Africa Weekly Review: Contracts of the Obasanjo period under review in Nigeria; Zambia after the death of the president.

Nigeria: The government’s focus on due process

The report this week that Virgin Atlantic is looking to sell its 49 per cent interest in the Virgin Nigeria airline is the latest case of an agreement struck under the administration of Olugesun Obasanjo (1999-2007) coming under the spotlight. Virgin Atlantic claims that it was illegally forced to move its domestic operations out of the international terminal at Lagos airport. This is contested by the administration of Umaru Yar’Adua, who won the presidential election in May 2007.

The new administration has often emphasized its strong commitment to “due process”. The president insists that he will step down (and probably stand in the re-run vote) if the ongoing election tribunal finds against his election victory of May 2007. He likes to stress the primacy of the rule of law as being central to a positive investment climate. Even one of the principal reforms of the Obasanjo era, the establishment of the Excess Crude Account, is likely to be modified due to its legal flaws. The new National Assembly has also been in review mode, investigating both the management of the power sector and the allocation of land in Abuja under the previous administration.

Scrutiny of Obasanjo-era contracts

There are numerous other examples. It is not an exaggeration to say that the single overriding theme of the Yar’Adua presidency is its scrutiny of contracts and transactions completed during the Obasanjo era. In April 2008 it rescinded the sale of Ajaokuta Steel to Indian interests and took the company back into temporary public ownership. Then in June it announced an audit of the oil license auction held in the final weeks of the Obasanjo presidency. This auction was notable for the absence of well-known companies and for the success enjoyed by small operations.

The focus on due process is also clear in post-Obasanjo transactions. July saw the release of the Kingibe report looking into the Africa Finance Corporation. In our Weekly Review dated 1 August 2008 we argued that the most telling criticism in the report was its revelation that the Central Bank of Nigeria did not seek the authority of either the National Assembly or the president for the deployment of its cash to invest in the corporation, and that the funds were committed before the corporation was legally operational.

The question is whether this focus on due process actually does serve to enhance the investment climate. Few will quarrel with the renationalisation of Ajaokuta or the audit of the oil licensing auction, since both transactions were deeply flawed. At the same time, this focus of the administration does consume time which could otherwise be be devoted to some of the other important initiatives it has promised. (It also prompts seasoned analysts to look for a hidden agenda and evidence that a contract has been revoked for the benefit of the new order.)

Reform the loser

The newly elected president in mid-2007 stressed his determination to resolve the unrest in the Niger Delta and also to overhaul the behemoth Nigerian National Petroleum Corporation. Both projects are in the committee stage. The president, unlike his impulsive predecessor, is a cautious man and he is insisting there will be major progress on both of these projects, but not until 2009.

Most investors would welcome the reversal of the excesses of the last administration but would also look for a deepening of the more successful Obasanjo reforms. But momentum has been lost and we have the sense that Yar’Adua must deliver in 2009. Both reformers and vested interests opposed to reform can quickly become restless.

The dispute between Virgin Atlantic and the federal authorities will be heard in court in October. It is little secret that Virgin has been hawking its stake in Virgin Nigeria for sale since the start of the year, and thus long before the disagreement over the terminal. The intentions of African Capital Alliance and the other local institutional investors holding the 51 per cent interest is not known.

Zambia: A tough act to follow

Zambia’s President Levy Mwanawasa, who died in a Paris hospital on 19 August, is best known internationally for his stance on Zimbabwe within the Southern African Development Community. Zambia, along with Botswana, have taken a critical position over the electoral circus in Zimbabwe in 2008 and in doing so endeared themselves to Western governments, if not to President Robert Mugabe. The implosion of the Zimbabwean economy this decade has brought marked benefits to Zambian tourism and agriculture.

Mwanawasa, first elected in 2001 and re-elected in October 2006, has presided over the strong recovery of the economy. The soaring copper price has given a timely boost of course, but it was the programme of economic reforms and a strong position on governance which delivered comprehensive external debt relief in 2006. The economy has been growing by 6 per cent annually since 2006.

The vacuum after Anglo’s withdrawal

Mwanawasa faced a serious challenge with the withdrawal of Anglo American in 2002. The government managed to fill the vacuum by offering generous terms to smaller foreign mining companies. This secured investment from Australian, Canadian, Chinese, Indian and Swiss miners. As a result the government expects copper production to rise by more than 50 per cent to 800,000 tonnes in 2008.

The rise in the copper price, along with the impact of a report by the UK’s Department for International Development, led the government to adjust its tax regime. Corporation tax was increased by five percentage points to 30 per cent, and the mineral royalty tax raised from 0.6 per cent to 3 per cent. While this has not pleased those investors who filled the post-Anglo vacuum on highly favourable terms and while some may still challenge the government in the courts, the new tax regime has not halted new mining investment.

Under Zambian law a presidential election must be held within 90 days of the announcement of the incumbent’s death. It is too early to say who will carry the baton for Mwanawasa’s Movement for Multi-Party Democracy (MMD). The late president was from one of the smaller ethnic groups but was careful to secure the backing of the Bemba-speaking people of Northern Province. Foreign investors took some interest in the election in 2006 because Michael Sata of the Patriotic Front took a strong line on unemployment and argued that foreign workers (particularly Chinese ones) had deprived Zambians of jobs. He came second, and has since been in poor health.

Healthy legacy for the new president

We are not overly concerned about the election and its aftermath. Most African countries discovered multi-partyism after the fall of the Berlin Wall in 1989 and held contested elections. In some cases the incumbent has lost and respected the result: Zambia is included in this group along with countries such as Benin, Ghana and Kenya. There is no tradition of military rule in Zambia. The forthcoming election may be messy but the new president will inherit a strong economy from Mwanawasa. The currency opened the year at about 3,850 per US dollar and is now trading at 3,550, after weakening gently to 3,600 after the president’s death.

Recent research reports:

African property: Magnet for remittances
Real estate attracts diaspora and regional institutional investor interest as a play on economic recovery

South African mining: Opportunities in a changing regulatory environment
Government negotiations are not one-sided

Ivory Coast: Electoral risk ahead
A strong economic rebound would likely follow a successful election outcome

With best regards,

Gregory Kronsten
Director, Africa Research
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