SADC Investment Policy and Regional Integration THE OIL FACTOR: CONTEXTUALIZING FDI AND PRIVATE INVESTMENT POLICY IN ANGOLA

ÂUREA MOUZINHO ECONOMIC DIPLOMACY PROGRAMME

Context  Angola is a southwest African country sitting on 1 246 700 km2 of land between the Atlantic Ocean, Namibia, Zambia and the Democratic Republic of Congo (DRC). It has 18 provinces (including the oil-rich Cabinda enclave).  Luanda is the capital and smallest city occupying just 2 257km2 of land.  According to the latest census (2014), the population is estimated at 24 million, and it expected to reach 60 million by 2050. 26.7% of the population lives in Luanda, and 62.7% is urban-based. Just under 40% of the population is below 29 years old (13.4% between 15 and 29).  Angola gained independence from Portugal in 1975. Immediately after a 27-year civil war ensued, which resulted in death of at least 500,000 people while over one million were left internally displaced.

Economic Indicators  Angola has an extensive natural resource endowments: diamonds, oil, gas, copper, gold, wild life, forest, fossils, water and arable land.  However, since independence oil and diamonds have been the most important economic resources. Oil has been the basis for rapid economic growth since 2002. Between 2001 and 2010 GDP grew at an annual average of 11.1%, the highest in the world. Growth rates between 2005 and 2007 were as high as 20 percent, although recently growth has decelerated significantly reaching only 4.5% in 2014.  Despite the rapid growth the economy, the economy remains highly undiversified. Oil accounts for 95% of exports, 46% of GDP and 80% of fiscal revenues.  The global downturn in oil prices has severely affected the economy: 26% cut on budget, rapid currency devaluation, slowing growth (est. 3.8% in 2015).

Social and political indicators Social and developmental challenges remain:  Over half of the population can be considered poor.  Unemployment rate is estimated at between 26% and 50%.  High and rising social inequality (Gini coefficient: 42.7).  Human Development Index has consistently been among the lowest (0.526 in 2013, ranked 149).  Since the end of the civil war (2002) indicators have improved, although progress has been slow due to political authoritarianism, neopatrimonialism and pervasive corruption.  Performance in governance indicators remains poor: 161 out of 175 in the Corruption Perception Index, minimal budget openness, general little confidence in the rule of law, repression of freedom of expression, association, free media …

FDI into Angola by CAPEX (Jan 2003 – Sept 2015) Year

No of Projects

Capital Investment (US$m)

No of Jobs created

2003

15

12 569.0

4 271

2004

15

8 779.2

5 332

2005

17

557.1

4 237

2006

19

2 746.2

1 056

2007

26

5 715.1

3 063

2008

49

11 451.1

11 603

2009

52

5 806.3

6 088

2010

44

1 329.5

6 607

2011

34

382.5

1 614

2012

23

2 958.6

1 439

2013

20

622.1

3 391

2014

10

16 131.8

3 558

4

262.5

546

328

69 311.1

52 805

2015 (Jan-Sept) Total

Source: fDi Intelligence, Financial Times Notes: 1 All Capex figures shown in the table are in USD - United States Dollar millions. jobs data includes estimated values.

2

Capex and

FDI Inflows  However, majority of FDI (98.4%) relates to the execution of oil-related projects, and net FDI has been at a deficit since 2003 (BNA, 2013).

Top 10 Angolan Sectors receiving FDI (Jan 2003 – May 2015) Industry Sector

Capex (USD Million)

Projects

Coal, Oil and Natural Gas

65575.8

32

Real Estate

4137.72

2

Financial Services

1241.9

129

Building and Construction Materials

1197

11

Beverages

841.2

20

Communications

559.01

13

Business Services

220.4

4

Metals Hotels & Tourism

487.77 477.2

8 6

Food & Tobacco

401.3

12

Source: fDi Intelligence, from the Financial Times Ltd. 2015 Notes: All Capex figures shown are in USD – United States Dollar Million; Capex and Job figures include estimated values

Angola – Reasons for low non-oil sector FDI  Complex and unpredictable business environment  Lack of an integrated and sustainable investment strategy for non-oil sectors  Perceived high political risk associated with constantly changing legal framework and weak judicial system.  More attractive regional markets

Case Study - Lobito Transport Corridor (LTC)  Main component is the Benguela Railway (CFB) built between 1902 and 1926, with the purpose of transporting minerals from Katanga (DRC) and the Zambia copper belt to European markets through the Port of Lobito.  The CFB suffered extensive damage during the fight for independence and the civil war, and closed off in August 1975.  The railway upgrade and rehabilitation was essential focus of the government’s infrastructure development agenda in the post-war period.

Case Study - Lobito Transport Corridor (LTC)  Chinese FDI has played an important role in Angolan reconstruction.  The China Railway Construction Corporation (CRCC) invested around US $1,83 million in the rehabilitation of the CFB, which was done in partnership with the Angolan government.  Other important developments in LTC: Port of Lobito, roads infrastructure, logisitics platforms, airports.

LTC - Domestic Relevance • Est. 40% of Angolan population lives within the catchment area of the corridor, 2.5 million in urban areas. • The corridor runs through the Angolan hinterland, which has a large rural (and poor) population, and which has extensive yet untapped agricultural potential. Between 12 to 20 million hectares of arable land with good potential for grazing and accessible water sources. Less than 10% of the arable land is worked, and agro-industry is still rare. • Angola is a net food importer, and the potential for the LTC to stimulate domestic production and lift much of the rural subsistence-farming populations out of poverty is substantial. This should also help redress regional asymmetries.

LTC – Regional Relevance • There is a strong colonial legacy to the corridor – to carry commodities. It seems that in the short-to-medium term that is still the most productive use of the corridor at the regional level. • Est. Katanga’s and Zambia’s deposits of copper and cobalt account for 40 percent and 50 percent of the world’s total reserves. • The LTC represents the shortest and quickest distance to the European and American markets for these goods. • However, difficulty in accessing finance to complete the railway and road developments beyond the Angolan border has meant that most of these minerals continue being carried through South African ports.

LTC – The Inconsistencies of Angola’s Domestic Policies • Angolan is the classic case of the Dutch disease. The oil crisis has brought to light the inconsistencies and unsustainability of the government’s implementation of its post-war development plan. • Driven largely by political reasons, the government used oil revenue for the rapid expansion of infrastructure (housing and transport), albeit with not as substantial public investment in other development priorities (i.e. education, health, agriculture). • The narrative of diversification of the economy has intensified in the context of the economic crisis, which also provided some motivation for the passing of the new investment bill.

Investment Policy Framework New Private Law of Private Invest (PIL) passed in August 2015.  Eliminated the minimum value for foreign investment  Decentralization of investment decision-making: ANIP vs Ministerial departments  Fiscal incentive scheme based on: location, creation of local jobs, extent of local ownership, etc.  Sectors with mandatory association with at least 35% Angolan shareholding: energy and water, hospitality and tourism, transport and logistics, civil construction, telecommunication and information technologies, mass media. PIL provides a comprehensive legal framework. However, it is unlikely to lead to improved FDI inflows because: • It lacks to power to change structural and political barriers that stand in the way of investment; • Creates further uncertainty about the credibility of the legal system.

Existing BITs •

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Luanda has standing bilateral investment treaties (BITs) with Portugal, South Africa, the United Kingdom, Italy, Russia, Spain and Germany, and Cape Verde; although only half of these are in force (Cape Verde, Germany, Italy and Russia). However do these BTIs make investment more accessible/more attractive? As of 2011, the top six FDI investor countries in Angola were the United States, France, the United Kingdom, France, China and Brazil and Portugal.

Outside of the private investment regulation framework… • The government used oil revenue for the rapid expansion of infrastructure (housing and transport). Little public investment in other development priorities (i.e. education, health, agriculture). • As a consequence, there is a gross shortage of local skills to meet the existing staff capacity requirements of the new infrastructure. This despite high unemployment! • Investors find local content requirements (70% of the Angolan staff) extremely hard to meet, and with tight visa controls the cost of qualified local labour increases substantially. • The Lobito Port is still an importing hub, and most goods are still carried on the roads from the coast to the highlands.

Outside of the private investment regulation framework… • Trade restrictions remain high and the policy environment is extremely volatile. Laws are passed by executive decree so there is a risk that unexpected laws might adversely affect returns to investment. • Eg: January 2015 Decree imposing trade quotas on beverages, food, livestock, cement, beverages, etc.

Concluding Remarks •

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Angolan’s FDI framework seems to be quite comprehensive. However, there are a number of policy inconsistencies with the trade policy and developmental priorities, which coupled with unfriendly business environment and uncertainty about the rule of law that compromise FDI flows. Investors are attracted by the profit potential of the Angolan market, despite the legal framework. Angolan has huge productive potential outside of oil. Agriculture and tourism are a few areas to consider.

Concluding Remarks •

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There is an urgent for the government to be transparent about the country’s strategic priorities and to work towards harmonizing these with a sustainable domestic and regional investment promotion strategy. How the government manages the current crisis and the result of the next democratic elections will be an important role not only for FDI, but for the country’s general economic welfare.

Âurea Mouzinho [email protected]