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Opportunity Knocks

Opportunity knocksJC Strategy’s Alastair Masser says Africa’s growing oil profile promises to deliver a sizeble dividend, both for the continent and for British businesses willing to embrace the continent’s commercial potential

The untimely death last month of Ghana’s President John Atta Mills set in chain an orderly if unexpected transition of power that has impressed many. Long considered an exemplar of democracy in West Africa, Ghana’s response was assured – there was no constitutional crisis, no power vacuum. For some this came as something of a surprise. But for those who follow Africa more closely, it was anything but. Perceptions of Africa are changing, albeit slowly. Views of the continent as one kept afloat solely by development aid no longer hold currency, and once-definitive analyses of a ‘hopeless continent’ have been gradually debunked. Instead, Africa is being viewed increasingly through an altogether different prism: commerce. And nowhere is this new approach more  evident than in the excitement generated by Africa’s oil boom. The UK’s oil sector has had a long if not always distinguished association with Africa, and remains at the forefront of British private sector engagement with the region’s frontier markets. As increasing numbers of new discoveries add to Africa’s ever-growing oil profile, the future looks promising, with both corporations and Africa itself set to reap the rewards.

Africa is undergoing a transformation that is difficult to ignore. Since 2001, average growth across the continent has outpaced the global average, and today seven out of the world’s ten fastest growing economies are African. These economies appear to have navigated the uncertainty which followed the global financial crash remarkably well, buoyed in large part by high commodity prices. A crisis which has led to sclerotic growth in the eurozone and elsewhere has slowed African gains, but not reversed them. Several of the continent’s principal economic powers enjoy membership of the coveted ‘7 per cent club’ of developing nations, who can expect to see their economies double in size over the course of a decade. Such fiscal momentum could only be dreamed of closer to home, where average growth in the eurozone stands perilously close to an unenviable zero per cent. In stark contrast, Africa looks poised to continue on its impressive trajectory, as significant macroeconomic reforms serve to tame inflation and open new markets to international trade and investment.

The death of President Mills coincided with what is only the latest in a litany of new finds of oil amongst Ghana’s offshore Jubilee field. The recent discovery at the Deepwater Tano (DWT) Block appears to serve as further confirmation of the growing potential of Ghana’s Western Basin. Discovered in 2007, the Jubilee oilfield is believed to hold a reserve of around 500 million barrels and has the potential to yield a further billion – figures which would catapult Ghana to a position as sub-Saharan Africa’s fifth largest oil producer. Yet large scale discoveries of this kind are not unique to Ghana. Between 1989 and 2009, sub-Saharan Africa’s estimated oil reserves more than doubled to close to 130 billion barrels, equivalent to almost 10 per cent of the world’s known total. And the region is likely to yield considerably more – the US Geological Survey estimates that within the continent’s interior more than 70 billion barrels may lie undiscovered. With global demand increasing at between 1 and 2 per cent each year, such prospects have already placed Africa firmly on the radar of those nations whose appetites for oil are greatest.

As this new scramble for Africa’s natural resources gathers momentum, it offers the continent a unique opportunity to accelerate its own economic development. The IMF predicts that if Ghana’s oil revenues are utilised effectively the West African nation could become a middle-income country within a decade, reducing its reliance on development assistance, which currently comprises around 10 per cent of national income. But for many states, harnessing the potential of such resource wealth has proved a major challenge. In spite of the promise long-associated with major discoveries of oil, they have all too often failed to serve as a stimulus for broader economic development. Ultimately, too few have seen the benefits, and this is a balance that must be redressed. Some welcome progress is already being made. As both governance and stability improve across much of the continent, multinational corporations are willing to take an increasingly long-term approach to investments, generating a real potential for a more sustainable symbiosis with their partner governments. As African governments come under increasing popular pressure to better utilise oil revenues, the oil corporations themselves could help provide a solution.

Oil companies are placing ever greater emphasis upon corporate social responsibility, which now comprises a key tenet of their engagement in overseas markets. This is of course undeniably good business, as improving the investment climate makes it easier for UK companies to raise finance. But there is more to it than that. Increasingly, the interests of corporations and their host governments are coinciding. UK-based Tullow Oil, which operates in Ghana, is one such example of a company taking a more enlightened approach to its commercial environment. Around 80 per cent of its employees now working in the Jubilee fields are Ghanaian; an effort to address a long-standing source of past tension towards foreign corporations whose operations utilised little if any of the local labour force. As both corporations and governments seek to maximise their revenues, there now exists a clear convergence of interests.

Yet a key question remains – how can those looking to do business in Africa do more to drive development whilst at the same time complementing their own operations? One seemingly obvious answer lies in addressing the continent’s grievous infrastructure shortfall. Africa’s infrastructure deficit – estimated at around US$31 billion per year – is a major obstacle to doing business, for companies both large and small. Access to reliable roads, power and water are prerequisites for economic growth. The World Bank estimated that even token improvements to Africa’s infrastructure could increase growth by as much as 2 per cent. For the majority of firms operating in the continent’s fastest-growing economies, reliability of power supply is more of an obstacle to doing business than corruption, crime or red tape. In helping to tackle
such challenges, foreign investors would reduce their own costs, and simultaneously deliver a sizable development legacy.

What is abundantly clear is that neither developing nations nor oil corporations themselves can capitalise upon Africa’s resource potential alone. Yet foreign investors are increasingly willing to take a more nuanced and informed approach to market entry, and are increasingly able to look beyond now-outdated stereotypes of the African marketplace and weigh each commercial opportunity – and country – on its individual merits. And these merits are perhaps as diverse as they are numerous. Whilst the UK’s oil corporations have, to a large extent, been the ones to establish this commercial bridgehead in sub-Saharan Africa, opportunities for investment are not limited to oil exploration. Africa is believed to be home to over half of the world’s untilled arable land, and numerous nations south of the Sahel are now seeking overseas investment in order to capitalise on the enormous latent potential of a burgeoning agribusiness sector. In addition, it is thought that as little as 5 per cent of the continent’s vast hydropower potential has to date been tapped. Lake Malawi, Africa’s third largest lake which covers around a fifth of the nation’s territory, offers exciting prospects for everything from hydropower to tourism. In order to fully explore and exploit these opportunities, the Malawian government is seeking investment to develop these and other burgeoning sectors.

Africa has changed markedly over the past two decades, and it is clear that perceptions in the UK have failed to keep pace. Only now are we beginning to witness a more informed engagement, one led in large part by private sector corporations who are able to look beyond African stereotypes and embrace the continent’s commercial potential. As more and more African nations integrate themselves effectively into today’s global economy, it will become ever more apparent that it is the commercial ties that bind. For British businesses Africa represents a remarkable opportunity. And as more and more African nations begin to harness their own economic potential, each promises to deliver a genuinely sustainable form of development that has hitherto proved elusive. Resources needn’t be a curse for African nations, but nor will they be a panacea. Yet as competition for resources becomes an ever more pressing concern, they give the continent a strong hand in what could just be Africa’s century.


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