Laura MacLean and Michael Burgess of Holman Fenwick Willan assess what the future holds for lawyers and their commercial clients in Africa in the New Year.
With Africa’s leading economies being resource led there can be no doubt that the hammer blows presented by one of the steepest falls in commodity prices as well as the oil price collapse have hit all leading markets hard. Now, the real question for the world’s second largest continent is whether 2017 will mark the year that governments and business across the continent shake off these setbacks, with a stabilising oil price and other commodity prices rebounding.
This article looks across a number of key sectors of African economies and considers the outlook for 2017.
2017 may well be the year commodities markets turn around from recent years of poor overall performance. With the World Bank raising its 2017 forecast for crude oil prices, and gold prices looking to hold or gain consistently, the potential advantage to African economies is clear -Africa is a resource-rich continent, from crude oil, coal and iron to gold, copper and many other precious and minor metals. But there remain significant questions including whether Africa can overcome the challenges it has faced, such as supply chain consistency and foreign exchange restrictions.
There has already been significant investment in the African economy by a number of the major trading houses. However, poor infrastructure and other issues have also caused some projects to falter. Consistent, reliable supply chains will be necessary if there is to be a genuinely significant jump in production of, and revenue from, African natural resources.
Whilst newcomers to the commodity markets have a more robust appetite for risk than some of the more traditional players, it is yet to be seen whether there is sufficient liquidity in the markets as a whole, and sufficient confidence in pricing, to justify the level of investment which will be required to overcome these challenges.
Doubtless for the strong-minded, there are opportunities to be taken, but sound analysis and management of the legal and other risks inherent in opportunities is a must.
OIL AND GAS
The African oil and gas industry has suffered considerably since the oil price slump in mid-2014: low oil prices have resulted in a cut in exploration and exploitation activities causing considerable delay, abandonment or cancellation of projects – as has been seen across the globe. Offshore projects have been hit especially hard, for example, in Nigeria, Angola and Ghana.
However, brighter days may lie ahead. If the implementation of the OPEC production cut can be combined with improvement of regulatory frameworks, as it is hoped will be the case, the much needed investment in the sector across the continent may return.
The firm commented on the progress made in East Africa towards reforming the oil and gas sector’s legislative and regulatory framework in our previous ALB article East Africa modernises its upstream oil and gas sector.
Reforms anticipated in South Africa and Nigeria are also awaited with interest. If pursued, such reforms could lead to the separation of oil and gas regulations from mining regulations in South Africa and increased certainty with regard to the sector’s regulatory regime in Nigeria through the passage of the Petroleum Industry Bill into law.
Optimism in 2017 for the industry in Nigeria, historically Africa’s biggest oil exporter, is enhanced by a reduction of security concerns.
Investors who have previously considered postponing ventures in the country will be encouraged by the government talks with militants to end crude pipeline attacks. Over several months in 2016, these attacks contributed to seriously reducing Nigeria’s output by 700,000 barrels per day. It is worth noting, however, that security remains a concern for investors across the continent.
Significant growth in demand for major infrastructure spending is expected in 2017, particularly in the renewable arena, as well as spending on conventional energy, airports, oil and gas and road infrastructure. This increase in demand will, however, face a number of significant economic and structural challenges.
The continent remains subject to domestic price inflation, as well as pressure from the recent low commodity prices and continued inadequate foreign exchange availability, which were touched on at the beginning of this article. These factors are highly likely to impact on project implementation and progress throughout the year. Additionally, the cost of tendering for projects is likely to remain high, due to lengthy tender processes resulting from inexperienced teams of government and quasi-government entities procuring projects.
Whilst many government agencies may not be geared for the anticipated increase in construction activity, (which may in turn result in continued bureaucratic problems for contractors, particularly in relation to the applicability of VAT, withholding tax and import duties to construction works and the ease of obtaining the required construction permits), it is evident that the appetite for work is there.
What remains to be seen is whether the construction industry’s enthusiasm for certain sectors, such as oil and gas and ports and terminals, is reflective of a general increase in willingness to do business on the continent.
Here again, there are opportunities for major infrastructure work for those who are able to take the time to analyse the risks, build the relationships and work through the issues.
For example, there is progress which Tanzania and Uganda are making with plans for construction of the 1,443 km Hoima-Tanga crude oil export pipeline (due for completion in 2020), the potential modification of the Tanzania-Zambia 1,710 km Tamza crude oil pipeline (or construction of a parallel gas pipeline) and the anticipated comprehensive upgrades to the Tanzania-Zambia Railway.
The railway network is also receiving a substantial boost in West Africa with the construction of a 3,000km long railway connecting Benin, Burkina Faso, Niger, Ivory Coast, Ghana, Nigeria and Togo. The project is set to complete in 2021.
PORTS AND TERMINALS
Opportunity in Africa in the ports and terminals sector is rife. Already at the start of 2017, Ghana opened a public tender for the development and operation of a new integrated container and multipurpose terminal in the port of Takoradi. Similarly, South Africa has requested proposals to develop a new terminal at Port Elizabeth and Kenya has launched the construction of a USD 3.4 million cruise ship terminal at the port of Mombasa in order to grow the country’s tourism revenue.
Notably, the Nigerian Export Processing Zones Authority has also granted a licence to the USD 2.5 billion Badagry Free Trade Zone and mega port project, marking a milestone in its development.
River ports and inland rivers to sea transport networks are another, often overlooked, area of potential growth. These require far less investment than maintaining road and rail networks and can be of particular use when cheaply transporting mining produce from isolated areas to the coast.
Competition in Africa is rising with both international shipping lines and terminal operators looking to increase their holdings. Pacific International Lines recently announced it wanted to invest in Africa and was considering terminals in Nigeria and Tanzania. All these recent announcements indicate that 2017 is set to be an exciting year in the ports and terminals sector and demonstrate the availability and willingness of foreign investors to engage in projects where the environment is right.
For the maritime sector, security has also been an issue. The release of 26 seafarer hostages in October 2016, the last remaining victims captured during the darkest days of the Somali piracy era, represented a symbolic victory in the fight to eradicate a peril that has plagued the Horn of Africa for nearly a decade.
Whilst progress has been made, security issues remain a constant threat to new investment on the African continent. The significant reduction in piracy off the East coast gives more confidence to vessels calling at North and East African ports, especially Mombasa and Dar es Salaam, and we may yet see a further contraction of the High Risk Area in the Indian Ocean in 2017.
In the Gulf of Guinea, security also remains a relevant issue. Marine kidnap for ransom is as prevalent as ever with the International Maritime Bureau reporting 34 kidnapped seafarers in 2016. The challenges of improving stability and security to secure outside investment will certainly remain in 2017.
A new year is a time to be optimistic and we hope that this optimism bears fruit in increased and enhanced business opportunities across Africa. It is important to note, however, that some of the countries where the best opportunities lie have challenging business environments.
With anti-corruption measures still being a work in progress in some cases and some bureaucratic hurdles still existing, working closely with local advisors and experts with an understanding of industry norms is the best advice to those wishing to invest.
The authors wish to acknowledge contributions from Sarah Taylor, Richard Booth, Richard Neylon, Matthew Gore and Alex Stoughton, all of Holman Fenwick Willan, to this article.