Southern Sudan: Investment Snapshot
Monday, 26 January 2009
The signing of the Comprehensive Peace Agreement (CPA) effectively triggered a boom in Southern Sudan’s larger cities, but explosive growth remains skewed, and despite the undisputed opportunities, investors also face significant obstacles, often driven by the administration’s severe lack of public management capacity. Political and regional security risks add to this challenging mix. By Rachel Zedeck.

Juba, Southern Sudan’s new capital, may be the new boom town, but the trash has not been picked up for more than three years, and without the infrastructure, waste, trash and human sewage rots openly. Clouds of red dust blanket everything, including scores of four-wheel drives branded with the emblems of the UN, NGOs and multinational firms. If aspirations and expectations have been high for Southern Sudan after signing the comprehensive peace agreement (CPA), the waste situation indicates that realising them was a bigger challenge than anticipated in the enthusiastic beginning.

A Skewed Post-Conflict Commercial Boom

Southern Sudan’s larger cities; Juba, Wau, Rumbek and Malakal are experiencing unprecedented, economic growth primarily in construction, hospitality, telecommunications and commercial trade. Investors and established trading companies come from DRC, Uganda, Kenya, Somalia, Eritrea, and as far away as Lebanon, Kuwait, India and of course China, primarily focusing on supplying consumables, logistic services, construction and life support services. Almost overnight, Juba town has become a bustling market for imported goods. With practically no manufacturing capacity in the region, even everyday commercial goods like shampoo, packaged food, but also fresh vegetables and even agriculture and construction materials are being trucked in from Uganda or Kenya. Due to the limited infrastructure, high transport costs can contribute to mark ups of 30% to 100%. The Customs Market on Yei road offers fresh fruit, over-priced building materials and a new supply of Chinese made consumer goods   even fake Gucci bags. The JIT supermarket offers a huge selection of packaged food and spirits, including boxed wine from South African. The target clientele for these goods are, of course, not local citizens: The boom reflects the massive influx of internationals, both in aid sector and from foreign companies, chasing the promise of Southern Sudan’s share in the oil revenues and donor contracts for reconstruction and rehabilitation in several sectors, amongst them infrastructure and construction, but also training, education, medical services and the like.

Services Follow

The services industry has quickly followed donors, NGOs and contractors: Service industries like banking, insurance and telecommunications have also launched operations in South Sudan. UAP Insurance and Kenya Commercial Bank (KCB) were amongst the first firms Kenyan firms to venture into Juba to support both the NGO and commercial sector, clients who they had previously served from Kenya. According to Patrick Kanyingi, UAP’s Director for Southern Sudan, the primary motivation to enter the Southern Sudan market was to assist in the reconstruction efforts: “Insurance plays an important role in economic and social development of any country or region. The future promises growth in agriculture and mining.” UAP had started their Southern Sudan operations in 2005, and state they have invested USD4m so far. The Southern Sudan office is independent, but is coordinated out of the Nairobi head office. Products and services are, in principle, the same services as Kenya, but they are primarily focused on car and operations coverage. UAP certainly encountered challenges, and has a long-term perspective underlying its engagement. Kanyingi notes: “The South Sudan market is an emerging market. One therefore needs to be patient as systems and infrastructure are put in place. There is a lack of clear regulations and laws, especially on the acquisition of land to develop as an investment of the funds brought in as capital to run the business.” The company currently only has one Sudanese staff member – however, recruited and trained in Kenya. The region’s severe skills shortages means that there is just not enough capacity in the local marketplace, especially in such a specialised industry.

Southern Sudan’s natural resources and agriculture are obvious starting points to generate export revenues and incomes for a broader part of the population. To date, products and commodities such as mangos, gold, rough diamonds and teak already find their way out of the country, but often through informal supply chains, and these volumes fall far short of the country’s potential. However, there are interested parties from an unexpected corner:

Middle East and China Look Southward

As the global credit crunch and higher risk profile constrict capital investment from Europe and North America, capital may come from a region that was historically closely allied to Sudan’s north: The Arab world is expressing keen interest in Sudan’s potential as an agriculture production centre. With large swaths of land and underground water reserves, the region is ideally suited to grow a variety of crops. In 2007, Libya and Jordan created dedicated agro funds to explore the region’s potential. These efforts could soon be mirrored by the Emirates and Qatar, both keen on securing new supplies of agricultural products – and the latter is currently engaging in a large-scale land deal for agricultural production in neighbouring Kenya. Like the Arab states, China is also refocusing its attention southward eager to expand an already existing investment of USD8bn in Sudan’s oil production.

On 1 September 2008, Chinese Consul General, Zhang Qingyang was welcomed by the South’s Minister for Regional Cooperation, Barnaba Marial Benjamin. Before the opening in Juba, President Kiir met with Assistant Foreign Minister Zhai Jun in Khartoum where they signed a document on financial assistance by the Chinese government to the government of South Sudan. Benjamin commented: "China is playing a very important role in development throughout the Sudan, particularly in the northern part, where they have carried out very successful projects. The Chinese government has decided they need to be here (in Juba) so that they can assist in the implementation of the peace process, especially in the area of coordinated development of southern Sudan to enhance development."

Like the rest of Africa, China is keen on Southern Sudan’s resources, but has a long track record of close co-operation with the Khartoum government, during which it had come under international criticism for its role in supporting Khartoum in its long fight against the south. It speaks of Chinese pragmatism that the country then moved on swiftly to establish relations in the south, but remains to be seen how productive these will really be.

Risk Snapshot

While commercial business continues to boom, so do risk factors:

Institutional Capacity

Barriers to private sector investment in Southern Sudan are significant. Above all, there is severe lack of institutional capacity for public management within the Government of Southern Sudan (GoSS). This does not only affect the ministries in general, but also inhibits economic investment across industries including agriculture, banking and telecommunications sectors. Few, if any, strategic needs have been defined by individual ministries and even those with a manifesto have little else, including surveys or baseline needs assessments of urban and rural communities. GoSS has achieved some goals, including a corporate tax structure beginning at 20% and quickly increasing. But while institutional capacity is only gradually catching up to the needs of the commercial sector, it is being overtaken by massive corruption with little or no legal recourse available.

Second, the investment required to support a new operation anywhere in South Sudan is a barrier for smaller and medium enterprises. With the pervasive lack of infrastructure, expenses including overheads for housing, transport, generator assisted electricity, insurance and food are significant. Even basic communications capabilities requires expensive infrastructure, e.g. the installation of a satellite dish and monthly bandwidth, exceeding USD25,000 to USD40,000 per annum without adequate technical support located in the region. While Juba is one of the most underdeveloped cities in East Africa, it represents the fastest growing economy of any city in Africa and is by far one of the most expensive. Individual monthly expenses can easily exceed USD5,000 to USD10,000.

Domestic Security Challenges

With a recent history of several decades of civil war, there is still a tangible sense of aggression from many southerners, especially young men being trained for army and police units. This helps to explain the deterioration of security in Juba town during 2008. Rogue military units were responsible for midnight raids on camps filled with expatriates, and in the absence of functioning public legal and security services, mob violence is prevalent, primarily witnessed against Ugandan and Kenyan nationals. People beaten to death by local security forces for traffic infringements has not been uncommon.

Recently, the security has improved dramatically supported by intensive, SPLA night patrols. Unfortunately, in a reflection of the new southern government’s institutional weaknesses, tension exists between local police and SPLA over who exactly controls domestic security. Domestic security especially in its major economic centers must be a priority for the Government of Southern Sudan (GoSS). With national elections planned for 2009, the south’s commitment to a legitimate political process may be the most critical precursor to establishing both legitimate political process and the autonomy of the south region as an independent state.

Regional Insecurity

Despite the official peace agreement having been in place for several years, violence in the wider region very much remains a concern:
  • Violence in both the northern regions of Abyei and Kardofan threatens to spill over into the South. Fighting between the SPLA and northern Sudan Armed Forces (SAF) erupted last May in the contested border area of Abyei. With significant oil reserves, this flare was originally seen as the biggest threat to the 2005 peace deal and economic development of the region’s oil wealth.
  • However, escalating ethnic tensions in Kardofan may overshadow oil conflict: Sitting along the border between North and South, Southern Kardofan is occupied by both Arab (mainly Misseriya and Hawazma) and African (Nuba) groups, polarized along political and ethnic lines. Ethnic tensions are exacerbated by extreme poverty and a resultant lack of basic services, acute underdevelopment, and economic marginalization. Animosity over resources, political representation and interests continues to rise. By withholding representation to the Nuba in the region, there is little or no allegiance to either the NCP or the SPLM political parties. Eventually, escalation could force direct confrontations between North and South as each enhances their military expenditures and operational capabilities to be discussed later.
  • Last but not least is the northern region of Darfur, the most notorious region in the Sudanese conflict. According to UN estimates, since 2003, up to 350,000 civilians died and 2.7m have been displaced due to violent outbreaks between local rebel groups and northern government militias. 4.7m people receive aid as part of the world's biggest relief efforts, estimated to cost USD1bn in 2009. This situation is not helped by a lacklustre year of performance of the under-equipped UNAMID operation. A combination of UN and African Union (AU) forces, UNAMID have been incapable of defending either themselves or the civilian population of Darfur.
In December, the situation was best summed by ICC Prosecutor Luis Moreno-Ocampo who bluntly said, "Genocide continues." Ocampo is still demanding an arrest warrant be issued against Bashir on 10 counts of war crimes, crimes against humanity and genocide. Unfortunately, many, both in European and Arab circles, have seen this campaign helping derail the existing CPA and any chance of a successful Darfur Peace Agreement (DPA) which has yet to be signed by anyone other than the SPLM. Outside efforts to nudge the peace negotiations forward remain ineffective – an indication of the lack of political will and the contradictory military escalations that undermine any real resolution.

Arms – Big Business, Big Risks?
Military spending on both sides is extensive, and a U.N. panel says both the Sudanese government and rebel groups in Darfur are violating the U.N. arms embargo. As much as this indicates a readiness for armed conflict, already a concern for most investors, it also diverts funds away from much needed investments in government capacities, infrastructure, and public services.

  • According to the World Bank's 2007 Public Expenditure Review for Sudan, the Government of National Unity's expenditure for defense and national security in 2006 was USD1.175bn, or 20% of total government spending. The north receives a wide array of Eastern European and Chinese military equipment, including combat aircraft and fighter jets. In October, Human Rights First reported China, India, Kenya, Iran, and Russia ship arms directly to northern Sudan, while many other countries underreport their exports.
  • Simultaneously, GoSS’ spending on security apparatus exceeded USD555m, or 42% of the southern government's expenditures. And in October 2008, SPLM lawmakers approved a USD980m increase to the SPLA’s existing USD1.5bn dollar annual budget. A legacy of he long civil war, the SPLA already maintains one of Africa’s largest armed forces at 170,000 strong, and the south buys tanks, armored personnel carriers, assault rifles, rocket propelled grenade launchers, mortar rounds, and ammunition. It also receives defense training from Ethiopia, Kenya, South Africa, the United States, and Britain. This only substantiates allegations that the military cargo of tanks, guns and ammunition on the MV Faina being held hostage by Somalia pirates was always destined for South Sudan rather than Kenya.

The GOSS has repeatedly alleged that Khartoum has defaulted on its obligations under the CPA with regard to the transfer of oil revenue, demarcation of the north-south border and proper execution of elections and the referendum, and therefore has the right to adopt this defensive stance. However, it also raises concerns over a resumption of the civil war. And if military spending has been excessive so far given Southern Sudan’s urgent need to invest in infrastructure and public services, it will be come even more disproportionate as oil revenues – the main source of revenues for the GOSS apart from donor funding – will fall significantly following the collapse in the global oil price.

Political Risk Outlook: 2009 Elections

According to the CPA, elections must be held no later than July 2009 – a deadline that now appears both impossible and inadvisable to keep: Even though the Sudan parliament approved the electoral commission in November 2008, this was two and half years behind schedule and critically delayed the national census. The commission has yet to even confirm a final date for the election, educate and register voters, and map out monitoring processes, all of which should have been completed a year before the election. In particular, this already enormous task is made more difficult by the fact that voters need to be prepared for a complex process involving up to 12 separate voting papers including ballots to elect the country's president to members of state assemblies.

It will also be a logistical nightmare to hold the elections in the middle of Sudan’s rainy season that will not end until November. South Sudan alone spans more than 637,000 square kilometres with little road infrastructure to support the deployment of equipment and personnel for the elections. In November 2008, an independent UN panel recommended delaying the elections because of heavy, seasonal rains and logistical problems. Unfortunately, both north and south seem to unwilling to accept this fact. Recently, Pagan Amum, Secretary General of the SPLM and GOSS Minister for Cabinet Affairs, denied any knowledge of the UN panel or its recommendations. Conversely, the NCP is accusing the SPLM of advocating a delay in the elections allowing it time to broaden its coalition of support.

Third, international donors have not yet committed to providing the necessary funding to run the elections. While USAID has purportedly promised more than USD45m, no operational contracts have been released to IFES who are regularly used by USAID to manage elections processes as they did in Kosovo.

Finally, more so than the the SPLM, the NCP appears reluctant to institutionalise democratic processes to create transparency after holding power for 19 years. Postponing the ballot would also allow the electoral commission time to design more effective monitoring processes minimizing contention and increase likelihood of international support for the results.

Of course a reasonably successful election will not be a panacea to Sudan’s problems, but would allow South Sudan to continue its state building efforts and would provide some degree of security for both investors and donors. However, even this may be shortlived, since the next deadline already looms: Under the CPA, Southern Sudan has the right to decide on a secession from the north in a referendum in 2011.

 About the Author

Rachel Zedeck is the Managing Director of Medea Group in Nairobi, Kenya, providing strategic advice on entering markets such as Sudan and others in East Africa. Rachel has previously worked with the UN, NGOs and the commercial sector in post conflict regions such as Bosnia, Kosovo, Jordan, Iraq and South Sudan.

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