By Raj Kulasingam, Senior Counsel & Tiago Almedia RMB Infrastructure Finance Transactor
Angola has seen changes in the last 2 years. This began with President Jose Eduardo dos Santos stepping down after 38 years. President João Lourenço (aka “JLo”) who took power in September 2017 succeeded him when JLo’s People’s Movement for the Liberation of Angola (MPLA) party won 61.7% of the vote and an absolute majority of the legislature.
However, to many Angolans and Angolan watchers, this change has been a long time in coming and Angola urgently needs not only new leadership but also new investment particularly in infrastructure to support diversification away from its long reliance on revenues from the oil industry. Low oil prices have had a severe impact on the Government’s coffers. As with many other oil producing nations, there is an increasing recognition of the need to diversify the economy, develop the country, reduce the reliance on oil and attract foreign investment.
A good summary of where Angola is today is the following excerpt from a recent World Bank report:
Angola has made substantial economic and political progress since the end of the war in 2002. However, the country continues to face massive development challenges, which include reducing its dependency on oil and diversifying the economy; rebuilding its infrastructure; and improving institutional capacity, governance, public financial management systems, human development indicators, and the living conditions of the population. Large pockets of the population live in poverty without adequate access to basic services, and the country could benefit from more inclusive development policies.
The key point here is that, the major obstacle for investment into industries other than oil is the poor quality of Angola’s infrastructure – from its transport network to its power system.
The good (bad) old days
In the days of high oil prices and overflowing government coffers, the Government procured a massive building programme. According to the Center for Studies and Scientific Research, Angola has spent $120 billion on reconstruction. At its peak, spending reached $15.8 billion in 2014. Whilst on one level the state of infrastructure in Angola today is a huge improvement on what was left behind after the end of the civil war, this rebuilding programme has had its own issues.
Much of the rebuilding programme was financed by oil-backed loans to China with a significant number of contracts awarded to state owned Chinese companies and their sub-contactors. Many of these contracts were awarded with limited or no transparency and with rumours of corruption and pay-offs. This, together with lax oversight/project management on behalf of the Government resulted in poor quality construction/delivery in some projects.
So what do international investors think of Angola? Perhaps a good test of investors’ pulse was the ability of Angola to issue $500 million of its 30-year Eurobond programme earlier this year. Whilst perhaps the rather attractive return of 9.1 per cent may have had some influence on the success of the Eurobond, it does nevertheless show that there is appetite for investment in Angola.
China, china, china and others
Angola’s love affair with China keeps growing. According to a recent study by Boston University, Angola is the African country that has received most Chinese funding for the construction of energy infrastructure since the year 2000. For example the USD4.5 billion 2170 MW Caculo Cabaça dam (which will be the largest power plant in Angola when completed) is being built by the China Gezhouba Group Co. Ltd and financed by the Industrial and Commercial Bank of China.
The recent Economist Intelligence Unit (EIU) report on Angola says that relations with China would be given “high priority” by the Angolan authorities. Examples of how this has manifested itself include the:
recent agreement on entry visas between Angola and China; and
opening of a branch of the Bank of China in mid-2017 in Angola.
The EIU also states that:
“The government will also continue to seek loans from China to enable it to continue capital spending programmes to build highways and power plants,” despite greater attention from Chinese entities on the “risk of projects with dubious repayment capacity,”
For example, Angolan authorities hope to secure around $2.5bn from Exim Bank China for infrastructure and energy projects. Of which, $690m will be for the Corimba coast road, while $760.4m will be for an electricity transmission system at Lauchimo dam. In addition, $1.1b will be used to build a naval academy in Kalunga.
Angola also has plans to negotiate a loan of nearly $13bn from the International and Commercial Bank of China, out of which $1.28 billion will be used to construct a new airport in Luanda and $11.7 billion as a credit line to fund various other projects across the country. China is here to stay in Angola but hopefully the lessons of the past are that there needs to be more oversight on the quality of works plus greater transparency on how contracts are priced and awarded.
This not to say that there have not been investors from other countries including such as a number of European countries and Brazil. However China still dominates the landscape.
Notwithstanding the love affair with China, the Angolan government is also making efforts to woo foreign investors more generally and open up its economy.
Private Investment Law
Most Angola watchers/investors were delighted when the new Private Investment Law (the “PIL”) established a new Private Investment Agency for Angola (AIPEX) and removed two requirements that had previously stifled foreign investment:
the requirement for a foreign investor to have a local partner who had at least 35% of the business; and
the requirement for a minimum investment of USD1 million.
The PIL also contains provisions relating to:
government financing programs (micro funding, privileged interest rates, public collaterals and risk capital);
administrative support (simplified and privileged access to business and operational licenses or assets of private domain of public entities);
benefits for reinvestment into projects.
The details of some of these are yet to be finalised but the intent of the Government to provide these benefits/incentives is clear.
In addition, foreign investments above USD 1 million can now get certain tax benefits and incentives depending on fulfilling certain criteria. Whilst investments above USD50 million are able to get further special tax benefits and incentives provided that they are able to generate a certain minimum number of jobs (although the details of how this will operate is subject to further regulation).
Creating a level playing field
The Competition Act was passed to create a more level playing field in Angolan business by prohibiting anti-competitive practices such as restrictive agreements and abuse of dominant position. In addition, the new cabinet has implemented a number of measures to tackle certain long established monopolies controlled by the previous political elite and the “Dos Santos entourage”.
Angola’s plan to develop infrastructure
So coming back to infrastructure, what next for this critical sector in Angola. The good news is that the Angolan government has made infrastructure for development a key element of Angola’s 2018/2022 National Development Plan (NDP). Highlighted statement from the NDP on infrastructure include:
public interest projects (including in infrastructure) may be financed “through public investment or promoted by the private sector” and “public-private partnerships’;
a strategy to develop an integrated transportation and logistics network (with connectivity to neighbouring countries) built around an improved railway sector with priority in urban areas and the “installation of logistics platforms along rail lines”;
investment in air and water transport infrastructure relating to completing the construction of existing airports (especially the New International Luanda Airport) and ports, as well as improved logistics (air) and rehabilitation of existing infrastructure (maritime);
investment in logistics infrastructure is to undertaken exclusively through concession agreements with private operators;
increase the electrification of the country with an emphasis on the less electrified provinces (e.g. Bié);
General Law of Electricity revised to facilitate private sector involvement in the production and distribution of electricity;
recognition of the importance of the private sector’s investment, financing and management of the development and maintenance of electrical sector infrastructure.
However the question remains as to how the Government is going to attract private investment into this sector since budgetary constraints will limit Government spending. There is clearly a need to focus on “productive” infrastructure such as agriculture value chain, transport and any other industry that would allow imports substitution since Angola imports almost everything. The criteria and process by which Government will identify priority projects that will bring real value add to the economy, will be a key signal to foreign investors, that Angola is now serious about attracting FDI from reputable and long term investors.
Whilst a PPP law has been on the statute books for some time, the legal framework for PPPs has gaps. Getting a PPP programme going in Angola to attract private investment will require a lot more work and investment in governmental/institutional capacity and skills. One idea would be to partner with an organisation like the IFC to structure programmes for power, transport, waste management etc. This model has been undertaken in other African countries with some measure of success.
It is also hoped that traditional DFIs will look to invest in the private sector in Angola that in turn will pave the way for more commercial financings.
What next? The challenges ahead…
So whilst it’s early days for JLo, the general consensus seems to be that he is moving Angola in the right direction. This ranges from purging key members of the previous regime from positions of power, pursuing legal action against Dos Santos’s son (previous head of the Sovereign Wealth Fund) to changes to laws and regulations to promote FDI.
However JLo has a long way to go to improve Angola’s business climate. Although it gained 7 places in the World Bank report on business climate 2018 Doing Business (doingbusiness.org/404.aspx?aspxerrorpath=/rankings), its ranking is still at the bottom end of the table – 175 out of out of 190 countries.
On corruption, although JLo has taken a number of anti-corruption steps and made various anti corruption statements, Angola still stands at 167th place out of 180 in the Index of Perception of Corruption(transparency.org/news/feature/corruption_perceptions_index_2017).
A further challenge for Angola is that it has few “real independent” business people with experience. Previous so called “business people” were mostly linked to politicians and the previous regime where more often than not, had no real “skin in the game” with skewed risk/reward profiles.
A key issue that will need to be addressed to attract private investment is the Government’s ability to give long-term assurances that foreign exchange will be available for dividend repatriation. Dividend repatriation and currency control issues remain a key impediment to private sector investment in Angola. There have been talks of leveraging the balance sheet of the Angolan sovereign wealth fund but this has not been borne out yet.
Angolans are optimistic people and the country has abundant resources (e.g. -hydro, agriculture and minerals other than crude oil). On the surface it would seem that that JLo is taking the right steps to move the country forwards and open up the economy. For example:
some inroads have recently been made by private sector investors in power generation, particularly into renewable energy projects, although investors continue to battle to obtain “bankable” documents from Government agencies/bodies;
the opening up of the downstream Oil & Gas retail sector, where the French giant, TOTAL, will now join Sonangol and Puma;
removal of the new Luanda Port concession from Isabel dos Santos to issue a new international tender;
taking steps to increase investment in agriculture (estimating a growth of 5.9% in this sector for 2018) through projects such as the Quiminha Agricultural Development Project which aims to start exports to Europe in October; and
the Government has signed a US$101 million loan agreement with the African Development Bank (AfDB) that will be invested in the development of agricultural value chains in Cabinda Province.
On the other hand whilst there have been headline reports of purges of key members of the Dos Santos regime, the reality is that many others are still in place operating in the same manner as they did under the old regime. Furthermore, JLo’s image of fighting corruption and a new approach to government in Angola was dented by reports earlier this year that his daughter (Ms Jéssica Lorena Dias Lourenço) had chartered a $200,000 private plane to deliver her child in Washington USA. In the meantime, calls for the wholesale clean up and privatisation of state owned companies such as Sonangol, Taag (the cargo/transport company) and others persist with little sign that this is happening or will happen.
Only time will tell whether we are moving quickly to a a new, diversified and prosperous Angola. Whilst there are some green shoots of change and progress in the air there is much more to be done. Whilst Angolans and the world waits for this, there is always Angolan music and dance, from merengue to kizomba, to enjoy in the meantime…..