Foreign investors pumping money into East African port projects face risks such as poor governance, volatile geopolitics and mounting public debt, according to risk consultancy Allan & Associates.
A number of ports located on or near the Horn of Africa, such as the Doraleh Container Terminal (DCT) in Djibouti, the Port of Berbera in Somaliland and Sudan’s Port of Sudan, are seeking international investment, but Allan & Associates said that sparse international media coverage means potential investors are often ignorant of the risks involved.
One particular issue is mounting popular pressure to ensure that development favours the local population, or ‘localisation’. For example, Nigerian officials are under pressure to award tenders at Lagos Port’s commercial hub to local businesses over foreign contractors.
Allan & Associates said: “These policies coincide with mounting levels of public debt, which are likely to pose liquidity risks in the medium term.
“To fund such infrastructure projects governments need access to large loans, many of which are provided by Exim Bank of China, which increases countries’ dependence on Beijing for the future development of their infrastructure.”
The risk consultancy is particularly cautionary about investing in Djibouti, where operator DP World recently had a concession unilaterally terminated by the national government.
A new law adopted in 2017 allows the Djiboutian government to renegotiate concessions agreed under previous administrations. The government is highly reliant on Chinese state investment, meaning competition with Chinese investors will remain high.
The country is also heavily dependent on Ethiopia, handling 95% of its export goods, allowing Addis Ababa to exert significant political pressure on Djibouti.
Finally, Allan & Associates also warned of Djibouti’s poor macro-economic indicators, such as public debt recently reaching 87% of gross domestic product (GDP).
The consultancy said: “Given that a large part of this debt is held by foreign debt holders, this will pose a risk of liquidity shortage and potential default in the medium-term.
“However, the economy is likely to be able to sustain short-term shocks, as foreign exchange reserves currently stand at 3.8 months of imports.”
Allan & Associates said port investors were better suited to look at options in Kenya, such as the facilities in Mombassa, Lamu and Malindi.
It said: “[Kenya] is persistently ranked better than its regional counterparts, and has improved a number of indicators in recent years for the rule of law and regulatory environment.
“It is also signatory to several international conventions that provide businesses with multiple investment settlement options.”
However investment in Kenya is not without issue. Funding gaps and bureaucratic processes have slowed current projects, while increasing debt could mean the government struggles to pay current contractors.