less transnational, railways.
Still, the countries receiving the highest FDI inflows for minerals and metals extraction -Democratic Republic of the Congo, Botswana and Namibia -- barely compare to
countries receiving FDI for oil and natural gas production. The fastest recent FDI
growth in petroleum extraction on land has occurred in landlocked Chad and
Sudan, which receive $700 million and a whopping $3.5 billion respectively in FDI
(the latter sum coming mainly from China).
The third and most profitable category of investment goes into offshore drilling in <link
nid="117007">oil and natural gas fields belonging to Angola</link>, Nigeria, Cameroon,
Equatorial Guinea, Congo and Gabon. In Nigeria, for instance, 79 percent of FDI or
about $4 billion goes to petroleum projects. In Equatorial Guinea and Angola, the
vast majority of their respective $1.6 billion and $1 billion total FDI inflows go to
offshore drilling. Investors make big returns on these investments, in part because
of the relative scarcity of fossil fuels, but also for political reasons.
Why Offshore?
The key difference in this third category of investment is that, unlike land activities such
as commodity distribution and resource extraction, offshore enterprises lie a safe
distance from political and social conflicts. On land, renegades and militant factions tend
to disrupt or seize control of profitable enterprises in order to demand a greater share of
the revenues. Tribal and factional leaders use cash to maintain their militias and political
support rather than to build infrastructure. Even small militias can do great damage -- one
group blockaded the Congo River from 1998 to 2002, preventing the movement of food
and fuel and thus holding the entire region’s economy hostage for four years. Most
prominent among such groups are Nigeria’s Movement for the Emancipation of the Niger
Delta (MEND) and Angola’s Front for the Liberation of the Cabinda Enclave, both of
which thrive off of <link nid="112489">regional oil wealth</link>. It is far more difficult
for these groups to orchestrate a raid on an offshore oil platform than on a pipeline that
runs through their neighborhood. The former requires some funding and operational
capability as well as a disciplined militant mindset, whereas any hoodlum or thief can
vandalize a pipeline running through his backyard.
Yet rebels do strike against offshore projects. Last month, MEND attacked Shell’s <link
nid="118581">Bonga oil platform</link> some 60 miles offshore, cutting off 200,000
barrels per day. The move proved that MEND can threaten distant offshore sites and sent
shivers down the spines of foreign concerns with offshore operations and the African
governments whose budgets depend on taxing their revenue.
With global oil supplies stretched thin and demand higher than ever, prices are soaring
and feeding the fires of inflation across the world. Pressure is growing on governments to
take action and reduce prices -- hence, the United Kingdom’s offer to Nigeria to <link
nid="120120"> help train security forces</link> there who will in turn clamp down on
MEND and other militants that routinely damage infrastructure and shutter massive
amounts of oil output. The UK hopes that a more secure Niger Delta will enable
Nigeria’s oil output to creep back, nudging global supply closer to meeting demand and
thus lowering prices.
Britain, once the colonial power in the Niger Delta, wants to ensure that the important
offshore sector of Nigeria’s energy industry is safe for foreign investors. In doing so it is
avoiding difficulties rooted in Sub-Saharan Africa’s challenging landscape.