African Investment: Driven by Terrain?

Via Stratfor (subscription required), an excellent analysis of how the rugged terrain of Sub-Saharan Africa prevents industrialization and modern infrastructure from taking hold and engenders chronic political instability. As a result, the article notes, most foreign investment goes to resource extraction, especially offshore projects protected from the disruptions that are rife on land:

“…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. At the same time, 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. Over 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 when many African nations have bad credit and, unable to access international capital markets, depend on FDI more so than other developing economies.

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. Sub-Saharan 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. On average, North African Islamic nations draw twice as much FDI as the rest of the continent combined.

Map: Major rivers in sub-Saharan Africa

Map: Railroads in sub-Saharan Africa

Plateaus, Rainforests and 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 roads and rails 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, and the world’s largest desert gives sub-Saharan Africa its name and its northern border. South of the Sahara, the impenetrable tropical rainforests of the Congo Basin extend through Cameroon, Gabon, the Republic of the Congo and the Democratic Republic of the Congo (DRC), 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) as well as hydroelectric dams interrupt the river’s course, making it navigable only on certain stretches. South Africa’s Orange River is entirely un-navigable, 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.

Graph: Average FDI for extractive commodities in Africa

Infrastructure and Investment

Given sub-Saharan Africa’s geography, it should be no surprise that infrastructure there is generally poor. African governments have proved unwilling to reinvest in infrastructure built by European colonists. Moreover, FDI needed for infrastructure projects 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 sub-Saharan region, 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 into 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 supply chains necessary to deliver goods to market. The second category is investment in infrastructure for the extraction of resources 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 the ocean provides against violent disruptions on land.

FDI in the first category, distribution infrastructure, mostly takes the form of cross-border 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 DRC 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 for 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, the DRC, Mozambique, Nigeria, Botswana, Namibia, Zambia and South Africa, but investors also support exploration in Ethiopia, Somalia, Uganda, Ghana, Kenya and Mauritania. Mineral and metal export depends on railway links, and 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 — the DRC, Botswana and Namibia — barely compare to countries receiving FDI for oil and natural gas production. The fastest, most recent growth in FDI for petroleum extraction on land has occurred in landlocked Chad and Sudan, which have received $700 million and a whopping $3.5 billion respectively in FDI. (The latter sum came mainly from China).

The third and most profitable category of FDI goes into offshore drilling in oil and natural gas fields belonging to Angola, Nigeria, Cameroon, Equatorial Guinea, Congo and Gabon. In Nigeria, for instance, 79 percent of the country’s 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….”

This entry was posted on Monday, July 21st, 2008 at 12:26 pm and is filed under Algeria, Angola, Chad, Democratic Republic of Congo, Nigeria, South Africa, Tanzania, Uganda.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

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