The independence of South Sudan will significantly change the operating landscape of organisations in Sudan and its surrounding neighbours. South Sudan – the world’s 193rd country – will arrive on the global stage with the majority of Sudan’s oilfields to bolster its economic strength. However, it also brings with it the continuing threat of violence driven by a possible North-South war or, more likely, a South-South war driven by ethnic divisions and proxy militias vying for power. There are many risks facing an independent South Sudan and the foreign companies and organisations with current or potential future operations in the area.

Outlook

Following independence, South Sudan faces two main war risk scenarios. There is a real risk that a North-South civil war will reignite following the Southern choice for secession. However, with widening cleavages in the South, the greater threat is that a newly independent South would fracture internally into a south-south civil war.

Political violence in the South is highly likely in the one-year outlook. The South’s control over oil resources poses a threat to the viability of the North, which has an incentive to stir up instability in the South. In addition, the competition between rival tribes in the South is likely to become even more acute following the referendum back in January.

The Southern government will have a decision to make as to the future of oil production and export in its newly independent country. South Sudan will take with it 75 per cent of Sudan’s oilfields. However, following decades of war there is still very little functioning infrastructure in the South with no pipelines and refineries allowing it to export its oil directly. This decision on oil production will also directly impact whether the North decides to go back to war with its new southern neighbour. If the South decides to exclude the North from its energy industry by seeking to build its own refineries and pipelines for export, the North will lose a key revenue stream, which it is not yet in a position to replace. If the South postpones the development of its own oil infrastructure and instead decides to rely on existing pipelines and refineries in the North, it will offer the North a longer window for diversifying its economy and pose a less immediate threat to the Northern state’s economic survival.

Both the Northern ruling National Congress Party (NCP) and the Southern ruling Sudan People’s Liberation Movement (SPLM) are primarily concerned with maintaining power in their respective regions and are therefore likely to be willing to strike some deals to achieve this. This probably includes agreements to use Northern energy infrastructure (indeed, the South has already temporarily halted plans for a pipeline south through Uganda).

Although politics in the South have been dominated by the SPLM and its armed wing the Sudan People’s Liberation Army (SPLA) both during the civil war and since its end in 2005, this dominance is not without challenge. Independence would raise the stakes for southern groups, especially those who fear exclusion by the SPLM/A from political and economic power. The SPLA is largely composed of a collection of militias, loyal to their own leaders rather than the movement as a whole, and these loyalties are likely to come to the forefront when no longer faced with the need to present a united front against the North.

The 2010 elections exposed these fault lines, with reports of mutiny by SPLA forces supporting candidates who had lost to official SPLM opponents in Jonglei and Northern Bar el Ghazal. Those vying for power in an independent South are likely to try and use these localised conflicts to build support bases and to undermine their opponents. As many of these conflicts already result in regular violent confrontation, there is a risk they will escalate into a larger-scale civil conflict in the South if more powerful militia leaders increase the flow of arms and funds to local groups. Militias already receiving proxy support from the North are also likely to be drawn into these confrontations. Violence is likely to emanate from the key strongholds of the former militia, including Mayom County in Unity State, Pibor County in Jonglei State and Rumbek County in Lakes State.

Outlook for Investors

Investment in southern Sudan has grown significantly since the end of the war in 2005. Bordering countries have benefited most from increased trade. South Sudan was the top importer of Ugandan goods in 2009, accounting for nearly 90 per cent of Uganda’s trade. Additionally, Kenyan companies, such as Kenya Commercial Bank and East African Portland Cement, have a large presence in South Sudan and Kenyan firms have won road repair contracts in Juba.

An independent South Sudan is very likely to be given some significant ‘birthday presents’ by countries seeking involvement in this new trade, notably the US. For example, South Sudan is likely to have much or all of its share of Sudan’s national debt written off and US sanctions lifted.

However, poor capacity within the Southern government and ministries and a preoccupation by many ministers (who are former commanders and militia leaders) with securing political influence and the well-being of their personal constituencies (including militias), have made regulatory reform and development a low priority. Many government officials spend much of their time building political alliances and maintaining their support bases in preparation for the political competition that will follow independence and the possibility that this will involve violent confrontations. The development of a functioning civil service and solid legal framework for investors has therefore not materialised and individual officials are the key gate keepers for successful business. This is unlikely to change until the power balance within an independent South Sudan has been established, and probably not in 2011. It also presents risks to investors reliant on individual officials for their access.

Although oil is the main indigenous industry in Sudan, it only accounts for 14 per cent of GDP. The remainder is made up of foreign aid spending on infrastructure and development projects. Aid to South Sudan is very likely to continue past independence, freeing the government to make oil industry development its primary focus, rather than diversifying output into other sectors that sustain the population, such as agriculture. Politically, the commitment to oil development is profound. Sudan is sub-Saharan Africa’s third largest oil producer after Nigeria and Angola. Sudan’s oil reserves, most of which are located in the Southern Sudanese Muglad and Melut basins, are estimated to make up 0.6 per cent of the world total, and currently stand at six billion barrels.

The South is likely to attempt to maximise revenues from oil production wherever possible, increasing the liklihood of contract reviews for companies which had their terms agreed before 2005. Also, Chinese company contracts (who are seen as allies of President Bashir’s North) are likely to be scrutinised with a view to awarding their concessions to companies from countries that are politically allied with the South – companies from the West.

Local divisions in South Sudan and likely hotspots for violence

Minority groups in Equatoria suffered greatly during the civil war, often at the hands of the main rebel group, the Sudan People’s Liberation Army (SPLA). Equatorians are therefore suspicious and resentful of the southern government led by the Dinka-dominated Sudan People’s Liberation Movement (SPLM) and this widely held sentiment will make the region more vulnerable to violent confrontations between local militia and the SPLA following the referendum. During the   April elections, Western Equatoria was the only state where SPLM lost a governor’s seat to an independent candidate, Colonel Bangasi Joseph Bakosoro. He is now arming local ‘self-defence’ groups with nearly US$2 million worth of weapons.

In Upper Nile, the Nuer cattle herder populations dominate while a number of minority groups, including the Shilluk and the Murle, feel marginalised and excluded from power at the local and regional level. The Murle in particular are cornered within a volatile area of arms-laden Jonglei State, where multiple ethnic groups vie for limited resources and water access for substantial cattle populations.

In Bahr el-Ghazal, Dinka populations and their cattle-based livelihoods dominate, but Dinka groups living in border areas frequently face violent confrontation with Arab nomads, who seasonally migrate south in search of arable land and water for grazing their cattle.