Sunday, May 3, 2009

Gulf investors target Africa

02 April 2009

Middle East firms are seeking opportunities in sectors including construction, telecoms and agriculture.

In January this year, one of Dubai's largest conglomerates, Dubai World, announced $16bn worth of investments in Nigeria's energy sector. The mega-deal, focused on the development of oil and gas reserves, is a firm statement of intent from the company and an indicator of Gulf investors' abiding interest in African economic opportunities.

The Nigeria deal is one of several major Gulf investments in Africa over the past two years. This burst of investment is putting Gulf investors into competition with Chinese firms across large tracts of sub-Saharan Africa.

Alongside the traditional mineral and resources sectors, Arab investors are increasingly drawn to the continent's construction, telecoms and agriculture sectors.

African states have actively encouraged Gulf investors into these areas, seeing them as a useful counterweight to China's influence. While Gulf financial aid to Africa has failed to match that of Western governments' over the years, foreign direct investment (FDI) flows from the Middle East are higher than those from Asia, North America and Europe.
Capital flows

According to the Dubai-based Gulf Research Center (GRC), in 2007, Gulf states invested $7.5bn in sub-Saharan Africa. This is higher than China's $6bn FDI to Africa, according to figures released in September 2008 by the UN Conference on Trade & Development (Unctad).

For the first months of 2009, Gulf investments of about $16.8bn have been announced, a figure inflated by a package deal between holding company Dubai World and the Nigerian government. It is likely that this money will be invested over several years.

Unlike the Chinese capital flows, which are structured through a mix of linked aid and project financing deals explicitly designed to underpin China's access to Africa's resources, the recent Gulf capital flows are mainly extended directly as FDI through state-backed corporate entities such as Dubai World.

There is some evidence of increased donor aid arriving from the Gulf in recent years. Development finance is extended through the region's bilateral and multilateral funds, which provide the foundation for official assistance programmes. Most Arab aid to Africa is geared towards large-scale infrastructure projects.

But although Arab aid is rarely tied to project finance, this may be changing. The Saudi Fund for Development (SFD) has amended its charter to allow it to provide financing and guarantees to support the kingdom's growing non-oil exports, alongside the financing of development projects.
Controlled expenditure

Loans are also starting to play a more important role in facilitating Arab investments. In December 2008, Qatar offered Kenya $3.5bn in loans to build a deep-water port at Lamu and rehabilitate roads in the area. The port is conveniently located close to where Qatar is looking to lease land for crop production – a key focus for recent Gulf investments in Africa.

Telecoms have also proved a major draw for Gulf investors. Kuwaiti mobile operator Zain acquired the Netherlands-registered, pan-African mobile phone network Celtel for $3.4bn in early 2005. Since then, the group says it has invested $12bn in Africa, making its presence felt across 15 African countries, including Nigeria, Ghana and Sierra Leone, as it seeks to service a market with a potential 400 million customers.

In February, Zain announced plans to roll out a mobile phone-based banking network in East Africa, which will be available to more than 100 million people in Kenya, Tanzania and Uganda. Inorganic expansion is a key part of its strategy. In November 2008, Zain said it would spend $4bn on acquisitions in Africa.

However, Zain will spend less on expanding its African networks this year than it did in 2008, company officials acknowledged in February. Spending on infrastructure is set to fall to $1-1.5bn, from $1.6bn last year.

Zain's aggressive service roll-out puts Kuwait at the top of the pile of Gulf investors in Africa, but other Gulf states have also identified the continent as a key strategic target. The UAE's range of investments extend from Dubai World's tourism projects in Rwanda to the group's ports subsidiary, DP World's, concession to run Dakar port in Senegal.

Ports are a key focus for UAE companies. DP World's first foray into Africa was a 20-year concession, awarded in 2005, to run Djibouti port on the Horn of Africa. The container and oil terminal is set to become a major hub of economic activity on the east coast, following its opening in January 2009.

State-owned Gulf firms such as DP World have moved swiftly into related transport areas. Dubai World subsidiary Istithmar World Aviation, for example, bought into Djibouti's national carrier, Daallo Airlines, in early 2008. Other Gulf investors are courting neighbouring Ethiopia.

UAE telecom firm Etisalat has pioneered the Emirati investment drive in African telecoms. It became the core shareholder of Atlantique Telecom, a mobile phone provider active in several French-speaking African markets, in 2005, and holds a controlling interest in Zanzibar's Zantel. Sudatel, partly owned by Etisalat, paid $300m to launch mobile phone operators in Mauritania and Senegal in January 2009.

While telecoms and infrastructure play to the Gulf corporates' advantages, Africa's substantial minerals resources are also a key draw for Emirati investors. Dubai Aluminium teamed up with Abu Dhabi's Mubadala Development Company in 2007 to buy bauxite concessions and a refinery in Guinea.

Gulf investment is attractive to African states for more reasons than just money. The Gulf's state-backed development funds offer benefits that Western investors are sometimes unable to match. The Dubai World investment in Dakar port is one example. When the government invited tenders for the management concession at the port in 2006, the incumbent operator, France's Bollore group, could not offer to build a new terminal as quickly as the Dubai investors.

The result was that Dubai World – free from the near-term commercial constraints and financial transparency requirements on the French group – secured the contract, with plans to complete the terminal by 2012.

A major factor that is pulling Gulf investors towards sub-Saharan Africa is the arable land, and the promise of long-term food security that the continent offers.

This issue rose up the agenda of the Gulf states in 2007, as food price inflation hit consumers, against a backdrop of declining domestic food output because of water shortages and poor arable land. Just 1 per cent of the UAE land mass is considered suitable for cultivation.

In return for Africa's plentiful fertile land - only 14.8 per cent of Ethiopia's arable land is cultivated - the Gulf offers access to cutting-edge agribusiness technology.

Qatar has been seeking out investment opportunities in the agriculture sectors of several African countries and is considering leasing 40 square kilometres of public land for crop production in the Tana River Delta region in the north of Kenya.

Africa is not the only destination for Gulf states seeking to secure food supplies. Qatar has also announced plans to invest $200m in Cambodia's agriculture, while Saudi Binladin Group is considering investing more than $4bn to grow rice in Indonesia. The UAE's Abraaj Capital acquired 324 square kilometres of farmland in Pakistan in mid-2008.

However, it is Africa that offers the best opportunities. The continent is more than a quick-fix solution for the Gulf's long-term economic needs. The ports, transport and telecoms investments have also had a material impact on Africans' lives, from mobile phone banking to booming trade volumes at Djibouti port. But the long-term strategic benefits accrued by Gulf investors may outrank even these.