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ANALYSIS: The Power of Interdependence and the Euro Debt Crisis

18 Jun

David O. Kuranga, Ph.D.

The author is the Managing Director and Principal of Kuranga and Associates Global Consultancy, a political and economic risk management firm that specializes in Africa. He is also the author of The Power of Interdependence with Palgrave Macmillan Press.

The Greek election this past weekend underscores key elements of the emerging global order that differs substantially from the system that was created after WWII. Many in Europe and around the world were closely watching an election this past weekend in a country of just around 10 million. The situation in Greece impacts institutions and people well beyond the borders of this relatively small country. Europe and certainly the entire world has become interdependent and thus highly integrated with each other to the point that nothing really happens in isolation. Given this situation do the Greek people really have a choice as far as policy moving forward? What power an influence do those that are impacted by the situation in Greece hold? How do those that are closely tied with Greece affect their desired policies in the domestic affairs of that country? The answer to all these questions and many others are the focus of my new book, The Power of Interdependence with Palgrave Macmillan Press.

Everything from the “Arab Spring” discussed in a previous article, to the Euro Debt crisis I wrote about in a recent piece demonstrates how what happens in one country can impact the entire region and possibly the world. These prominent events demonstrates the condition of interdependence that exists in our world today. The level of interdependence today far exceeds what existed after WWII when the current global system was formed. Since the conditions have changed over the last 60 years, the institutions have also changed and evolved. Today all major regions of the world have at least one regional organization that was established to address interdependence among members of a region. These organizations have become borderless in many areas where visas are no longer required for nationals and goods and services flow freely.

What has not been done in global affairs and international relations is to measure the impact these new interdependent arrangements have on the countries and their people that are party to them. The Power of Interdependence is a comprehensive study that looks into this issue and seeks to provide answers to the pressing questions and issues that are currently in our world today. The Power of Interdependence lays out a formula to measure the impact of interdependance within a region or an international system and thus predict the outcome of events such as the Greek election or the intervention in Mali I discussed in a piece recently. For decision-makers and policy-makers this is very beneficial becuase rather that sitting, biting your nails, and watching the news, you can actually take simple steps to analyze and acurately predict the outcome of a given situation even better than many of the supposed experts and correspondents that dominate mainstream print and televised media.

In a situation such as Greece, it is highly unlikely that decision-makers will be able to deviate from a policy framework that is not supported by the majority of other countries that are also impacted by these decisions especially those within the region. They serve as a constituency that did not necessarily vote in the election, but are still most likely to win every vote and major decision depending on the issue and how closely dependent the countries are to one another in that area. This variable is too often overlooked, which is why so many supposed experts and mainstream media outlets this weekend wasted so much time over-hyping the vote and pandering over the election outcome in Greece, and not the real issues which is the capacity to address the core problems. In any major issue ask yourself, who else outside this country is directly impacted by this? How are they linked to the country in focus? What is the level of interdependence between them? Once you answer these questions, you will know the outcome long before it takes place, and can turn of the ill-informed mainstream media correpondents, pundits, and analysts, and focus on what you need to do to address the real issues that will remain once the actually predictable outcome occurs.

Kuranga and Associates Global Consultancy is a political and economic risk management firm with a principle practice area of Africa. To learn more about Kuranga and Associates go to www.kaglobal.net. © Copyright 2012 David Kuranga. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

David O. Kuranga, Ph.D.
Managing Director

Kuranga & Associates Global Consultancy
Office: 212.363.0936
New York, NY
david.kuranga@kaglobal.net
https://kurangaandassociates.wordpress.com/
http://us.macmillan.com/thepowerofinterdependence/DavidOladipupoKuranga

What does the Euro Debt Crisis Mean for Africa?

15 Jun

David O. Kuranga, Ph.D.

The author is the Managing Director and Principal of Kuranga and Associates Global Consultancy, a political and economic risk management firm that specializes in Africa. He is also the author of The Power of Interdependence with Palgrave Macmillan Press.

Reports of a possibly uncontrollable tidal wave of defaults in the Euro Zone of countries, first with Greece, then Spain, and finally Italy (possibly Portugal) has sent ripples throughout global financial markets. Exchanges across Europe, North America and Asia have seen a great deal of volatility depending on the outlook of debt rescues underway in Europe. As Greece is set to vote this Sunday between a far-left party that pledges to cancel the multilateral Euro debt agreement or a right of center party that pledges to uphold it despite its unpopularity in Greece. There is a very real possibility that Greece will exit the Euro-zone since there is not much room to renegotiate the unpopular austerity measures that came with the bailout package Greece received. If that were to happen, Greece will soon default on its sovereign debt, further Greek businesses that took loans in the Euro would also default due to the fact that they would be forced to repay double what they borrowed due to currency devaluation. Inflation will also climb to over 30% in the net-importing country.

A default in Greece will trigger great concerns that Spain and Italy will also default. Similar to the way the collapse of the Thai Baht in 1997 triggered the Asian Financial Crisis that rippled across Asia in a contagion and subsequently was felt throughout global financial markets. A collapse in Greece will make banks, creditors, and financial institutions that hold European debt to become concerned of the prospect of a default by another Euro-zone country, notably Spain, Portugal, and Italy. If Euro-zone leaders are not able to provide suitable lines of credit to those countries the cost of credit in those countries will skyrocket, making growth and fiscal recovery virtually impossible. Spanish banks have already been pledged 125 Billion by European countries, the need there will be much greater than this if Greece defaults as the government will also need additional lines of credit. In a self-fulfilling prophesy, both Spain and Italy, and likely Portugal will also default on their sovereign debt. In the case of Italy, sovereign debt totals a massive sum of over 1 trillion USD. In the meantime, given that many banks in Europe hold sovereign debt from these same European governments, average depositors in Europe will make a run on banks. Liquid capital in many financial institutions across Europe will dry-up quickly, banks could easily fail.

While much has been said on how this potential collapse in Europe will impact North America or Asia, not much has been written on what impact this will have on Africa. The country in Africa that is most exposed to European financial woes is South Africa. during the 2008 Global Financial Crisis (GFC) South Africa actually experienced negative growth. Trouble in Europe will undoubtedly spell immediate trouble in South Africa. Other countries directly linked to South Africa through trade and investment will also feel the impact of the crisis. The rest of Africa has limited exposure to the global financial system thus the impact of crisis in Europe will not be as severe. However, commodity prices on raw materials will plummet as global demand for such goods declines. This will inevitably have an adverse impact on many African economies that rely heavily on the export of these unprocessed commodities.

African governments that have been borrowing will find it difficult to access credit and a wave of austerity measures will hit even some of the basic rudimentary social services available in Africa. Controversial petroleum subsides in Nigeria will be scrapped, in other countries other programs in healthcare and education are also likely to suffer. The degree of cuts in Africa will depend on how long it takes European decision-makers to wrestle the debt crisis. Talks of a collective Euro-bond have increased as a way of issuing sovereign debt backed by all members. There is also the possibility that the IMF could step in an offer emergency credit to the block if global leaders can agree.

The rapid growth, now seen in many countries in Africa will slow, and some countries in Southern Africa, particularly South Africa could see economic declines as was the case in 2008. While the effects of a European crisis will be greater in Africa than the 2008 GFC, with the exception of South Africa the impact will not be as great in the region as other regions that are more exposed to default risk in European financial markets. Still, African leaders cannot afford to ignore the developments of Greece this weekend. If indeed Greece does default, governments in Africa will need to immediately begin to reduce spending and look for ways to diversify trading partners within the region and with other nations in the developing world.

Kuranga and Associates Global Consultancy is a political and economic risk management firm with a principle practice area of Africa. To learn more about Kuranga and Associates go to www.kaglobal.net. © Copyright 2012 David Kuranga. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

David O. Kuranga, Ph.D.
Managing Director

Kuranga & Associates Global Consultancy
Office: 212.363.0936
New York, NY
david.kuranga@kaglobal.net
https://kurangaandassociates.wordpress.com/
http://us.macmillan.com/thepowerofinterdependence/DavidOladipupoKuranga

Capitalizing on Private Public Partnership’s In Africa

4 Jun

David O. Kuranga, Ph.D.

The author is the Managing Director and Principal of Kuranga and Associates Global Consultancy, a political and economic risk management firm that specializes in Africa. He is also the author of The Power of Interdependence with Palgrave Macmillan Press.

With the onset of the Global Financial Crisis, governments all over the world have straddled with the limited availability of capital alongside the need for capital intensive development projects in order to meet the Millennium Development Goals (MDG’s). In increasing trend in the developing world has been for governments to forge partnerships with private partners as a means of leverage limited resources. There have been several Private Public Partnerships (PPP’s) in Africa over the last few years. The growing trend is that these will increase in the years to come. Political risk assessment and subsequent risk management is the key to succeed in these ventures for both private and public partners.

LEKKI TOLL ROAD, LAGOS NIGERIA

A key example of a recent PPP is the Lekki toll road where the growing population in Nigeria’s largest city, Lagos has created a substantial transportation infrastructure hurdle and some of the worst traffic conditions in the country. The need for new roads and transportation corridors to accommodate the growing population and new housing developments is substantial. One area of expansion has been the Lekki Peninsula Phase I and II. The government of Lagos State in Nigeria oriented a PPP toll bridge from the Lekki Peninsula to the Lagos Island and mainland connection. The partnership was a result of a joint loan taken between the government, the African Development Bank and the Lekki Concession Company Limited (LCC), a subsidiary of ARM Investment Managers. The project expands the existing 50km of the Lekki-Epe Expressway in Phase I, and adds an additional 20 km of road on the Lekki Peninsular Phase II.

Some of the improvements made with the project was to widen the first 23km and upgraded the last 26.5km of the expressway from Lekki to Epe on the main corridor from the peninsula into Victoria Island. In addition a new ramp was installed at the Falomo junction connecting to the Falomo Bridge. The project also installed walkways for pedestrians. The project also consisted of a coastal road and upgrading 10 additional connecting roads between the Lekki expressway and the coastal road. According to the African Development Bank (AfDB) the project is projected to create over 1000 jobs.

Financing

In addition to the 85 million USD in financing provided by the AfDB, total project cost was roughly 382 million USD, or about 44.91 billion Naira required additional financing. The AfDB provided about 35% of total financing. The project was also funded in part by Standard Bank London. The project is supposed to last for 30 years, with the repayment of the private partner coming from the collection of tolls over the time period. The tolls run from between 0.30 USD to 2.00 USD depending on the vehicle used. When the road opened late in 2011 it was the first major public private partnership in the transport sector for Nigeria. The involvement of the AfDB helped to validate the due-diligence process for international partners and provide a stamp of approval for international investors to participate. To date there have been substantial private investment in the telecommunication sector this is the first significant partnership in the transportation sector.

Controversy

Since the initiation of the toll road project there has been opposition, in part linked to opposition to Governor Fashola of Lagos State. There is considerable controversy over the legality of a toll road and the practice has been challenged in court. In addition there has been opposition to the user fees attached to using the bridge.  Many of the services including clinics and hospitals are located on the other side, thus residents have to pay an added cost just to access basic facilities that are presently not available on the peninsula.

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The Success of PPP’s and Political Risk Management

The legal challenges and protests that has surrounded the Lekki Toll Road is an example of political risks that could shroud PPP’s. The nature of PPP’s particularly in infrastructure generates a high priority on risk assessment and risk climate in the host country. Most infrastructure projects involve hundreds of millions if not billions of dollars to construct and develop and maintain. They take years to build and construct as oppose to months and weeks with other types of investment. Once an investment has occurred there is almost no way to turn back, as an investment in infrastructure is relatively immobile and must function in the host society in order to generate revenue. Thus in an infrastructure investment, investors are stuck with what they have got in terms of investment climate and there is not much that can be done once an investment occurs. For this very reason, infrastructure investment in frontier economies has been slow, particularly in Africa where there are a myriad of opportunities but a high-level of fear that the risk outweigh the potential benefits of revenues. Thus in the previous decades since independence in Africa infrastructure development has been lead by the state. The state has conceived planned and built much of the existing infrastructure in Africa utilizing its own resources in the process.

Of all the parties that could potentially invest in infrastructure, the state has the least level of risk. The most significant risk being, if there is civil conflict an key infrastructure falls into the hands of forces that are opposed to the state. This has occurred in several countries in the region including Sudan and Cote D’Ivoire, but most recently in Libya. With the limited level of risk, the state has the highest potential of seeing a return on investment (ROI) or at the very least increasing political support with particular constituencies as a result of the investment in infrastructure. With this dynamic the vast majority of infrastructure development in Africa is limited largely to what the state prioritizes and has the resources to execute. This paradigm has resulted in low-levels of investment in infrastructure given the limited resources available to the state.

This dynamic of the government being the primary driver of infrastructure development is changing with the success of the private sector in the telecommunications sector on the continent. Major internet and mobile phone service providers have reaped big profits in Africa over the last decade and are projecting strong growth for the next several years. This success of this infrastructure development has led to the possibilities of public private partnerships in other areas beyond the telecommunications industry to include transportation, air, rail, sea, and roads. There are numerous political and economic risks involved in investing in African infrastructure.

Private investment in infrastructure requires some type of concessionary agreements with the government. Ideally these agreements should last long enough for the private investor to get a high enough ROI to justify the investment and could be for the life of the infrastructure put in place. These concessions are often for several decades or longer. Needless to say, it is unlikely that the political administration that negotiates an infrastructure concession will be around throughout the life of the agreement. Political turnover is the first major risk when investing in infrastructure and other long-term PPP’s.

In this it is possible that future political administrations will not honor the agreements made by predecessors especially if they are under political pressure to disavow them. These risks are not unique to Africa, expropriation of vital infrastructure from private investors is a possibility that investors should consider when investing in infrastructure. These risks can be managed from the onset by tailoring concessionary agreements with expropriation clauses and mandatory minimum levels of compensation if they occur before the expiration of the concession. The risk of expropriation of the telecommunication services is not likely to occur in Africa. Telecommunications are viewed as a luxury, thus the providers are providing something that is not considered an entitlement. Thus it is not likely that there will be political pressure on future administrations to expropriate or nationalize telecommunications infrastructure investments.

Infrastructure such as roads, bridges, and highways, are typically provided to citizens free of cost by the state. Public private partnerships in these areas where a private company will be allowed to charge user fees to the public for access may be a bit more controversial. There has already been considerable controversy in Lagos, Nigeria surrounding the Lekki toll road. The concession made by the Lagos State government has already faced substantial opposition and legal battles. In addition there were a number of “Occupy” protests where residents attempted to block the road. They were supported by opposition politicians who were arrested along with protesters. It is not at all clear that a future administration in Lagos will honor this agreement. Any investment in infrastructure such as roads and bridges, if structured with user fees as the primary means of repayment, should come with considerable risk management from the onset with expropriation clauses and mandatory compensation and payment schedules if that were to occur. While it remains unlikely that Lekki toll road will be expropriated, the risk of this occurring is higher than with the telecommunications investments. As governments open-up to investment areas that have been previously regulated and controlled by the state, there are a vast array of opportunities in Africa for firms to form lucrative partnerships with the state. The key to succeed in these ventures is assessing and managing the political risks.

Kuranga and Associates Global Consultancy is a political and economic risk management firm with a principle practice area of Africa. To learn more about Kuranga and Associates go to www.kaglobal.net. © Copyright 2012 David Kuranga. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

David O. Kuranga, Ph.D.
Managing Director

Kuranga & Associates Global Consultancy
Office: 212.363.0936
New York, NY
david.kuranga@kaglobal.net
https://kurangaandassociates.wordpress.com/
http://us.macmillan.com/thepowerofinterdependence/DavidOladipupoKuranga