Warning on east African security

Dr Elizabeth Stephens, Head of Credit & Political Risk Advisory in the credit, political & security risks division of brokers JLT, told Commercial Risk Africa that they are keeping a close watch on the region. “There are a number of different factors affecting the region,” she said. Firstly the oil finds in Kenya are close to the Ethiopian border, which combined with the oil in South Sudan, has led to intense speculation about future opportunities in Ethiopia and Eritrea. However, she warned, while new finds in the extractive arena may present some exciting opportunities, there are also some growing risks. Dr Stephens pointed to Mozambique where infrastructure constraints around coal mining projects were brought to the fore in January 2013 when Rio Tinto announced a US$3bn write-down of Rio Tinto Coal Mozambique (RTCM).hideAlong with technical concerns about the quality and productivity of the Benga and Zambeze mines, purchased from Australian miner Riversdale for US$4.2bn in 2011, Rio Tinto attributed the loss to limitations placed on exports by the slow development of rail links and shipping infrastructure. Dr Stephens continued: “Political factors are a significant impediment to infrastructure development. A number of state agencies are involved in the approval and facilitation process of infrastructure projects and are afflicted by weak capacity and coordination. Bureaucrats are inexperienced with commercial infrastructure projects and the involvement of the state logistics parastatal CFM whose stake-holding is required by the government. “CFM overseas all of Mozambique’s rail and port systems and, as its mandate cuts across a number of other agencies, thwarts the decision-making process. CFM is highly politicised and is an outlet for the political and commercial interests of President Armando Guebuza and the ruling FRELIMO party. “Speculation abounds that the government stymied infrastructure projects of benefit to Rio Tinto to the advantage of rival producer Vale and to penalise Rio for being perceived to avoid capital gains taxes in 2011. Rio’s plans to fund a privately owned and operated rail line without a stake for CFM or capacity for multiusers, a government priority, further soured relations. “In contrast, Vale, since it began operating in Mozambique in 2004, has developed more favourable relations with the government and CFM and partnered with CFM on infrastructure projects, including the Nacala corridor. “Vale has not escaped the constraints imposed by slow infrastructure development and revised down estimated annual coal exports in November 2012 for the year from 4.9m to 2.6m tonnes due to the logistical constraints of the Sena line. That aside, Vale is enjoying advantages over its rivals; it has predominant management of the Nacala line and exporting the most coal on the Sena line.” Kenya too suffers from infrastructure constraints and anyone moving to develop the new oil fields will first have to oversee the building of long highways—or railways—to reach an otherwise fairly inaccessible part of the country. To develop the oil fields, Kenya will also need to rework its existing legislation and that could include a change in approach to ownership. Dr Stephens said the indications are that ownership would have to be around 35% Kenyan. Added to that, there are suggestions that oil wealth should be divided among the Kenyan counties on a pro-rata basis, which would mean the Kenyan president handing much of the revenue to areas dominated by the opposition. Similarly in Uganda, concerns are mounting about political upheaval. Standing president Yoweri Museveni would require a change in the constitution to stand again and would need large sums to fund his next campaign—something that could come from the secret oil concession auction to be held in June. Overall, Dr Stephens warned: “In terms of investment, now is not a bad time to go in, but be aware of what might happen in the next few years. It really is a case of hope for the best, prepare for the worst.”

Warning on east African security

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