SPECIAL REPORT: Infrastructure investment risks amid mounting geopolitical competition in the Horn of Africa

Infrastructure investment risks amid mounting geopolitical competition in the Horn of Africa

The importance of trade and port infrastructure: a short history of ports in Africa

As countries across Africa are rolling out the African Continental Free Trade Area (AfCFTA) – the largest single market in the world – the need to reduce non-tariff barriers has become an urgent imperative to maximise the benefits of tariff-free trade. One tried and tested development and industrialisation strategy is to improve critical infrastructure, such as telecommunications, power production and distribution, road networks, air- and seaports.

This type of infrastructure expansion is nothing new to resource-rich Africa. In fact, it is precisely upon such provisions that  European countries expanded their power and influence in the region during the colonial times, with many building a string of ports along the African littoral, mainly to extract natural resources, ship slaves, or move citizens and goods in the metropolis to the colonies or vice-versa. However, comparatively little effort was made to develop the supporting or inland infrastructure and local communities, many of whom lived in segregated societies during white-minority rule. This is a factor which also partly explains the lack of development in the region.

The remnants of these ports exist to this day, and many are located along the West African coast. Comparisons can be made to China’s Belt and Road Initiative (BRI) which was launched in 2013, whereby Chinese state-owned or state-backed enterprises expand on ports and supporting infrastructure.

Lessons learned: COVID-19 pandemic and the impact on ports

The COVID-19 pandemic really highlighted the need for modern ports and infrastructure, as restrictions on commercial operations and travel caused unprecedented disruption to global supply chains from March 2020. Although global shipping lines ramped up capacity and operations from June, when large economies began opening up, knock-on effects from the disruption continued throughout the year and remained ongoing in some parts of the region in the second quarter of 2021.

To a large extent, the disruptions were due to a lack of synchronisation between shipping companies and landside port operations, adding to longer processing and anchorage times due to littoral states’ inability to meet the sudden surge in demand.

One important example is the Kenyan port of Mombasa – the so-called gateway to East Africa – where the surge in ship capacity overwhelmed port capacity, leading to increased costs and longer processing and clearing times. In turn, this highlighted important bottlenecks at the major port, caused both by delivery delays and an inability by local operators to clear the goods arriving at the port. Another example is the port of Lagos, which has seen a series of face lifts over the past decade, but the supporting road infrastructure is poor and leads to slow clearing times and trade disruption on a daily basis.

Growing competition fuels political risks

Market competition over African ports and a stake in their development has been ramping up over the past decade, particularly among global superpowers and regional hegemons. Nowhere is this more evident than in the Horn of Africa. Here, buoyant Chinese state-owned companies are competing against state-backed Gulf corporations, and Turkish conglomerates over the management of the region’s many ports and trade routes. With about 10 per cent of global trade passing through the Red Sea on a daily basis, the strategic economic importance of the region is hard to deny. At the same time, multiple foreign military forces have established bases in the region, particularly in Djibouti which holds the only US military base in Africa, underscoring this competition in this pivotal region.

Many factors may accelerate this intense competition. On the one hand, this competition is providing local governments and political actors with greater availability of investment and financing opportunities to choose what is considered more beneficial to them, and in turn increase their agency. On the other, the intense competition may provoke shifts in geopolitical alliances and relations. In turn, this may pose more political risks to companies, particularly in the form of expropriation and contract cancellation or renegotiation, as cash-strapped and indebted governments seek to maximise revenue in the wake of the COVID-19 pandemic and subsequent economic downturns. Joint ventures and private public partnerships (PPPs) may also be at greater political risks due to such geopolitical friction.

Gulf expansion in the Horn and beyond

While the Horn certainly plays an important part in the Gulf’s wider long-term development plan, the region has for a long time been relevant to Gulf states, particularly given their long-established historical, religious, cultural, trade and linguistic ties, as well as current diaspora links. Economic opportunities in a hyper-connected and competitive world, however, has elevated the Horn’s importance to Gulf states as evidenced by the establishment of the Council of Arab and African States in January 2020. While specific plans have not been outlined, the Saudi-based inter-governmental body, which includes Egypt, Eritrea, Djibouti, Jordan, Saudi Arabia, Sudan, Somalia, UAE, and Yemen, aims to foster more dialogue and economic integration, and cooperation in what is seen as a shared regional security space.

The region fulfils three strategic objectives for Gulf countries, particularly Saudi Arabia and the UAE. Firstly, expansion in the Red Sea region fits within their geopolitical ambitions to counter Iranian influence or proxies. By establishing greater presence in the Horn, they are able to crowd out any Iranian influence and secure support from local stakeholders in return for investments and grants. Secondly, their expansion in the Horn seeks to improve their access to food. The UAE imports about 90 per cent of its food needs, as local capacity to expand its limited agricultural output have been further impeded by desertification. It is anticipated that much of the region will become food insecure within the next decade. The Horn offers significant arable land, which remains under-developed. Saudi companies have for instance invested heavily in buying land in Ethiopia and Sudan, although output has not met initial expectations. Thirdly, expanding trade infrastructure – in this case seaports – helps maintain the UAE as a regional trade hub and ensure the smooth movement of goods in the wider Red Sea region, which forms part of Dubai’s and Riyadh’s long-term development plans of becoming regional trade hubs. DP World owns and operates the largest ports in the region, and has committed to significant upgrades, including at Bebera (Somaliland) and Bosaso (Puntland/ Somalia). It is also operating large ports in Saudi Arabia, on the Eastern flank of the Red Sea.

Beyond the Horn, DPW has established itself as one of the world leaders in port development and management, consistently ranking among the top-5 leading port developers globally over the past few years. 

Company

Country

Volumes

Ranking

PSA Holdings

Singapore

60.4m

1

China Cosco Shipping

China

48.6m

2

APM Terminals

Netherlands

46.8m

3

Hutchison Port Holdings

Singapore

45.7m

4

DP World

Dubai

44.3m

5

China Merchants Ports

Hong Kong

41.5m

6

Terminal Investment Limited (TIL)

Switzerland

28.8m

7

ICTSI

Philippines

10.1m

8

CMA CGM

France

8.3m

9

SSA Marine

United States

8.3m

10

Source: Lloyd’s Market Association, Drewry Maritime Research

With 80 ports across the world, DPW owns and operates the largest number of ports globally compared to its behemoth competitors in China, Denmark, and Singapore. In terms of volumes, it ranked fifth in the Lloyd’s Market Association’s 2020 ranking of global ports based on equity twenty-equivalent foot (TEU) measurements. It is also present across all continents, including North America and Western Europe where the company and its main subsidiary, P & O, is present at Southampton (UK), Antwerp (Netherlands), and Barcelona and Tarragona (Spain). In Africa, the company has a presence in Angola, Eritrea, Mozambique, Senegal, Somaliland, and Nigeria. 

Raising standards

While the rationale of ports remains the same as during colonial times – to reduce non-tariff barriers as much as possible – the global standards for conducting business have changed and place a greater burden on commercial operators. Nowadays, global businesses need to comply with national legislation and regulations, while also ensuring they meet international business standards and growing body of regulations, as well as impact criteria for local communities, mainly through the creation of jobs. Failing that may expose any contract signed with a sitting government with emerging political risks, such as contract frustration, cancellation or renegotiation, in the event of important government changes.

While European companies benefit from long historical links with Africa due to colonialism, and neo-colonialism, growing demands for transparency, good governance, and impact mean that projects and services have increased costs for doing business with Europe. European investors are also increasingly risk-averse, compared to their Asian and Middle Eastern competitors which has opened up the market to a growing number of investors.

Chinese investors’ rapid expansion on the continent over the past two decades, is largely explained by their ability to propose more affordable projects, and do not impose conditionality on investments as opposed to projects led by Western investors. In addition, many deals signed between Chinese companies and African governments are opaque, which has fuelled suspicions about corruption and a lack of accountability in such deals. However, much of the criticism made towards Chinese majority-owned projects is that they do not meet some of those growing requirements for transparency and good governance, or do not have a strong enough positive and sustainable social and environmental impact.

For companies based in the UAE, where authorities are attempting to modernise their economies and attract greater number of businesses to relocate, business standards of its domestic companies will also become important determinants for investments overseas.

This is even more imperative in jurisdictions with high risks of corruption and poor governance, and where foreign companies are implicated in market distortion tactics, influence-peddling, or bribery with some regularity. Such market demands have forced UAE-based companies to modernise their business practices in order to stay competitive to local communities. One testament to this, is DPW’s arbitration cases against the Djibouti Free Port Authority with regards to its expropriation from the Doraleh Container Terminal; the company has obtained favourable rulings over the port seizure from six courts since 2018. Its investment in the nearby Berbera port in self-declared Somaliland, may become a less risky venture in a region facing growing risks of instability and balkanisation over a series of security concerns in Ethiopia – the regional political and economic powerhouse. Some of the internal conflicts in Ethiopia, including in Tigray, but also between Afar and Somali regions, are posing growing threats to supply chains transiting major Ethiopian roads and railways via the port of Djibouti, and may make Berbera a safer transport link should the conflicts escalate over the coming year.

Long-term development, a double-edged sword

Given Africa’s economic growth potential, partly through the AfCFTA, modern and efficient infrastructure will become competitive advantages for local economies to exploit. This is evident in the large number of port expansions and upgrades which are currently being carried out by several global port operators. Nevertheless, choosing the right partner to carry out national ambitions of development and increasing trade in Africa is a complex act of balancing risks and rewards, with international business standards.

While European companies’ historical dominance in Africa has been challenged by China’s booming and foreign-oriented trade economy over the past two decades, port operators in the UAE are offering a third alternative for regional countries to choose from. Meanwhile, domestic efforts in the UAE to attract inward investment paired with their need to increase standards in-country are likely to spill over to overseas ventures to build a competitive advantage.