SOEs’ ROLE & INVESTMENTS IN AFRICA

SOEs’ ROLE & INVESTMENTS IN AFRICA Presenter: Mr. Bongi GasaDate: 03 August 2005

CONTENTS • Introduction: Infrastructure Integration in Africa. • “Africa First” – The role of SOEs in Africa. • The DPE’s – Africa Infrastructure Development Project. • Conclusion.

INTRODUCTION • Regional integration requires effective regional infrastructure – transport, communications and energy – to widen and integrate markets, achieve economies of scale, encourage participation of the private sector, and attract FDI and technology. • Yet despite efforts to integrate transport, communications and energy, gaps still exist in infrastructure and services across African economies – raising the cost of doing business and impending factor mobility, investment and competitiveness.

Introduction (contd) • Poor infrastructure is a critical barrier to accelerating growth and poverty reduction. • Transport costs are amongst the highest in the world. For example, shipping a car from Japan to Abidjan (CdV) costs US$1,500, but shipping that same car from Abidjan to Addis Ababa costs US$5,000 – UNECA, October 2004. • In some regions of Africa, farmers lose as much as half of what they produce due to lack of adequate post-harvest storage facilities. • According to ECA estimates, increasing the stock of physical infrastructure by 1%, could add 1% to the level of GDP. • In some cases the impact has been greater: eg. the Mozal smelter investment in Mozambique doubled exports, added 7% to GDP, created 1000s of new jobs, skills transfer, and facilitated SMME sector growth.

…Introduction (contd) • Between 1990 and 2002, relative to total infrastructure investment in developing countries in the order of US$ 150 billion, private sector commitments for infrastructure in SSA totalled only US$27.8 billion, and two thirds of this amount (US$18 bn) was for telecommunications. • A recent WB research paper estimates that SSA needs to spend around 5% of its GDP (between 2005 and 2015) on infrastructure investments, and a further 4% on operations and maintenance = totaling expenditure of US$20 billion/year.

…Introduction (contd) • The recent Commission for Africa Report – 2005 makes the following recommendation (and commitment towards funding) wrt Infrastructure Investments in SSA: • “ Africa needs an additional US$20 billion a year investment in infrastructure. To support this, developed countries should provide an extra US$ 10 billion a year up to 2010, and subject to review, a further increase to US$ 20 billion per year in the following five years. This should support African regional, national, urban and rural infrastructure priorities – ranging from rural roads, railways, ports, ICT and all other infrastructure needed to support greater integration of Africa’s regions and to enable Africa to break into world markets.” • Clearly, from the above statement, there’s a major role and opportunities for our SOEs. What are the necessary strategic interventions???

The Role of SOEs in Africa ‘AFRICA FIRST’ – A DPE PUBLICATION. • Perhaps it is important to premise our discussion on this sub-topic of “Role of SOEs in Africa” on the following quotation from the ‘Africa First’ booklet, because it clearly outlines government’s views and objectives on the topic: • “ From our perspective as government, it is important to note where SOEs operate, how they operate, what projects they engage in, and how their participation contributes to the larger agenda of African renewal and rebirth. At the same time, it is imperative that we ensure that SOEs involvement in Africa conducts itself with probity. It must integrate commercial viability and returns on investments with appropriate policies for procurement, the empowerment of SMMEs, the employment of local labour and services that serve to build up and encourage sustainable development in the countries of operation.”

ESKOM in Africa • Eskom has established a dedicated NEPAD team to mobilize Eskom’s resources to promote, develop and implement NEPAD related projects in the power sector. • Eskom’s “In Africa” grid vision is guiding the plans for many power projects and facilitates Eskom’s involvement in the development of southern African regional ‘power highways’ projects. These projects aim at developing the appropriate power transfer capacity in the SADC region and beyond, so as to exploit the economies of scale in developing new generation plants and maximise the power trading potential of the Southern African Power Pool (SAPP). • In addition to being a member of SAPP, Eskom is also a member of Union of Producers, Transmitters and Distributors of Electric Power in Africa (UPDEA) – an association of African Power Utilities.

ESKOM Enterprises • The following are just a few of the major projects in which ESKOM is involved in the continent: • Eskom Enterprises (EE) participates in a range of activities, from consultancy to engineering work and construction. EE operates in over 20 countries in Africa, and is pursuing business prospects in another 10 more. • EE projects are related to the development of additional electricity generation capacity and hydro programmes, and are mostly linked to the extension and consolidation of the rapidly growing African power grid.

Eskom Ent (contd) • EE’s Investment Division has concluded concessions controlling ownership in 5 hydro stations outside SA, with a combined installed capacity of 618 MW. – double combined Eskom hydro output inside SA. • EE has a contract with Uganda Electricity Concession (Nov 2003) which grants it a 20-year concession to operate and maintain the two hydro stations, Nalubale and Kiiri, with respective installed capacity of 180 and 200 MW. The NPV of this project to EE for the first 7 years is US$65 million. • EE has been appointed as the operator for the Manantali Project in Mali for the next 15 years. The contract includes management and operation of the Manantali Dam, a 200 MW hydro power station, including associated 225 kV transmission lines connecting 3 electricity utilities of Mali, Senegal and Mauritania.

Eskom Ent (contd) • EE is involved in a major cross-border infrastructure investment project in power generation, transmission and supply – the Western Power Corridor (Westcor) project – a joint venture project put together by 5 national power utilities of 5 countries, namely Eskom, BPC of Botswana, ENE of Angola, NamPower and SNEL of DRC. • The goal of the project is provide low-cost, affordable and environmentally-friendly energy and to ensure that economic development in the region is not constrained by shortages in energy supply.

Eskom Ent (contd) • The Westcor project aims to: • Build a 3500 MW Inga III hydro-power station in the DRC, and construct inter-connections of transmission power lines for the supply of power to the 5 countries. • Build hydro-power stations in Angola on the Kwanza River, and also in Namibia, with a possible power generation capacity of 6700 MW. The extended project, in its final phase, includes the development of Grand Inga – potential supply capacity of 40 000 MW. • Build interconnections stringed with fibre optic for broad-band telecommunication links to be leased to private sector operators. • Increase trade in electricity by investing in JV projects that will allow sharing of capital and development costs.

Eskom Ent (contd) • The estimated cost of the project is US$ 4 billion – 1st phase, and will be commissioned in 2010, subject to positive feasibility study outcomes. • The required Inter-Utility Memorandum and Inter-Governmental agreements already exist. The pre-feasibility and feasibility studies, inclusive of EIAs, have commenced.

Transnet and its subsidiaries • Transnet is SA’s and Africa’s largest integrated transport logistics company with an asset base of about US$ 7 billion and employs a workforce of some 76,000 people. • It is a multimodal transport enterprise, with active and niche market representation in road, air and rail passenger transport; road, air and rail freight transport; aviation, ports, pipelines; engineering and design work in rolling stock and rail infrastructure and telecommunications.

Transnet and its subsidiaries • Spoornet: - is the largest railway company in Africa, - southern hemisphere if we include the rail network, locomotives and rolling stock. Owns and operates 80% of Africa’s total rail infrastructure. The following are some projects across the continent: • Upgrading and refurbishing of rail lines e.g. between Eritrea and Ethopia, and many other lines in West Africa. • Development of railway corridors in SADC region. • Spoornet (and Transwerk) also leases refurbished and redesigned locomotives. Leases have been effected to the Sudan Railways Corporation, Comazar in Tanzania, SNCC Railways in the DRC, CFCO Railways in the DRC, BBR in Zimbabwe and Swazi Railways. Total revenue of these leases = around R215 million per year.

Transnet (contd) • Spoornet also has “Operate, Maintain and Upgrade” agreements in Zambia (Spoornet Zambia), with BBR in Zimbabwe, and Business Interface Agreements with railway corporations in DRC, Swaziland, Mozambique, Namibia and Botswana, resulting in the facilitation of millions of tons of cross-border traffic (mainly goods trade) per year between South Africa and these countries. • Transtel: - the company’s expertise in telecommunications originates from its position as service provider to Transnet and its subsidiaries.

Transnet (contd) • Transtel currently operates satellite based networks in 16 African countries, where more than 150 remote terminals deliver a wide range of mainly business services. • Transtel also provides radio access through Radio Train Warrant systems and provides maintenance for all related radio equipment on the Ressano, Garcia to Maputo project in Mozambique. Similar services are provided in Zambia and Swaziland. • Lastly, Transtel provides CFBU satellite services, to enable point-to-point data network systems for private customers such as banks, and telecommunications customers in Botswana, Zimbabwe, Zambia, Tanzania, Angola, Mozambique, Nigeria, Uganda, Namibia, Kenya and Lesotho.

South African Airways (SAA) • SAA is the largest airline company in Africa and is five times larger than any other African airline. • SAA’s main growth areas are Nigeria, Angola, Zimbabwe, Senegal, Ghana, Tanzania and Mozambique – where markets are growing in excess of 10% per annum. • In 2003, SAA acquired a 49% stake in Air Tanzania (ATCL). The remaining 51% is owned by the Tanzanian government. “hub and spokes” strategy.

SAA (contd) • SAA sees Africa as the biggest growth potential and key to SAA’s return to profitability. • Africa provides 16% of total SAA revenue. 40% of SAA African traffic, connects onto the SA International Network in JHB. • African air traffic is projected to maintain strong growth for the next two decades. • World-wide, GDP growth is the biggest driver in air traffic (passenger and cargo traffic), with a roughly 2 to 1 correlation.

arivia.kom • The company inherited the work of its component elements in Eskom, Transnet and Denel that were forged together to form arivia.kom. • Since 1998, these components have provided a fully computerised transport information system in Malawi, motor vehicle registration systems in Tanzania, Egypt and Zambia; police Ids in Uganda and Botswana; electoral registration systems in Lesotho and other SADC countries, social welfare payment systems in Uganda and Namibia; and driver’s licence systems Lesotho, Zambia and Uganda. Together these projects were valued at almost US$27 million in 2004.

arivia.kom (contd) • An Africa division was created in 2002, with a specific mandate to focus on the rest of Africa ICT markets, their requirements and how SA expertise could be leveraged to the benefit of all African countries. • The next move was then to establish regional offices for arivia.kom to have presence in countries with a high potential for growth in the ICT industry, and for these offices to serve as a hub for further growth throughout the regions.

arivia.kom • Through SA/Nigeria bilateral agreements, arivia.kom Nigeria Ltd, with a 49% Nigerian Govt shareholding, has been established – initial capital investment of just over R3 million. A further US$ 900 000 has been injected for projects funding and an additional US$ 900 000 as loan guarantees from aravia.kom. • arivia.kom also has a 70% stake in Ariel Technologies Botswana (Pty) Ltd – 30% held by Botswana business partners. The company is self sustaining and offers sound business opportunities for growth. • A regional office has also been established in Ghana, in collaboration with two Ghanaian ICT companies – aim is to have presence in Ghana and West Africa. Several business opportunities have been identified, especially in the banking and telecommunications sectors in the region.

Denel • Africa is a growing market for Denel, especially in the area of aircraft maintenance. • Denel is the primary defence products manufacturer on the African continent, with a much wider resource, product and service base than any other arms industry in Africa. • Denel fulfils a key role in the SA national defence capabilities, and in particular the mission support capabilities required by the SANDF for peace-keeping operations in Africa.

Denel (contd) • Since its inception in 2004, the Denel Centre for Learning and Development (DCLD) has trained students from Botswana, Namibia, Zimbabwe, Swaziland, Uganda, Kenya, Zambia and Angola. Training is in areas of aerospace engineering, avionics, civil aviation regulation, and management. • Denel, as part of its marketing strategy to enable its customers to become self-reliant, has sold many transfer-of-technology packages to African countries, thereby providing a growth catalyst to their technology and expertise base.

Denel (contd) • Denel is very active in the area of de-mining through one of its division – MECHEM. Mechem has been conducting humanitarian de-mining operations since 1991, most of these in Africa. • Mechem has successful de-mining operations in Mozambique, Angola, Uganda, DRC, Eritrea, Somalia and Sudan. • The company is currently in discussions with the Nigerian Defence Force to repair and upgrade their airport hangars and develop an aerospace maintenance and repair facility for their old military airplanes.

Infrastructure – DPE Strategic Interventions • DPE Perspective: • “There are three main problem areas that emerge out of our experience of leading infrastructure development in Africa. The first is the lack of coordination leading to an inability to provide a comprehensive project development service. The second is the risk profile of investment in Africa and the adverse impact this could have on the ability of the SOE to raise capital. Lastly, there is the difficulty of the regulatory and investment environment in many African countries.” • - Minister Alec Erwin, September 2004.

Africa Infrastructure Project • The Africa Infrastructure Development project is one of 5 DPE projects currently underway. It is a 3-phased project. • The focus is on reviewing existing SOE activities in Africa, assessing areas of future SOE involvement, and developing proposals for the optimal long-term management of these SOE activities in order to maximize the developmental impact through sustainable operations. • The ultimate aim is to develop an over-arching strategy for these SOE activities and designing an appropriate vehicle to oversee a coordinated and cohesive implementation, and financing of this strategy.

Africa Infrastructure Project (contd) • Phase One: - deliverables • A comprehensive report detailing the current state of SOE activities in Africa. • A knowledge base of lessons about risks and opportunities associated with doing business in Africa. • Phase Two: - deliverables • The objective of phase two will be to produce a report that provides a framework to prioritize future SOE activities and identify pilot projects that can be targeted to demonstrate success. • This will essentially be a scanning/analysis phase and a country (risk profile) assessment phase. The objective here is to identify ‘quick wins’ type of investments that will maximize the developmental impact.

Africa Infrastructure Project (contd) • Phase Three: - Developing and Documenting a Framework for Implementation of agreed projects in priority countries: • Defining specific objectives and targets; • Devising methods of involving the private sector and SEP’s where appropriate; • Quantifying of capital investment and working capital, and bridging finance where required; and • Identification of potential strategic financial partners and methods for leveraging the investment capital.

CONCLUSION • It is critical that we (as DPE) do a realistic assessment and evaluate the impact of SOE investments on the African continent. • Ensure that SOE investments in Africa are in line with their core business mandates and activities. • The massive infrastructure investment projects that SOEs have embarked upon inside SA dictates that as SOEs increase their investments in Africa, we need to protect SOE balance sheets from high risk investments – to avoid high costs of borrowing in the capital markets. • Assist African countries in which SOEs investments occur to strengthen and improve their policy and regulatory environments.

Conclusion (contd) • As President Thabo Mbeki once remarked – SoNA 2004: • “Other regions of the world, including the most developed countries, are hard at work to change their neighbourhoods for the better. We can only ignore or minimize this task with regard to ourselves at our own peril, driven by a lingering sense that we are not an integral part of the African continent. This – we will not do.”

Thank you

SOEs’ ROLE & INVESTMENTS IN AFRICA