The Inside Track to East Africa's Economies
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A New Start? Business Potential and Risks in Newly Independent Southern Sudan Print E-mail
Friday, 04 February 2011
Southern Sudan has overwhelmingly voted in favour of a secession, showing the hope that independence will lead to a better, safer, more equitable future. The challenges, however, are formidable. Louise Khabure analyses what needs to concern investors.

Southern Sudan’s desire for independence has been clear since the Sudan Government’s National Congress Party (NCP) signed a peace agreement with the Sudan People’s Liberation Movement (SPLM), the chief political party in southern Sudan, in 2005. The Comprehensive Peace Agreement (CPA), while addressing various aspects of governance such as wealth sharing, security arrangements and political participation, also foresaw a referendum to determine whether the south wanted to stay in a unified Sudan or become an independent nation state. This referendum, effectively the last stage of the CPA, took place on 9 January 2011.

The cut-off for granting independence is a 60% voter turnout, a criterion met easily, and an estimated 99% of the people who participated voted for secession, according to provisional results. A secession will grant Southern Sudan the freedom to decide over its political, economic, social, cultural and religious future. Expectations are sky high and mood resplendent over what separation from the North will bring for Africa’s newest nation. Southern Sudan’s economic potential is not in doubt. However, after decades of war, poverty is endemic, the region is underdevelopped and lacks even the most basic infrastructure. Apart from oil and subsistence agriculture, the South produces very little.

But in this underdevelopment and demand for even the most basic consumer goods lies solid business potential. For anyone considering investing in this post-conflict oil economy, this is a huge gamble: Massive demand contrasts with destabilising political events and societal attitudes, no more than 100 km of road network, no power or electricity framework, unavailable transport system, unreliable mobile and satellite communication, improper and insufficient housing, a poor and uneducated population.

Hanging on to Your Assets: Expropriation Risk
The biggest risks that foreign investors faced in developing countries were an immature or a volatile political system that increase risks of expropriation. Today, there is a better climate because of stronger international law and the symbiotic nature of growth in other emerging and developed economies, leading to a reduction of these incidences. However, South Sudan is still at the very beginning in this respect as KK Security, a regional security firm, found out: The company, one of the biggest private employers in South Sudan with over 600 local staff, had its assets and vehicles violently seized by powerful officials from the Nuer tribe, the second-biggest in the territory. Its accountant, a Kenyan, was held hostage while he was told to countersign cheques. In a raid to free him, other Kenyan workers were beaten up by a local mob.

This situation has set alarm bells about doing business in south Sudan. Unlike other emerging and pre-emerging markets where host countries have learnt to play the game and extract value from foreign enterprises through more subtle instruments of regulatory control, KK Security lost their assets through outright seizures. Therefore the risk that the government will discriminatorily change laws, regulations or contracts governing an investment – or will fail to enforce laws cannot be ruled out. This further worsened by the lack of clear scope for taxation and compensation.

However, David Raad, a former American diplomat who runs a private consultancy to bring business to South Sudan, has a different position: He argues that investors are at a higher risk of incurring losses if they do not do a thorough due diligence of the people they include in their management/ownership circle, fail to oversee and enforce management plans, pin their businesses success on a relationship with a political actor as happens frequently, make assumptions that basic market principles and standard business practices are not applicable in this pre-emerging market, or fail to fight for their legal rights in the local courts. The reason that investors flock to political figures is because the law states that a company must have a southern Sudanese shareholder. Most assume that it is necessary for a foreigner to partner with a Sudanese entity in order to do business, but in fact this requirement can be met through a nominee shareholder’s agreement with any competent Sudanese lawyer. However, for larger projects, there is more pressure to engage with politicians and government officials.

The March 2009 Economist Intelligence Unit survey found breach of contract, restrictions on the transfer and convertibility of profits, civil disturbance, government failure to honor guarantees, and regulatory restrictions to be more significant than expropriation risk. This means investors will need to engage with politicians one way or another. Raad recommends that investors get into some limited partnerships with the communities in which they reside, even though it is time consuming. However, the reality is that coupled with proper business practices, investors in Southern Sudan must develop proactive political management strategies that will counteract a government official’s incentives to divert investor returns. To do this, they will need to identify and engage some of the local politician’s power bases. As with the management of any risk or uncertainty, political mastery can become a source of competitive advantage in addition to a means of avoiding losses. Consulting with a well positioned ex-government officials or stringers on retainer can also help. The difficulty in this is of obviously finding the right person as any new investor will approached by a large number of people offering help.

Nascent Legal and Regulatory Framework
Laws, regulations and contracts are useful only if they are enforced, whereas shifting laws and regulation or the lack of enforcement can create uncertainty. Even when contracts can be enforced legally, the KK Security example shows that inventive politicians can circumvent them, and that a significant level of impunity still exists. Southern Sudan does not have a clear governance framework and still has a long way to go: The country will still have to finalise all outstanding issues in the negotiations with the North including border demarcation, oil revenue sharing, and citizen rights in the post-referendum period as well as the status of the contentious oil rich Abyei region.

The South’s legal framework is still rudimentary, despite the efforts since the signing of the CPA. The process of constitution making has just started. President Kiir issued a Presidential decree forming a Constitutional Review Committee that will review the current constitution of Southern Sudan as the region moves to statehood.

Despite the unclear legal environment, in 2008 a provisional law for the establishment of an investment authority was set up in order to provide for the promotion and support of investment into Southern Sudan and in the creation of the administrative, operational and governance framework for the authority. This offers a guide for businesses. The International Finance Corporation’s Law Library, a free online service, provides a breakdown of general laws and regulations related to the business environment in Sudan. Any investor will need to look through these resources. However, in business practice, the right connections help to keep problems from occurring in the first place, and if they do, one has a better chance at mitigating the loss.

Priorities and Problems
South Sudan is in the process of charting a still uncertain course of stabilisation. Security has been declared the number one priority. The political differences, dissidents and the delicate security situation continue to be a matter of serious concern. The south is not a monolithic entity and if the violent challenges to the July 2009 poll results are anything to go by, the problems will continue into the country’s independence if not handled carefully.

There are positive signals: President Kiir issued an executive order pardoning army officers who rebelled or fought against SPLA forces before and after elections urging them to rejoin army ranks and to move freely in the south. In the latest round of South-South dialogues, concrete issues of governance and security were discussed and agreed upon. Notably present at this meeting were key SPLM critics. These are crucial efforts to forestall any future fighting and security problems, even if their success is far from guaranteed.

Externally, neighbours and the wider internationally community has come to Southern Sudan’s support in the post-referendum phase. The US is active in negotiations and has dispatched US senator John Kerry to bolster the diplomatic efforts of their Special Envoy, Scott Gration. Uganda has strengthened its military presence along the borders with Sudan while Kenya is engaged in diplomatic talks with both regimes in Khartoum and Juba. These efforts are all aimed at thwarting any form of bloodshed that was witnessed previously or a possible return to war. Although still in the initial phase, President Kiir has already made formal application requesting entry into the East African Community (EAC), and the East African Legislative Assembly is also preparing a framework that will allow their entry into the regional economic block. There is plenty of goodwill to ensure that peace prevails so that development and investment can begin. Of course this goodwill is not just driven by regional security concerns, but also by business interests of Southern Sudan’s immediate neighbours, Kenya and Uganda.

In 1997, the US placed economic sanctions on Sudan as punishment for sponsoring terrorism and for oppressing the minority Christian population, mainly Southerners. US president Barrack Obama has promised to lift these sanctions if the secession referendum were conducted in a free and fair manner. However it remains to be seen if this promise will be fulfilled. In the past, this had been a concern for US American firms, but it can be assumed that the sanctions will not affect the new country. It is likely that the situation in Darfur and the governments conduct towards resolving this crisis which is taking place in another part of Sudan will also affect this sanction issue despite praise from Washington over the voting.

For investors to survive in this challenging security environment, with a weak rule of law, they need to seek some align with local counterparts and key personalities whilst ensuring that their corporate ethics and principles are not violated, and their reputation not threatened. It is also useful to been seen making a contribution to the welfare of the local host community. For example, the Kenya Commercial Bank (KCB) Group gave KES16m (USD220,000) for the construction of a primary school block. Whereas this may not tackle the more complex security and political problems in south Sudan, KCB’s contribution is regarded as recognition of the need to support the South’s youth with adequate educational facilities. Such corporate social responsibility initiatives can ensure better cooperation with the communities the business operates in, but also with the government.

Focus on Agriculture
After security, agriculture is the second priority. The southern half of Southern Sudan, western Equatoria, central Equatoria and eastern Equatoria used to be a breadbasket during the war days. These regions have very good soils and very good rainfall. In principle, there is a high potential for agriculture which can be enhanced through improving productivity, soil and farming methods. Strengthening agriculture will crucial to diversify the economy and, at the same time, improve food security and decrease poverty rates. To date, more than 80% of the population depend on agriculture, often subsistence agriculture, for their livelihoods.

Dr. Benjamin Barnaba, the country’s information minister, declared in a recent meeting in Nairobi that Southern Sudan has the capacity to provide food for the whole country. The government is convinced that investors will stream into the country to embark on mechanised commercial farming as was practiced in Zimbabwe. However, this will be impractical without a resolution of the land tenure problems and an enactment of a land law. Most of the land is community owned and is held in trust by its leaders. Negotiations on land transfer will tend to be protracted and could easily spark violence amongst the population.

While subsistence agriculture still provides an income for the vast majority of people, commercial, large-scale farming is an uncommon practice for the southerners, and so the necessary support structures are missing: There is no functioning farmers union nor a coherent agricultural extension services. Machinery, access to materials or seeds is non-existent, rainfall data or a weather station absent. Without infrastructure, produce cannot be transported. And government’s budget allocations also paint a different picture from Barnaba’s ambitious plans: Agriculture receives an allocation of 0.8% of the annual budget, in sharp contrast to other ministries as for example the Prisons Ministry that has up to five times more of the budget. Without a clearly mapped out plan, agricultural production will not reach the scale envisioned by top officials, neither from small farmers nor from large commercial farms.

Basic Challenges
Other basic challenges include lack of electricity that heavily affects business. Everything is powered by generators and the plans to build power generation capacity are far from complete. This is costly for business and also restricts local manufacturing capacity. Similarly, access is impossible or very limited at best. Juba airport needs an overhaul and the process of building roads and railways needs to be expedited, not to mention the lack of all other social amenities.

The absence of human capital is another chief problem. Most businesses are forced to train the locals on basic service delivery and technical aspects either in Juba or neighboring countries. Work ethic is virtually non-existent and relationships with workers can be very difficult. Due to monetary and time investments required, the alternative has been to recruit outsiders ‑ but this is equally costly and can be extremely risky. Foreigners have been subject of biases and targets for extortion or violence.

Without clear efforts to build cohesion between locals and foreigners and to create local opportunities for building capacity, the situation may worsen after independence. With expectations running high, the locals will expect jobs that they are, however, hardly trained to do. This is not helped by the fact that Southern elites have been benefiting from corrupt practices and in government jobs. A source remarked that there are over fifty Hummers – the luxury SUV in Juba driven only by locals. Therefore if expectations remained unchecked, this widening inequality maybe a powder keg for a return to armed conflict. With a little money and a tribal ideology, dissatisfied individuals can be easily co-opted to create serious unrest in the country.

Potential
A senior bank official operating in Juba outlined some of the growth areas for potential investors, although he notes that both in the short term and in the long term, oil will dominate the economy: it provides 98% of the country’s budget, and Southern Sudan still contains several untapped reserves that will draw the bulk of investment.

Others are timber production and, considering the vast expanse of virgin land, agriculture as mentioned. The Equatoria Teak Company (ETC), a Norwegian-British group, has already begun operations through the Forestry Ministry, cutting trees and replanting plantation areas. Recently, they completed their first sale of the first-class wood, and have set up a low-tech saw mill in the town of Nzara The wood is sorted into grades, the most expensive of which is worth up to USD5,500 per cubic metre. Although a geophysical survey has not fully taken place, it known that he country has a good amount of other minerals: there are huge deposits of gold in Kapoeta, Eastern Equatoria for instance.

The communications sector is also expected to offer considerable potential: The country will soon acquire its own telephone gateway and this will pave way for further growth ‑ previously utilised Uganda’s + 256 codes. Mobile, satellite and land line telephony will grow. Already companies like MTN, Vivacell, and Mobitel have been doing business. Infrastructural development in all areas such as housing, schools, roads, hospitals, general construction will bring a lot of opportunities, which will also be interesting for cement factories and other manufacturers of building material. The hotel industry, from luxury to low budget, has lots of potential especially while housing is still lacking. It has become near impossible to find accommodation in hotels if one does not book weeks in advance. With growing numbers of visitors from both business and the aid and NGO sector, the demand will increase. In general any sphere of business in this virgin market has potential.

Watch out for:

  • Diaspora Sudanese from Kenya and the rest of the world returning permanently or temporarily after the referendum;
  • Developments in community relations: cohesion is key for security, therefore the internal problems and tribal issues need careful scrutiny;
  • The overall reform and institution building process: the enactment of laws and regulations and the nature of administration of key resources such as oil, infrastructure projects;
  • The negotiations with the North on the final secession modalities and oil infrastructure sharing; 
  • The disputed border areas between the North and the South;
  • Contracts offered by NGOs and aid agencies;
  • How quickly the government moves to resolve security problems, poverty and the looming humanitarian crisis;
  • Regional decisions on joint infrastructure development.
Perspectives
Many of the challenges and opportunities outlined above are not, strictly speaking, new. Since signing the CPA that gave Southern Sudan semi-autonomous status, the South has pushed ahead to take charge of its own affairs, often creating facts on the ground in disregard of the finder details in the debate of national versus regional legislation and regulations, and how responsibilities and decision-making power would be divided up between the national and the southern government. The referendum results, while clearly a source of excitement, pride, and hope for the vast majority of the Southern population, did not necessarily signify a new beginning: How the public administration worked, and politicians and government officials interacted with business in the past, offers important clues for the future. And even though the South overwhelmingly decided in favour of separation, both parts of the country will be tied together for years to come: In the absence of any oil infrastructure through the south, all of Southern Sudan’s oil is currently exported through the north.


Louise Khabure is an analyst and independent consultant on a range of political, security and conflict issues in the Horn, East Africa and the Great Lakes region. She has worked for a range of international nongovernmental organisations, political risk consultancies and think tanks.



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