Regional Trends in FDI and PRI The Case of by aos51173


									Regional Trends in FDI and PRI:
The Case of the African Trade Insurance Agency

                                              Compared with the second half of the 1990s, FDI flows into sub-Saharan Africa
                                              (SSA) during the first half of this decade have nearly doubled. The increase has
                                              been felt primarily in the extractive industries (oil, gas and mining), but also in
                                              the service sector, particularly in telecoms, finance and transportation. FDI flows
                                              in 2005 reached a record level of US$15 billion, but then declined to about US$12
                                              billion in 2006.1
                                                    With oil prices at an all–time high and commodity prices well in excess of
                                              historical levels, there are good prospects for SSA to continue attracting FDI into
                                              the extractive industries. The region’s buoyant growth is also a stimulus to FDI
                                              in other sectors. The latest World Investment Prospects predicts that FDI into
                                              sub-Saharan Africa will continue on an upward path until the end of this decade.
                                              However, in relation to global FDI flows, or even to flows to emerging markets,
                                              SSA’s standing is low and that is unlikely to change. Furthermore, sub-Saharan
                                              countries without significant natural resources or with small domestic markets,
                                              lack of infrastructure or skills and generally more difficult business environments
                                              are unlikely to be significant beneficiaries of the upward FDI trend.
                                                    South Africa has been critical to FDI flows in the region. Large swings in
Compared with the second                      FDI flows to South Africa took place on account of a large merger and acquisi-
                                              tion (Barclays’ purchase of ABSA) in 2005, followed by net divestments in the
half of the 1990s, FDI flows                  subsequent year. In general, FDI into South Africa is more diversified than in
                                              other resource-rich countries in Africa. There have been a number of invest-
into sub-Saharan Africa                       ments in a diverse range of sectors, a recent example being the acquisition of a 20
                                              percent stake in South Africa’s Standard Bank Group Ltd. by the Industrial and
during the first half of this                 Commercial Bank of China.2
                                                    In addition to South Africa, China, India, and increasingly Middle Eastern
decade have nearly doubled.                   Gulf states have made significant investments in SSA in sectors, such as natu-
                                              ral resources, infrastructure, and tourism. Companies from Brazil, Malaysia, and
                                              Russia are actively investing in the region as well. Interestingly, the United Arab
                                              Emirates have invested approximately US$380 million in Sudan. As for China,
                                              its Ministry of Commerce estimates that Chinese direct investment into Africa
                                              during 2000-2006 was US$6.6 billion – with much of the activity coming from the
                                              private sector. It is estimated that over 800 state-owned Chinese companies are
                                              actively engaged in Africa today.3

                                                   Risks Covered by ATI
                                                   •	 Political	risk	insurance	for	trade	&	investment
                                                   •	 Mobile	assets	insurance
                                                   •	 Unfair	calling	of	bonds	insurance
                                                   •	 Inter	&	intra-regional	and	domestic	whole	turnover	credit	insurance	
                                                      with typical payment terms of up to 12 months
                                                   •	 Comprehensive	 nonpayment	 cover	 for	 single	 (structured)	 credits	
                                                      - Private obligors;
                                                      - Parastatal obligors; and
                                                      - Sovereign obligors

This article was contributed by the African
Trade Insurance Agency.

      Perceptions of political risk – one    reaching out to investor groups across      ATI – Widening its capac-
of the principal deterrents identified       SSA, as well as Europe and Asia.            ity and reaching out beyond
by World Investment Prospects of an
otherwise rosy global FDI scenario –         ATI Perspectives on FDI and                 SSA
continue to be present in SSA. There         PRI Trends
are reasons for optimism, however.                                                       ATI works in cooperation with a global
Although still present, the continent is                                                 network of public and private institu-
facing far less incidents of open con-       Since ATI’s launch in 2001, ATI has         tions including the world’s second larg-
flict. In addition, the region is benefit-   received to covered project, trade and      est ECA, Atradius, several Lloyd’s of
ing from economic growth with aver-          investments transactions with contract      London syndicates, and the Multilateral
age GDP growth rate for SSA of 6.1%          values in excess of US$350 million.         Investment Guarantee Agency (MIGA),
for 2007. Growth across the region is        Investment insurance represents 47%         a member of the World Bank Group.
reducing the perceived threat of trans-      of ATI’s overall business and has been      Through these cooperation agree-
fer restrictions. Additionally, govern-      issued for projects in a variety of sec-    ments, ATI has been able to expand
ments are doing more to allay inves-         tors as seen in the following image.        its capacity to cover projects by sharing
tors’ fears by actively courting foreign          Interest in PRI coverage has come      project risks with partner organiza-
investor groups and starting to reform       from Europe, South Africa, Mauritius,       tions. In fact, ATI has been involved
in order to create improved business         regional development banks and China        in US$206.7 million in deals as of
environments. According to the World         with South-South projects compris-          November 2006 although the organiza-
Bank’s Doing Business project, Ghana         ing 46% of ATI’s portfolio. To date,        tion allocated only US$29.9 million to
and Kenya were amongst the top ten           clients have had high levels of inter-      these projects.
reformers globally in 2006/07 and were       est in Expropriation and War, Civil               In support of growing trade
joined by Mozambique, Burkina Faso,          Disturbance and Terrorism coverage.         and investment links with Asia,
and Mauritius as the top reformers for            Central Africa is becoming an          ATI has signed a Memorandum of
SSA region alone. In SSA, 52 percent         increasingly active part of ATI’s portfo-   Understanding with Sinosure, China’s
of the countries introduced at least one     lio with significant coverage provided      Export Credit Agency, with the objec-
reform last year to improve their busi-      for Burundi and Democratic Republic         tive of supporting Chinese FDI into
ness environment.                            of Congo (DRC). Interest has been           Africa with increased insurance capac-
      South-based investors are respond-     primarily in sectors such as telecom-       ity provided by Sinosure.
ing positively, with China and India in      munications, infrastructure, and natu-            South-based investors are increas-
particular at the forefront. While their     ral resources. For example, ATI is set      ingly active in SSA. ATI has done much
interest in extractive industries has        to provide political risk coverage for      to reach out to these groups where PRI
been capturing the headlines, Chinese        a US$100 million rehabilitation of a        is being considered for projects. In par-
and Indian investment in SSA has             copper mine in DRC and has already          ticular, India and China but also across
also gone to apparel, food processing,       issued such coverage for a bottling         the SSA region itself.
retail ventures, fisheries and seafood       plant, a residential housing project
farming, commercial real estate and          and a cellular technology project in
transport construction, tourism, power       Burundi.
plants, and telecommunications. As
well Russia has been actively re-engag-
ing in SSA, with rough estimates that
the investments of four companies
alone - Rusal, Nornikel, Alrosa and
Renova - in the region amount to US$5             Sector Exposure Since Inception
billion. Gazprom is also seeking to
strike investment deals or partnerships
in the region, and already has an agree-
ment with Sonangol (Angola).
      Multilateral and private financial
institutions are also helping investors
mitigate political risks in their invest-
ments. In terms of number of guaran-
tees issued, SSA was the top destina-
tion for the Multilateral Investment
Guarantee Agency of the World Bank
Group in FY 2007. The African Trade
Insurance Agency (ATI), which in
addition to export credit insurance also
insures investment projects, has been

The Benefits of ATI’s capital
and legal structure                                  Members
                                                     Burundi, DRC, Djibouti, Eritrea, Kenya, Madagascar, Malawi, Rwanda,
Capital restructuring increases ATI’s                Sudan, Tanzania, Uganda and Zambia
ATI was founded with US$100 mil-
lion in seed capital that was granted
by the World Bank’s International              membership seeks to continue to facil-        million funding constitutes a Line
Development Agency (IDA) in form of            itate investment in Africa by formally        of Credit to the PTA Bank from KBC
individual loans to each member coun-          expanding its ability to provide cover-       Bank NV of Belgium.
try. ATI’s underwriting capacity for           age for projects in the region, thus               This support demonstrates how
each country was linked to these coun-         broadening its potential investor pool.       ATI, can directly support the Burundian
try contributions.                                                                           economy, by providing the missing link
     ATI is in the process of complet-                                                       needed to unlock the financing from a
ing capital restructuring that converts        Case Studies                                  financial institution overseas, ATI is
these individual IDA credit contribu-                                                        creating growth in the Burundian pri-
tions into common equity, thus creating        Shelter Afrique Transaction                   vate sector in a sustainable manner.
one common pool of funds that can be           ATI provided coverage for a US$2 mil-         ATI also demonstrated that banks can
used for projects across member coun-          lion loan issued by Shelter Afrique,          indeed increase their financial expo-
tries. This process will be completed          a pan-African habitat and housing             sure to viable transactions, by mitigat-
by 31st December 2007. ATI is better           organization, for a residential hous-         ing country risks which otherwise pre-
able to diversify its portfolio of projects,   ing project in DRC. This loan was             vent the provision of capital by lending
increase country exposure ceilings, and        issued to Société Immobilière Khasam          institutions for private commercial
seek additional capital contributions.         (SIMKHA), a private investor who also         transactions.
At the end of the process, total paid up       provided an additional US$3 million in             This policy contributed towards
capital will be over US$134 million.           capital for the project. The funds would      an important objective in creating an
                                               be used to construct two residential          enabling environment for private sec-
Benefits of being a pan-African                blocks in the Gombe site in Kinshasa          tor activities and diversification of the
organization                                   in an attempt to address the demand           economies of ATI member countries
•	 Economies	of	scale	that	benefit	mem-        for residential housing.                      towards manufacturing activities.
   ber countries                                                                             Brarudi is one of the largest manufac-
•	 Increased	portfolio	diversification         One of the effects of the war on DRC          turing firms in Burundi, with its share
•	 Access	 to	 reinsurance	 on	 interna-       has been a significant need for infra-        of taxes representing well in excess of
   tional markets                              structure and housing development.            one third of all collected tax revenues
•	 Status	as	supra-national	organization	      Kinshasa, in particular, is facing a          in Burundi. It is also among the larg-
   means not subject to domestic politi-       substantial shortage of housing and           est employers in Burundi. With on
   cal risk                                    considerable growth in the city’s popu-       average 50% of employment in Africa
•	 Individual	 country	 obligations	 on	       lation. The Shelter Afrique - SIMKHA          being in the agricultural sector, this
   guarantees without operational over-        project fits in with the overall priorities   diversification is essential throughout
   sight                                       and plan that Government of DRC has           the continent.
                                               prepared with assistance of UNDP and
Membership                                     UN-HABITAT.

ATI has been working to expand its             Brarudi Transaction
membership from its initial 7 found-           ATI issued a Political Risk Insurance
ing members and has added 5 African            policy to Eastern and Southern African
countries to its ranks. Currently,             Trade	 &	 Development	 (PTA)	 Bank	           Footnotes
Liberia is in the process of joining and       to cover a US$10 million loan which
a series of West African countries have        was being extended to Brasseries et           1.   Economist Intelligence Unit, World
                                                                                                  Investment Prospects to 2011: Foreign
expressed growing interest in joining.         Limonaderies du Burundi S.A.R.L
                                                                                                  Direct Investment and the Challenge of
However, ATI is also looking beyond            (BRARUDI), Burundi’s only beer and                 Political Risk, 2007.
the boundaries of sub-Saharan Africa           soft drinks bottling plant. The PTA           2.   “Foreign investors eye Africa with new
to Northern Africa, India, and China as        Bank loan covered the cost of replace-             enthusiasm,” Reuters, December 14,
well as potential corporate and multi-         ment of the first bottling line and relat-         2007.
lateral entities.                              ed plant, machinery, equipment and            3.   “800 Chinese state-owned enterprises
     ATI has seen growing interest in          services to be supplied by Heineken, a             active in Africa, covering every country,”
                                                                                                  Mining Weekly, September 28, 2007.
African markets and by broadening its          shareholder in the Brarudi. The US$10


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