Privatizing Africa: A Way In To A Complex Economy?

Privatizing-AfricaSUB-SAHARAN AFRICA offers some tantalising prospects for businesses seeking to boost the high risk/high reward elements of their investment portfolios. But concerns over accountability and governance, as well as headline political and economic risks, mean that much of the world’s poorest continent will remain a niche market dominated by a few specialists, and will be heavily dependent on aid finance and officially guaranteed instruments to mitigate risks.

There are good news stories in the vast continent north of the Limpopo and south of the Sahara. Troubled economies from Cote d’Ivoire to Tanzania are being noticed by investors. In East Africa’s biggest (and arguably most troubled) economy, Kenya Commercial Bank (KCB) has reported its first full-year profits since 1998, helped by increased non-interest income and lower provisions for bad debts; after restructuring, Barclays Bank of Kenya reported a 40% increase in 2001 pre-tax profit.

Resources industries continue to attract substantial funds. At Calgary-based energy investment bank Waterous & Company, the belief is that, with international oil companies reassessing their Middle East options, “African countries are much more attractive to investors now”. signs that the US is keen for the share of African oil and gas to increase in North American markets point to further growth.

Niche players such as London-based HSBC Equator Bank and Paris-based Africa Merchant Bank are working on instruments that are being tailored to the African market. A handful of facilities such as the London-registered Termite Fund are focused on channelling capital into extractive industries.

Positive about Mozambique

Privatisations offer an opening to banks wanting to buy into previously closed African markets. In one of the continent’s most committed reformers, Mozambique, South Africa’s Absa Bank has joined several international banks by completing its privatisation purchase of an 80% stake in Banco Austral.

Mozambique has capitalised on its proximity to South Africa — Maputo is the closest port to Johannesburg — to open its economy to investment. Like other southern African economies, it is hoping an energetic commitment to creating an investment-friendly environment will act as an antidote to the poison of Afro-pessimism in recent months — spreading out from Zimbabwe as markets have reacted badly to president Robert Mugabe’s flawed re-election.

“Mozambique offers foreign investors political and economic stability, and a range of interesting benefits,” says Carlos Ramalho, head of merchant banking at Banco Standard Totta de Mocambique. Big ticket energy-related and industrial projects are under way, offering potential for Maputo-based banks and project finance specialists to become involved in major facilities. According to Mr Ramalho, whose bank is part owned by South Africa’s Standard Bank: “It would be wise and politically strategic to get local banks into all of these projects on a small level.”

Commercial participation in projects is good news for a continent that has become dependent on aid and multilateral financing. But except for short-term commodity and minerals-related financing, most of sub-Saharan markets “will have to remain in the hands of international financial institutions”, says a leading emerging markets banker. “Multilaterals provide the only really substantial support for economies where cash transactions will continue to dominate.”

Kenya under pressure

Even though Kenyan banks have reported improved performance, the economy in which they function remains under intense pressure — and suffers from the government’s poor record of governance. In a Reuters interview looking at prospects for 2002, KCB chief executive Gareth George said: “Given the uncertainties around, one, the donor support and, two, the political environment and the outcome of the next election, it is difficult to see any material improvement taking place over the next 12 months.”

Kenya must hold elections by the end of 2003. Meanwhile the country’s president, Daniel arap Moi, has consolidated his hold on power with the rebranding and strengthening of the ruling party as New Kanu. Mr Moi has seemed impervious to criticism from organisations such as the IMF, which suspended lending to Kenya in early 2001 as a protest against its lack of progress in tackling corruption.

Harsh realities in Nigeria

Most tantalising and frustrating of all is sub-Saharan Africa’s most populated country, Nigeria — oil rich, people rich (a population of more than 110 million) and, arguably, ungovernable. A deal in mid-April to repatriate another $1bn of funds stolen by the late Nigerian dictator Sani Abacha and his family brings to nearly $2bn the amount of looted money that president Obasanjo’s government has retrieved. The deal showed that Mr Obasanjo, who is a military leader turned advisory council chairman of lobby group Transparency International until his return to the presidency in 1999, was making progress towards his pledge to bring order to the chaos in Nigeria.

Central bank cracks down

Central Bank of Nigeria (CBN) is fighting to clean up the banking sector’s image, claiming successes in tackling advance fee fraud (better known as the “419” scam) and other abuses. In February, it closed an insolvent top 10 bank, Savannah Bank of Nigeria, and acted against 16 other Nigerian banks for currency trading abuses.

The reaction to the crackdown demonstrates how much reform is still needed. CBN’s move, which followed earlier central bank claims that there were no major problems in the sector, led to a run on smaller banks as depositors shifted their savings to bigger institutions. This underlined a move towards consolidation in a sector comprising 88 banks and employing more than 43,000 staff in 1750 branches. Three Lagos-based institutions hold around 43% of deposits: First Bank of Nigeria (FBN), Union Bank of Nigeria (UBN) and United Bank for Africa (UBA).

Macro policy issues must also be resolved. In March, finance minister Mallam Adamu Ciroma withdrew Nigeria from its IMF staff-monitored programme. Seasoned Nigeria watcher Francis Beddington of JP Morgan Chase says: “The decision to withdraw from the IMF deal was mainly for domestic political consumption.” With the government focused on getting Mr Obasanjo re-elected in 2003, “we would expect government actions to be populist, particularly on the fiscal side, irrespective of the formal outline of foreign policy”, he says.

Another Nigeria watcher says: “Running an IMF-style fiscal policy in the Nigerian environment was unsustainable before the elections.”

Without an IMF agreement in place, Nigeria will be unable to approach Paris Club governments to finalise its debt rescheduling. Mr Beddington points out that the government has said it will repay only $1.5bn this year. That is less than half the total due and of that, $600m will go to multilaterals, leaving only $900m to be split between Paris Club and commercial creditors. Arrears are likely to build.

Doing business in Nigeria will continue to be chaotic but there is potential, underwritten by oil and gas sales, and energy projects, for which big ticket project finance could be sought.

Foreign banks are looking on. Several senior executives told The Banker they were looking at the potential of Africa’s biggest market but were wary of over-committing themselves to a still chaotic business environment. South African banks are among those most interested, including Standard Bank Investment Corporation (Stanbic) and Absa Bank. Absa was involved in talks to buy into a significant local institution but pulled back because of concerns about lack of shareholder control.

Privatisation forays

Problems associated with investing in Nigeria were underlined with the collapse in March of the government’s $1.3bn flagship privatisation deal, involving state telecoms company Nitel. The sale of the 51% stake to local investment vehicle Investors International (London) was terminated when IIL failed twice to complete payment. The state Bureau of Public Enterprises (BPE) is now trying to sell Nitel shares through the stock exchange after second choice bidder Korea Telecom/Swedtel venture Telnet declined to return to the fray. The BPE said IIL had lost its $131.7m down payment, part-financed by FBN, which is a partner in IIL along with local notables and state governments. IIL had retained Portugal Telecom’s Tecnologia das Comunicadoes as its partner to manage Nitel; the Portuguese company had declined to take an equity stake.

Few countries can boast the range of problems that Nigeria poses to the investor. Even so, after a decade of structural adjustment across the continent, huge problems remain. In Ethiopia, president Tilahun Abai and 40 other senior Commercial Bank of Ethiopia (CBE) employees were arrested in January. They were charged with illegally granting loans and overdrafts worth some $105m. The African Development Bank (ADB) is due to hold its end-May annual meeting in Ethiopia, two years after war with Eritrea meant it cancelled its originally planned Addis Ababa meeting.

The arrests came as State Bank of India withdrew from a management agreement brokered in July 2001 to run CBE. This was an important element in Ethiopia’s agreement with the IMF and gives food for thought for ADB delegates who are arriving at Addis’s glitzy new Sheraton Hotel.