Africapitalism: Purposeful thinking for African business
By: Nicole Velleman
Africa offers a ray of hope in an uncertain global economy. Many parts of the continent are experiencing rapid and sustained economic growth, with political, social and infrastructural conditions continually improving. Market attractiveness has begun to outweigh the risks of doing business, and foreign investment is flooding in. Most exciting is the emerging growth in intra-African investment: Africans doing business for Africa.
Now is the time of the African Challengers. These local businesses with global ambitions are expanding rapidly and fending off larger global competitors. This movement can be observed in the workings of big business, SMEs and entrepreneurs alike. Increasingly, local B-brands are investing in marketing to grow brand equity, using local know-how and quick decision-making to compete against (and beat) multinationals.
Our latest white paper, 'Doing Business on Purpose', demonstrates how businesses can make a positive societal impact in a way that is also commercially advantageous. We show that by uncovering the why behind your business and brand, you can give your employees a reason to wake up in the morning, engage meaningfully with consumers, be a part of something that is bigger than yourself, and enjoy sustainable growth.
Purpose is relevant
Purpose is especially relevant on the African continent, where businesses cannot separate themselves from the social contexts in which they operate. The successful African brands of the future will be those that view societal challenges as opportunities rather than barriers, and that become financially and emotionally invested in Africa. This is not philanthropy - this is for-profit business done with long-term, holistic goals in mind.
Can purpose be used as a competitive advantage by local businesses as they take on global players?
Key private sector figures are advocating new models of 'philanthropic investment', 'venture philanthropy' and 'philanthro-capitalism'. Africapitalism, the term coined by Nigerian mogul Tony Elumelu, is a for-profit model aimed at stimulating economic development. Elumelu believes that the African private sector has "the power to transform the continent through long-term investments, creating both economic prosperity and social wealth", and by doing so, we can teach non-Africans how to approach investing in the continent. And he's not alone in his thinking: the likes of Aliko Dangote, Lucien Ebata, Theophilus Danjuma - other key figures with enormous economic power - have realised the value they can create by investing in development.
Unique advantage
African businesses have the unique advantage of fully understanding the risks, opportunities and, crucially, the social contexts of the markets in which they operate. International competitors, even with large research and marketing budgets, lack the social sensitivities, on-the-ground access and long-term experience needed to build relevant brands in the way local businesses do. While multinationals are making decisions overseas, African businesses can adapt quickly to meet the needs of more demanding consumers with growing spending power.
Additionally, African governments have earned a reputation of hostility towards exploitative foreigners. It makes political sense to create attractive business environments for locals through innovation and investments in human capital. We are seeing spending on education increase and social innovation hubs and accelerators popping up all over the continent.
Embracing new business paradigm
Africa is embracing a new business paradigm. Why try to convince the sceptics that doing business in Africa is a good idea, when you can enable those who are already investing in the continent to create better-functioning business environments?
In a recent television interview, Aliko Dangote said that the reason for his success was that he believed in Nigeria, and invested when others were too scared to do so. Whether you look at it from a financial point of view (creating the best environment for business to prosper) or an emotional point of view (working towards fulfilling Africa's potential), all roads lead to the same point: Africa's future requires the business world to think purposefully to solve key problems, drive development and improve the quality of life.
The mission to build better societies cannot be left to government alone. Responsible business practice is critical in building better-functioning environments, which in turn improves the attractiveness of these markets.
Public-private partnerships are a key tool in getting this right, and there are encouraging examples of these engagements taking place. The Power Africa initiative, for example, is a multi-stakeholder partnership between the United States, the governments of Ghana, Tanzania, Kenya, Liberia, Nigeria and Ethiopia, and the African private sector. It aims to double access to power in Africa over the next five years. Elumelu's company, Heirs Holdings, is the single largest private sector investor, having pumped $2.5 billion in the project.
These governments understand that energy sector reforms will drive growth and investment and only by partnering with the private sector can they make their ambitions a reality.
Creating societal value
So, how can African businesses go about creating societal value while still serving their own interests?
Collaborate with government, other businesses and civil society to create better business environments
Encourage private sector investments in infrastructure
Produce safe, affordable and responsible products and services
Develop human capital by investing in training and skills development
Recruit locally
Empower local business through strong supplier and distribution networks
Innovate, invest in technology development, and share knowledge
These emerging patterns of thinking are incredibly exciting. Business leaders who think about success in terms of purpose will prove to have a competitive advantage: one that allows African businesses to realise both financial and social wealth.
Trim the “fat” but that’s not our principal foreign policy strategic challenge
by Mukoni Ratshitanga
It is commonly held that foreign policy is an extension of a country’s domestic policy. Small wonder then that it is hotly contested as domestic policy.
States endeavour to protect their sovereignty and territorial integrity, promote their economic well-being and national image, among others.
Foreign policy is therefore nothing but the name we give for a country’s domestic political, economic and, in the widest sense, ideological image of itself. It is this broad context within which foreign policy specifics are fashioned that Mzukisi Qobo misses in his article: “SA should trim excess fat from many embassies,” (Business Day, September 21 – http://www.bdlive.co.za/opinion/columnists/2012/09/21/sa-should-trim-excess-fat-from-many-embassies ).
He argues that South Africa should close down diplomatic missions from whence there is no “demonstrable increase in investments, growth in export markets and an upturn in employment.”
Economic diplomacy is and should be one of our strategic tasks. This has in fact exercised strategic levels of government in the last couple of years. It was noted that since 1994, South Africa has done well in political diplomacy but not as well in economic diplomacy. One of the least known facts is that thanks to our success, we are host to the second largest number of diplomatic missions in the world after Washington.
Acknowledgment of our success and failures, relative and absolute, did not imply, as it could not, perceiving foreign policy in cost accounting optics. Rightly or wrongly, it took it for granted that government is morally, politically and legally obliged to be prudent in its uses of public resources, including the all-round productivity of foreign missions assessed as part of on-going review of everything it does.
Admittedly, it is not prudent to assert that there will not be much “demonstrable increase in investments, growth in export markets and an upturn in employment as an outcome of our diplomatic relations” with many of our SADC neighbours and much of the continent for a long time to come.A cursory glance at the underlying logic of the Southern African Customs Union’s (SACU) equal share of customs revenue among SADC member states suggests that though unstated, South Africa is in fact a provider of development aid to the region. Were each one of our countries in the region to receive their due, South Africa would doubtlessly benefit the most.
But the model is not without good reasons. Our development efforts would be unsustainable if the rest of the region (and continent) remains underdeveloped. This is why South Africa’s contribution to the development of the region and continent has continued to be and must remain part of our foreign policy objectives. Besides self-interest, there is, after all, a principle of “solidarity” in the system of international relations, according to which you lend a helping hand to your neighbours and others further afield.
Consistent with another and antithetical paradigm, Qobo is doing something more than advice government to “trim the fat” and close down missions from whence there is no “demonstrable increase in investments….” This is the corporatization and “rightsizing” paradigm of the state, a cost accounting purview which perceives government and governance exclusively in terms of financial loss and benefit.
This view does not appreciate the social and political side of foreign policy which does not easily lend itself to the precision of an accountant. At times to its own and largely to society’s detriment, it defines the “national interest” in extremely narrow terms and often ends up being all things to everyone.
Soon, the protagonists of this school of thought will demand the closure of South Africa’s mission to the United Nations in New York because it has no “demonstrable increase in investments, growth in export markets and an upturn in employment as an outcome of our diplomatic relations,” or so it assumes.
The strategic foreign policy challenge is not, as Qobo and others would like to have us believe, the R10bn or so we spend annually on our missions or that 60% of missions are headed by politicians or people who are not career diplomats, a non issue if historical and contemporary domestic and global lessons mean anything.
Relative to the totality of what it earns the country, the money spent on our diplomatic missions must also be assessed in terms of government spending as a whole. We have, for example, rightly or wrongly increased the political wage bill by more than R1bn a year after the 2009 general elections with the increase in cabinet ministers, deputy ministers and departments.
The larger issue with respect to our foreign policy is its strategic political orientation!
Mukoni Ratshitanga, September 25, 2012.
The Legacies of Sebhat Gebre-egziabher
Sebhat Gebere-egziabher is one of the literary figures in the history of Ethiopian literature who introduced a hitherto not-so-openly dealt with theme. He is also one of the literary writers who pursued their studies at some level in the West and got back to Ethiopia. The pieces he had written were only published as books before few years for he was just keeping a diary and never thought that they would assume the form of a book. Undeniably his works have grabbed the attention of his readership and fans.
Among other things, Sebhat is widely criticized for not writing as many books as he read. He is said to occupy the foremost position when compared to other literary writers who were known to have read a lot of books on an assortment of subjects. Simply, he was one hell of a bookworm. It makes one wonder, though, if Sebhat felt the responsibility to write in order to hand down the knowledge he garnered from books to the younger generations. Even the publication of the books that bear his name today was made possible by the pressure from others. All of his works mainly highlight sexual hedonism. This appears to be a deviation from the Ethiopian literature per se. However it doesn’t mean that sexual scenes and accounts are not found in other works authored by Ethiopian writers other than him-only not in such a straightforward fashion as in Sebhat’s narratives.
Apart from his works, his world outlook and modus vivendi has seized the attention of his fans and followers in particular and the Ethiopian public in general. Today sebhat has more fans, followers, and critics than any other literary writer in the country. Have you ever wondered how he came to be an individual of such a persona at the moment and has become the persona grata that he is at the present?
In his biography written by Zenebe Wela, Sebhat said, “I got hold of liquor, and counted it without savoring it.” Apparently Sebhat’s life had detoured when he broke up with his first wife, Hanna. Prior to this mishap, he had been a total teetotal, non-smoker, non-Khat chewer dandy. A chap you would, by Ethiopian standards of the day, refer to as a ‘demure journalist’. The termination of his wedlock with Hanna put him on an absolute u-turn. He was perplexed, so to speak, lost grip on life, and embarked on a way of life contrary to the one he had previously pursued. He didn’t see this coming at all and thus couldn’t figure the state of affairs that befell him. Eventually Sebhat became less of a journalist and more of a philosopher. For he was no more required to tally with standards set by Hanna, he adopted the principle of being ‘oneself’ in life.
The majority of his followers and fans don’t seem to be aware of this turning point in his life. Had he not lost his beloved Hanna, he would not have had the personality he has today. In any event, Sebhat didn’t join this path out of his own volition but he was compelled by circumstances he happened to stumble upon in his journey of life.
Do the yoof have to follow his example then? Should we take him as a model? It is pretty questionable. He has made clear on several occasions that he hasn’t ever done anything with the intension of setting an example of any sort whatsoever for the young generations.
Maybe compared to his own friend and colleague, Bealu Girma, who departed this life at a rather early age, Sebhat has not produced as much in more than half a century in the sphere of literature. He knows his literary pieces are not that historically, politically or even epistemologically enlightening and has kept on warning the younger generations not to follow his example. All the same, there is no denying that fact that he has had a great influence on his admirers. “I have never asked anyone to follow me but if anyone wants to, it is absolutely their right,” says Sebhat. “If anyone out there thinks the youth have done wrong and are going astray by following my example, why don’t they do better things and win the youth over to their side?” It makes sense, doesn’t it? Yet anyone as popular as him cannot avoid being looked up to in one way or another.
The reality, however, is that Sebhat’s works are full of sex scenes and accounts and whenever his name is mentioned anywhere, I am sure, sex pops up in minds of whoever happen to around. People have soft spot for sex and sex sells. Apart from that most people argue that his works don’t have much to offer than being mere erotica.
By Gubae Gundarta
Building an African Infrastructure
Paul Collier
Key political decisions are needed to build critical rail networks for
a continent well suited to them
THE coming decade could be Africa’s opportunity for investment. Globally, there is a massive pool of investable private resources. Prospects in the advanced economies look bleak, and in the major emerging economies—the so-called BRICs: Brazil, Russia, India, and China—the future is looking more uncertain. Although Africa is not immune to global risks, its continued growth is likely to rest on the potential for further resource discoveries and for commercial cultivation of its vast, underused agricultural land.
New transportation infrastructure is vital to harness these two potential sources of growth. At the top of the list is the classic form of economic infrastructure: railways.
The continent is a huge landmass, well suited to railroads. Yet during the past half-century Africa’s rail network, never very extensive, has shrunk. Even the United States, a huge landmass with relatively low population density, has one kilometer of track for every 43 square kilometers of land. By contrast, Nigeria, home to one-fifth of the population of sub-Saharan Africa and one of its most densely populated countries, has but one kilometer of rail for every 262 square kilometers. Nigeria is not atypical: by radically reducing transportation costs, railways could open up vast tracts of Africa to economic opportunities, especially in agriculture and mining, which many countries are relying on for future growth. The continent needs a decade of massive investment in rail networks.
Politics at play
Railways are hardly technologically challenging. They represent the oldest continuous industrial technology. Africa’s lack of railways compared with other regions is primarily a consequence of politics. Although railways are technologically simple, they are politically complicated—for three fundamental reasons:
• Railways are a primary example of a network industry. The key feature of a network industry is that its operations are so interconnected that it is more efficient to run it as a single entity. This presents an unavoidable role for public policy: how to manage a monopoly provider in the public interest.
• They are a classic example of high fixed costs relative to operating costs. In the parlance of economics, the marginal cost—the cost of producing one more unit—is well below the average cost. For social efficiency, prices should be set around the marginal cost, but for an activity to be commercially viable prices must at least equal the average cost. This tension in pricing calls for a political solution: typically either a subsidy from the government or cross-subsidization from users who are not very price sensitive to those who depend on cheap rail service.
• The mainland continent of Africa is split into so many countries that inevitably rail lines need to be international, especially because many of the countries that would benefit most are landlocked. Yet a transnational network investment is potentially at risk from each national polity. Indeed, each time rolling stock crosses borders a valuable asset moves into a new jurisdiction.
Because African governments have yet to tackle these three political challenges, the African rail network remains inadequate.
Organizing a network industry
Railways are not the only network industry. Telephone service and electricity are other important examples. In Africa phone networks are usually provided by the private sector but subject to regulation; electricity is usually in the public sector and run as a public monopoly. A rail network could be run under either of these models. However, in Africa public ownership and management of the rail network is unlikely to be the best approach. Governments have so many other pressing needs that they cannot afford to finance the huge cost of a rail network—new or rehabilitated. Furthermore, African governments’ resources are already stretched so thin from management of their core functions that peripheral tasks are best organized by the private sector.
The Tanzania Zambia Railway Authority (TAZARA), the rail link between Zambia and Tanzania built by China in the 1970s, offers a salutary lesson. TAZARA today barely functions. Building a line is not enough; it must be well managed and linked to potential commercial users. Currently, many African governments could get financing for more such Chinese-built lines in exchange for mineral concessions, but granting mineral concessions means mortgaging Africa’s limited wealth and should not be done lightly.
Africa’s particular needs suggest that a rail network should be a regulated private monopoly, with both financing and managerial expertise from a private company. But regulation poses difficulties that may be insuperable. It is not possible to anticipate all eventualities: presenting a public rail regulator with a set of agreed rules to be implemented is not enough. To cope with unforeseen circumstances, the regulator must have some discretionary room. But in African governance environments such discretion would likely kill private investment. With the region’s reputation for corruption, even an honest regulator’s decisions would be subject to allegations and expectations of bribery. Once a regulator is given the power to set prices that could bankrupt either the railway company or its customers, neither group would be willing to risk investment.
Fortunately, there is a viable alternative to a domestic regulator with discretionary power—namely, an international dispute settlement board whose members are approved by governments, investors, and customers. This is a standard means of international contract enforcement, and indeed one commonly used both by foreign investors in China and by Chinese investors in Africa. The record of these boards is good. Despite frequent findings against governments, there is a high rate of compliance with decisions. Before investment, a government, an international rail investor, and commercial rail users can negotiate a mutually satisfactory agreement and lock it in by including a contract clause that refers disputes to such a procedure.
Differential pricing
As noted above, because the fixed costs of rail investment are so large, marginal costs are substantially below average. This would generally argue for public ownership, with government using tax revenues to subsidize the fixed costs of the network to keep the price to users around the marginal cost. The importance of such low pricing is not just hypothetical. Although rail networks can open up huge tracts of little-used land to commercially viable agriculture, the amount of usable land is likely to be highly sensitive to transportation costs.
While marginal cost pricing would be very helpful for opening up African agriculture, African governments are in no position to finance such a subsidy. Indeed, even if a government were to provide a subsidy, it might actually deter investors because of the government’s limited long-term credibility. Neither potential rail operators nor potential commercial farms would trust a government commitment to a long-term subsidy.
As with regulation, there are feasible alternatives: price discrimination among users is one. Price-sensitive users can pay only marginal costs, if higher-profit industries less sensitive to transportation costs pay more. In Africa, rail networks have two principal potential users, mining and commercial agriculture.
Many natural resource discoveries will be far from coasts and will require lengthy rail links to move ore to ports. Without these rail links vast tracts of underused land would have no commercial value. The core economic challenge is to organize the rail network in a way that meets the needs both of the extraction industries and of agriculture.
Mining operations require railways and ports. Were there no agricultural users, the mining companies themselves could finance the rail network from some of the high profits generated by extraction. As long as these rail links serve agriculture and resource-extraction users, agriculture need pay only the marginal cost of operation. In effect, the differential profitability of mines and agriculture creates the potential for price discrimination between them.
Mining companies, eager to open up resource-laden lands, have offered to set up such railways, even though these companies are not likely to welcome or desire multifunctional use of the rail network. Mines are accustomed to dedicated services. With the price for agricultural users set close to the marginal cost, the hassle for the mining company of serving other users would far outweigh the benefit from the revenue. For governments, however, a multiuser rail network is very desirable. Especially in light of the uprisings in north Africa, the imperative across the continent is to generate jobs.
Modern mining, which is becoming increasingly capital intensive, generates few jobs and is often damaging to the environment. As a result, the local population may see few direct benefits from mining operations alone. But commercial agriculture can generate both mass wage employment and opportunities for small farmers—a large constituency that will benefit from a rail network made viable by resource extraction.
Who will run the railway?
Such a multiuser rail infrastructure, while attractive, is organizationally demanding. Who will run it? As noted above, it would be beyond the core competence and natural interest of a mining company to run a railway that prices its service for farms at their marginal cost. As a result, even if a mining company were to provide such rail service, farms would likely mistrust it because of its peripheral nature for the mining company. Further, resource endowments are unlikely to be discovered all at once. A single rail company would, in effect, have acquired the exclusive right to any undiscovered minerals. Other resource-extraction companies would not be likely to explore if they had to depend on the single rail company to ship their ore. In that situation, the government would have radically less future bargaining power over mining concessions.
Yet, as already discussed, government control is probably not a good solution either. A third-party commercial operator with core competence in infrastructure but without mining interests appears to be the most credible option. All rail contracts would include an agreement with the government and commercial users—enforced by reference to a dispute settlement board—that builds in price discrimination. The agreement would ensure that the difference between average and marginal costs is covered by the high profits of natural resource extraction, with agriculture charged only the marginal cost.
Such contracts could provide the underlying security needed for a rail company to raise sufficient money to build a rail network, ensuring recovery of the initial investment from income generated by resource companies. Conversely, it would reassure resource-extraction companies of consistent railway service free from political motivation, and commercial farms would be assured low-cost transportation to market.
An international rail line
In many cases the track of African railways must cross national borders. For example, South Sudan, Uganda, Rwanda, Burundi, Zambia, Malawi, and the eastern Democratic Republic of the Congo all need rail links to the coast of east Africa—through Kenya, Tanzania, and Mozambique. Similarly, the most efficient route to the coast from eastern Guinea, which has many valuable minerals, is through Liberia. Yet for the past half-century the governments of these countries have not sustained the necessary political cooperation to make such transnational lines work.
If a rail line is transnational, pricing issues become more complex. For example, the natural resource may be in one country (at the rail head), while most of the agricultural land to be opened up may be in another country. Moreover, because much of the output—ore or agricultural—is for export, the monopoly position of the port gives the government of the coastal country the ability to negate a pricing agreement confined to rail charges by inflating port charges. Another complication occurs because the rolling stock keeps crossing borders. Unless there is a coordinated approach to legal recourse, the engines and cars cannot be used as collateral for loans, which will make the financing cost unnecessarily high. Finally, because the goods transported by the railway cross borders, they are vulnerable to delays because of slow or predatory customs procedures. Hence governments must make credible commitments to maintaining the free flow of goods in transit.
For a transnational rail line to be commercially viable, the risks for investors and customers must be addressed at the start of negotiations. In effect, the governments involved must agree in advance to a limited but clearly specified degree of pooled sovereignty. An intergovernmental rail authority must be established that has sufficient power to negotiate credibly with a rail company and its commercial users. Clearly, the decision to set up such authorities is beyond the realm of ministers of transportation and rests with presidents and parliaments.
The way forward
After half a century of neglect, it is tempting to resolve the need for rail investment by succumbing to the offers of mining companies. While that would undoubtedly get railways built, it would come with two hidden costs. Once a particular mining company owns a rail network, other mining companies will be reluctant to be depend on it, which would give the network builder enormous bargaining power with respect to future resource discoveries. Governments tend to look at the short term, but mining companies have learned to consider the long term. Further, mining companies have little interest in multiuser railways. They are liable to regard low-value agricultural users as a nuisance. In contrast, governments have an overwhelming interest in ensuring that rail networks serve many users. During negotiations, mining companies will doubtless tout their willingness to provide comprehensive rail service to all, but afterward governments may be in a bind if a mining company finds so-called facts on the ground that it says prevent construction of a multifunctional railroad.
In the scramble to negotiate mining deals, African governments risk missing a historic opportunity to transform the transportation arteries of the continent. The past impasse over rail provision did not stem from a lack of financing, but from inadequate political design. Because railways are network industries, they cannot be kept in check by competition nor—because of deficiencies in African governance—by regulation. The solution is to write contracts subject to dispute settlement boards. Because railways have high fixed costs, social efficiency will require subsidies for price-sensitive users. Subsidies cannot come from cash-strapped governments, but can be achieved through price discrimination. In Africa, rail arteries must be transnational, which can lead to intercountry disputes and holdups that would deter private investment. Yet these risks can be addressed by subregional rail authorities with decision-making power.
Africa’s current generation of political leaders has the opportunity to open the physical geography of the region. The decisions they must make are complicated, and much is at stake for the economic well-being of the continent. But forewarned is forearmed.■
Paul Collier is Professor of Economics and Director of the Centre for the Study of African Economies at Oxford University.
Key political decisions are needed to build critical rail networks for
a continent well suited to them
THE coming decade could be Africa’s opportunity for investment. Globally, there is a massive pool of investable private resources. Prospects in the advanced economies look bleak, and in the major emerging economies—the so-called BRICs: Brazil, Russia, India, and China—the future is looking more uncertain. Although Africa is not immune to global risks, its continued growth is likely to rest on the potential for further resource discoveries and for commercial cultivation of its vast, underused agricultural land.
New transportation infrastructure is vital to harness these two potential sources of growth. At the top of the list is the classic form of economic infrastructure: railways.
The continent is a huge landmass, well suited to railroads. Yet during the past half-century Africa’s rail network, never very extensive, has shrunk. Even the United States, a huge landmass with relatively low population density, has one kilometer of track for every 43 square kilometers of land. By contrast, Nigeria, home to one-fifth of the population of sub-Saharan Africa and one of its most densely populated countries, has but one kilometer of rail for every 262 square kilometers. Nigeria is not atypical: by radically reducing transportation costs, railways could open up vast tracts of Africa to economic opportunities, especially in agriculture and mining, which many countries are relying on for future growth. The continent needs a decade of massive investment in rail networks.
Politics at play
Railways are hardly technologically challenging. They represent the oldest continuous industrial technology. Africa’s lack of railways compared with other regions is primarily a consequence of politics. Although railways are technologically simple, they are politically complicated—for three fundamental reasons:
• Railways are a primary example of a network industry. The key feature of a network industry is that its operations are so interconnected that it is more efficient to run it as a single entity. This presents an unavoidable role for public policy: how to manage a monopoly provider in the public interest.
• They are a classic example of high fixed costs relative to operating costs. In the parlance of economics, the marginal cost—the cost of producing one more unit—is well below the average cost. For social efficiency, prices should be set around the marginal cost, but for an activity to be commercially viable prices must at least equal the average cost. This tension in pricing calls for a political solution: typically either a subsidy from the government or cross-subsidization from users who are not very price sensitive to those who depend on cheap rail service.
• The mainland continent of Africa is split into so many countries that inevitably rail lines need to be international, especially because many of the countries that would benefit most are landlocked. Yet a transnational network investment is potentially at risk from each national polity. Indeed, each time rolling stock crosses borders a valuable asset moves into a new jurisdiction.
Because African governments have yet to tackle these three political challenges, the African rail network remains inadequate.
Organizing a network industry
Railways are not the only network industry. Telephone service and electricity are other important examples. In Africa phone networks are usually provided by the private sector but subject to regulation; electricity is usually in the public sector and run as a public monopoly. A rail network could be run under either of these models. However, in Africa public ownership and management of the rail network is unlikely to be the best approach. Governments have so many other pressing needs that they cannot afford to finance the huge cost of a rail network—new or rehabilitated. Furthermore, African governments’ resources are already stretched so thin from management of their core functions that peripheral tasks are best organized by the private sector.
The Tanzania Zambia Railway Authority (TAZARA), the rail link between Zambia and Tanzania built by China in the 1970s, offers a salutary lesson. TAZARA today barely functions. Building a line is not enough; it must be well managed and linked to potential commercial users. Currently, many African governments could get financing for more such Chinese-built lines in exchange for mineral concessions, but granting mineral concessions means mortgaging Africa’s limited wealth and should not be done lightly.
Africa’s particular needs suggest that a rail network should be a regulated private monopoly, with both financing and managerial expertise from a private company. But regulation poses difficulties that may be insuperable. It is not possible to anticipate all eventualities: presenting a public rail regulator with a set of agreed rules to be implemented is not enough. To cope with unforeseen circumstances, the regulator must have some discretionary room. But in African governance environments such discretion would likely kill private investment. With the region’s reputation for corruption, even an honest regulator’s decisions would be subject to allegations and expectations of bribery. Once a regulator is given the power to set prices that could bankrupt either the railway company or its customers, neither group would be willing to risk investment.
Fortunately, there is a viable alternative to a domestic regulator with discretionary power—namely, an international dispute settlement board whose members are approved by governments, investors, and customers. This is a standard means of international contract enforcement, and indeed one commonly used both by foreign investors in China and by Chinese investors in Africa. The record of these boards is good. Despite frequent findings against governments, there is a high rate of compliance with decisions. Before investment, a government, an international rail investor, and commercial rail users can negotiate a mutually satisfactory agreement and lock it in by including a contract clause that refers disputes to such a procedure.
Differential pricing
As noted above, because the fixed costs of rail investment are so large, marginal costs are substantially below average. This would generally argue for public ownership, with government using tax revenues to subsidize the fixed costs of the network to keep the price to users around the marginal cost. The importance of such low pricing is not just hypothetical. Although rail networks can open up huge tracts of little-used land to commercially viable agriculture, the amount of usable land is likely to be highly sensitive to transportation costs.
While marginal cost pricing would be very helpful for opening up African agriculture, African governments are in no position to finance such a subsidy. Indeed, even if a government were to provide a subsidy, it might actually deter investors because of the government’s limited long-term credibility. Neither potential rail operators nor potential commercial farms would trust a government commitment to a long-term subsidy.
As with regulation, there are feasible alternatives: price discrimination among users is one. Price-sensitive users can pay only marginal costs, if higher-profit industries less sensitive to transportation costs pay more. In Africa, rail networks have two principal potential users, mining and commercial agriculture.
Many natural resource discoveries will be far from coasts and will require lengthy rail links to move ore to ports. Without these rail links vast tracts of underused land would have no commercial value. The core economic challenge is to organize the rail network in a way that meets the needs both of the extraction industries and of agriculture.
Mining operations require railways and ports. Were there no agricultural users, the mining companies themselves could finance the rail network from some of the high profits generated by extraction. As long as these rail links serve agriculture and resource-extraction users, agriculture need pay only the marginal cost of operation. In effect, the differential profitability of mines and agriculture creates the potential for price discrimination between them.
Mining companies, eager to open up resource-laden lands, have offered to set up such railways, even though these companies are not likely to welcome or desire multifunctional use of the rail network. Mines are accustomed to dedicated services. With the price for agricultural users set close to the marginal cost, the hassle for the mining company of serving other users would far outweigh the benefit from the revenue. For governments, however, a multiuser rail network is very desirable. Especially in light of the uprisings in north Africa, the imperative across the continent is to generate jobs.
Modern mining, which is becoming increasingly capital intensive, generates few jobs and is often damaging to the environment. As a result, the local population may see few direct benefits from mining operations alone. But commercial agriculture can generate both mass wage employment and opportunities for small farmers—a large constituency that will benefit from a rail network made viable by resource extraction.
Who will run the railway?
Such a multiuser rail infrastructure, while attractive, is organizationally demanding. Who will run it? As noted above, it would be beyond the core competence and natural interest of a mining company to run a railway that prices its service for farms at their marginal cost. As a result, even if a mining company were to provide such rail service, farms would likely mistrust it because of its peripheral nature for the mining company. Further, resource endowments are unlikely to be discovered all at once. A single rail company would, in effect, have acquired the exclusive right to any undiscovered minerals. Other resource-extraction companies would not be likely to explore if they had to depend on the single rail company to ship their ore. In that situation, the government would have radically less future bargaining power over mining concessions.
Yet, as already discussed, government control is probably not a good solution either. A third-party commercial operator with core competence in infrastructure but without mining interests appears to be the most credible option. All rail contracts would include an agreement with the government and commercial users—enforced by reference to a dispute settlement board—that builds in price discrimination. The agreement would ensure that the difference between average and marginal costs is covered by the high profits of natural resource extraction, with agriculture charged only the marginal cost.
Such contracts could provide the underlying security needed for a rail company to raise sufficient money to build a rail network, ensuring recovery of the initial investment from income generated by resource companies. Conversely, it would reassure resource-extraction companies of consistent railway service free from political motivation, and commercial farms would be assured low-cost transportation to market.
An international rail line
In many cases the track of African railways must cross national borders. For example, South Sudan, Uganda, Rwanda, Burundi, Zambia, Malawi, and the eastern Democratic Republic of the Congo all need rail links to the coast of east Africa—through Kenya, Tanzania, and Mozambique. Similarly, the most efficient route to the coast from eastern Guinea, which has many valuable minerals, is through Liberia. Yet for the past half-century the governments of these countries have not sustained the necessary political cooperation to make such transnational lines work.
If a rail line is transnational, pricing issues become more complex. For example, the natural resource may be in one country (at the rail head), while most of the agricultural land to be opened up may be in another country. Moreover, because much of the output—ore or agricultural—is for export, the monopoly position of the port gives the government of the coastal country the ability to negate a pricing agreement confined to rail charges by inflating port charges. Another complication occurs because the rolling stock keeps crossing borders. Unless there is a coordinated approach to legal recourse, the engines and cars cannot be used as collateral for loans, which will make the financing cost unnecessarily high. Finally, because the goods transported by the railway cross borders, they are vulnerable to delays because of slow or predatory customs procedures. Hence governments must make credible commitments to maintaining the free flow of goods in transit.
For a transnational rail line to be commercially viable, the risks for investors and customers must be addressed at the start of negotiations. In effect, the governments involved must agree in advance to a limited but clearly specified degree of pooled sovereignty. An intergovernmental rail authority must be established that has sufficient power to negotiate credibly with a rail company and its commercial users. Clearly, the decision to set up such authorities is beyond the realm of ministers of transportation and rests with presidents and parliaments.
The way forward
After half a century of neglect, it is tempting to resolve the need for rail investment by succumbing to the offers of mining companies. While that would undoubtedly get railways built, it would come with two hidden costs. Once a particular mining company owns a rail network, other mining companies will be reluctant to be depend on it, which would give the network builder enormous bargaining power with respect to future resource discoveries. Governments tend to look at the short term, but mining companies have learned to consider the long term. Further, mining companies have little interest in multiuser railways. They are liable to regard low-value agricultural users as a nuisance. In contrast, governments have an overwhelming interest in ensuring that rail networks serve many users. During negotiations, mining companies will doubtless tout their willingness to provide comprehensive rail service to all, but afterward governments may be in a bind if a mining company finds so-called facts on the ground that it says prevent construction of a multifunctional railroad.
In the scramble to negotiate mining deals, African governments risk missing a historic opportunity to transform the transportation arteries of the continent. The past impasse over rail provision did not stem from a lack of financing, but from inadequate political design. Because railways are network industries, they cannot be kept in check by competition nor—because of deficiencies in African governance—by regulation. The solution is to write contracts subject to dispute settlement boards. Because railways have high fixed costs, social efficiency will require subsidies for price-sensitive users. Subsidies cannot come from cash-strapped governments, but can be achieved through price discrimination. In Africa, rail arteries must be transnational, which can lead to intercountry disputes and holdups that would deter private investment. Yet these risks can be addressed by subregional rail authorities with decision-making power.
Africa’s current generation of political leaders has the opportunity to open the physical geography of the region. The decisions they must make are complicated, and much is at stake for the economic well-being of the continent. But forewarned is forearmed.■
Paul Collier is Professor of Economics and Director of the Centre for the Study of African Economies at Oxford University.
9/11 Ten Years On: A Risk Diffused
by Dr Alexis Crow
In the run-up to the anniversary of the attacks of September 11 2001, the Obama administration is circulating two different messages: one for domestic consumption, and one for its overseas allies.
The first message is aimed at rallying political support, and is likely to tout the killing of Osama bin Laden as an operational victory in the midst of a larger strategic campaign. The second message emphasises that the anniversary of 9/11 is – according to one official – 'not just about us.' The Obama administration seeks to transmit what it calls a 'positive, forward-looking narrative' to its allies. Yet how positive can the US and its allies be in the continued struggle against Islamic fundamentalism?
On the one hand, we have moved away from the presumption (led by the US) that the 'war on terror' was the defining strategic imperative – or the ordering principle for international security – of the era. This is a welcome fact for the very reason that the war on terror was unwinnable. It was exhaustingly costly to those who chose to wage it – from the lives lost, to the material and economic costs, as well as from a political standpoint.
The challenge of global Islamic terrorism now has diffused into a set of diverse risks: it has joined the ranks of older Cold War threats such as nuclear proliferation and state failure – and also the ranks of newer 'post-modern' risks such as cyber-war, climate change, and energy security.
Policy-makers need to respond with a pragmatic, realistic assessment of fighting terrorism in such a complex strategic landscape. It will require creative thinking in terms of resources, infrastructure, and partners – specifically, dynamic relationships with new partners with whom America and its allies have not previously engaged.
Crucially, this means that the US should not view risks such as terrorism through a Cold War system of deterrence, which is currently being hyped as Washington’s innovative strategy on terrorism. This 'new' policy of containment and deterrence is not entirely engaging and creative, and fails to take stock of the complex strategic landscape in which Euro-Atlantic societies operate. Yes, drone attacks are effective and promise immediate effect without lasting commitment, but disrupting transnational and global terror networks, engaging with partners on terrorist finances, halting piracy off the coast of Somalia – all of these risks require new thinking. The US could lead the way by adopting a flexible combination of tools, allies, intelligence, and push to engage with countries such as Russia and China.
Such a policy shift is politically expensive in the West: it necessitates an admission that the single risk of terrorism has been supplanted with many others, and furthermore that risks cannot be managed alone and may require cooperating with non-traditional allies or even the 'bad guys'. Only in such a way can the US and the wider West be 'forward-looking' beyond 9/11.
Libya: AU’s lost opportunity
By Elizabeth Sidiropoulos
VICTORIOUS: A rebel fighter stands on the back of a truck with a rocket launcher in Muammar Gaddafis Bab al-Aziziyah compound in Tripoli last Wednesday. The ransacking of the compound marked the effective collapse of Gaddafis 42-year-old regime. The AU has played a marginal role in resolving the Libyan crisis, says the writer. Picture: AP
In life realities on the ground often lay waste to the best-laid plans. So has it been for the AU in the Libyan crisis. Since the rebels entered Tripoli on August 21 the hand-wringing around the AU’s marginalisation by Nato during the campaign has reached a crescendo.
In that period, the Transitional National Council (TNC) has been recognised as the legitimate government in Libya by many states, including 20 from Africa; there has been a diplomatic flurry of activity on both sides of the Mediterranean with pledges for reconstruction assistance… and oil contracts; and the Libya Contact Group met in Istanbul – all this before the AU’s Peace and Security Council meeting on August 25 and 26. Has the AU lost another opportunity and how did it come to be much less important than the Arab League on the Libyan question?
First, although the AU had drafted a road map as early at March 10, it failed to win genuine support for it from both sides of the Libyan fray.
Second, the Arab League and Turkey’s support for Resolution 1973 provided, in Western eyes, sufficient legitimacy for Nato. Western and Arab interests coalesced in Libya. Resolution 1973 makes only scant reference to the AU, but emphasises the important role of the Arab League “in matters relating to the maintenance of international peace and security in the region”.
The resolution further notes that member states that have notified the secretaries-general of the UN and the Arab League are authorised to take “all necessary measures to enforce compliance with the ban on flights”. No mention of the AU. Should the three African states on the UN Security Council not have sought to insert the AU into that paragraph?
Third, once Resolution 1973 was passed by the UN Security Council, the AU failed to recognise that if it wanted to stay in the game it would have to escalate its diplomatic engagement (given its absence of hard power) not only with the Libyan parties, but critically with Nato, the Arab League and key countries such as France, the UK, the US, Turkey and Qatar. The Nato sorties, supporting the armed rebels, inevitably shifted the balance of power in Libya.
Fourth, it was extremely unlikely that the Europeans particularly would cede any political initiative to the AU – not only for the oil, but because Libya borders on the EU. African migrants have used Libyan shores as a springboard to enter Europe for a long time; the upheaval engendered by the Arab Spring across the southern Mediterranean exacerbated this, with the concomitant anti-migration backlash in Europe.
Last, while the AU’s Constitutive Act provides for involvement in members’ affairs where there have been gross violations of human rights, the fact remains that the AU lacks the political will (and often the means) to play hardball with some of its recalcitrant leaders who flaunt the very principles that the organisation is meant to espouse.
The West and Arab states were not going to rely on the AU. A drawn-out process of negotiation, while Gaddafi waged a war of attrition on the opposition, was not going to be permissible. Thus, once the “dogs of war” were unleashed, the AU’s road map lost any political capital it may have had as a credible alternative: ostensibly open to the AU’s overtures, Gaddafi would have stalled rather than negotiate himself out of power, and Nato’s entry meant that the rebels sniffed victory.
Lest we forget, Resolution 1973 was adopted in the face of an escalating brutal assault on protesters by an increasingly belligerent Gaddafi, who had failed to heed the calls from many quarters (including the AU) to cease military operations against civilians. Reforms had been promised several times but never carried out. In February and March Gaddafi calculated that the rebellion could be crushed. He was in no mood to negotiate with “rats”.
Furthermore, the Libyan uprising was part of the wave of grassroots uprisings against dictators (mostly West-aligned) that started in Tunisia. Even the Libyan leader had been rehabilitated in Western eyes a few years earlier. The cry in the Arab streets was for an end to these oligarchic regimes that had led to economic hardships.
Ironies abound, of course: the Arab League’s membership is hardly a who’s who of democracy; the TNC’s democratic credentials still need testing; and Bahrain, where Saudi Arabia helped to quash protests against the state, is not the object of the same concerted international response. “Regime change” was inevitable, but probably should not be articulated so unashamedly by Western powers, and the rebels have perpetrated crimes against civilians, too. Yet, these do not exonerate a megalomaniac dictator who did not realise that his time was up.
The AU often hesitates in condemning African leaders who use violence to obliterate internal opposition. Its intention may be to avoid escalation, but when is the right time to escalate the firmness of the dialogue and when is the time to use a combination of tools to effect an outcome? As the AU hopefully assesses its performance over the last few months, these are the tough questions it must seek to understand.
The AU rightly opposes unconstitutional changes of government, but still has to resolve the dilemma of what to do with regimes that provide no real political space for opposition and political contestation.
So what should be the AU’s next steps? Its road map may still be relevant in principle, but developments have overtaken it. The Libya Contact Group has met. The “Friends of Libya” will meet in Paris on Thursday. The AU and six African states (including South Africa) are only observers at the Contact Group. The AU can’t expect to influence outcomes in Libya from the margins of the locus of power or by running a parallel process to that of the Contact Group. It should seek to integrate its high-level ad hoc committee into these processes.
It should also recognise the TNC. Not doing so quickly will make it more irrelevant in the post-Gaddafi Libya and unable to play a meaningful role in pushing for, as its August 26 communiqué said, “an inclusive transitional government, the establishment of a constitutional and legislative framework for the democratic transformation of Libya… and the national reconciliation process”. The latter should be linked to a transparent investigation of atrocities committed by both sides. At the Security Council, South Africa, with Brazil and India, should argue strongly for the UN to reclaim its central role in the process, as the Contact Group reports have argued. If the AU does not take these actions now, its objections to its marginalisation will become a self-fulfilling prophecy.
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