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Investing in Transition States: The Horn of Opportunity A briefing note for South Korean investors

2018 GROUP Front cover picture: Cityscape of , capital of the Republic of the Investing in Transition States: The Opportunity A briefing note for South Korean investors

Foreword

It is my pleasure to introduce this report on the investment Investing in Transition Countries presents, not only the opportunity in the Horn of Africa. prospect of making a difference in Africa, but a real financial opportunity with potential for outsized returns, As a development financial institution, the African for those willing to engage in these markets and seize the Development Bank works to promote economic growth first-mover advantage. This report outlines the Horn of and social progress across the . The Transition Africa opportunity, namely the investment climate and States Coordination Office (RDTS) was established to opportunities in , , , support the Bank’s commitment to play a leadership role in and Sudan, with also considered as an entry point stimulating economic and social development in countries to these markets. in transition. Our ‘Strategy for Addressing Fragility and Building Resilience in Africa (2014-2019)’ recognizes the I commend the report to you, and assure you of my potential of private sector investment to kick-start office’s every support as you consider your participation transformational change by leveraging the opportunities in these markets. present in these markets and providing better livelihoods and economic prospects to vulnerable populations. Sibry Tapsoba Director, Transition States Coordination Office African Development Bank

AFRICAN DEVELOPMENT BANK GROUP

The Horn of Africa Opportunity 1 The Horn of Africa is a large and dynamic market – with 174 million people and a total GDP of $188bn.

Total foreign direct investment to the automotive, electrical machinery, and is USD 4.8 BN annually, and has been infrastructure. Three additional sectors are growing 12% year on year. In addition, also introduced for consideration in this Korean investors have had a longstanding region: textiles, and extractives. relationship with the region – the Korean For the engaged investor, there are Trade-Investment Promotion Agency opportunities to invest to tap the large, local (KOTRA) has offi ces in Sudan and Ethiopia, market; as well as to manufacture for and Korean FDI has increased fi ve-fold export, both regionally and further afi eld. since 2014. We invite you to read this summary note. This summary briefi ng note presents the A copy of the full, extended version of this “Horn of Africa opportunity”. It outlines the report can be obtained by contacting the market dynamics in each country, as well Transition States Coordination Offi ce of the as specifi c sectors for consideration: African Development Bank.

Methodology

This, ongoing, work was commissioned by the AfDB’s regulatory environment, risks and the region’s trading Transition States Coordination Offi ce (RDTS), with sup- relationships. Based on typical investor patterns, the port from KOAFEC Trust Fund. Dalberg Advisors and Horn of Africa emerged as the fi rst priority region. In CrossBoundary LLC have prepared this summary note. 2018, the African Development Bank, supported by CrossBoundary, is facilitating investments from Korean In late 2017 Dalberg Advisors analysed 80+ metrics businesses into this region. across 16 countries and four in Africa; , Mano River Basin, Great Lakes region and Horn of Africa. This work focused on ‘transition states’ and aimed to evaluate which region might have the best ‘fi t’ for Korean investors. These regions were assessed based on their local economy, available resources (e.g. land and labour), prior relationship with Korea,

AFRICAN DEVELOPMENT BANK GROUP

2 The Horn of Africa Opportunity FDI inflows into the Horn of Africa Vehicle Imports into the Horn of Africa USD Millions; including Ethiopia USD Millions; 2016 4,794 1481 The Horn of 4,Africa329 Opportunity2015 1392 2016 3,633 The3, 009Horn of2 Africa,827 has a large and growing GDP, with FDI inflows into the Horn of Africa 1031 Vehicle Imports into the Horn of Africa most economic activity and wealth concentrated in USD Millions; including Ethiopia USD Millions; 2016 Sudan and Ethiopia. Total GDP for the region is $188B, 4,794 1481 with 89% from these two markets ($95bn and $72bn 4,329 2015 1392 527 2016 respectively). Economic growth is high across the region — 3,633 Sudan, Ethiopia, Djibouti and Eritrea are between 5 and 9% 375 2012 2013 2014 2015 2016 3,282009 2,827 1031 GDP growth per annum; although conflict has led to the 141 114 112 South Sudanese economy shrinking, while that Somalia is 64 21 7 growing at a slow pace. GDP per capita is highest in Sudan

at $2,899. In Eritrea, Somalia, S. Sudan and Ethiopia it is Djibouti Eritrea Ethiopia Somalia South Sudan 527 less than $800. Total FDI into the region largely goes to Sudan 375 2012 2013 2014 2015 2016 Ethiopia; which has been growing its FDI flows by 12% p.a. 282 and could be higher as official figures may not capture all Source: UNCTAD, Bank Development Indicators 2017, 141 114 112 64 UNECA 2016, Ethiopian Investment Commission, Korea EX 21 7 Electricalof the FDI Machinery flows. In terms Imports of the in relationshipthe Horn of withAfrica Infrastructure Development Index (AIDI)* USDKorea, Millions; Sudan 2016 is slightly ahead of Ethiopia as the primary Score out of 100 Djibouti Eritrea Ethiopia Somalia South Sudan importer of South Korean goods (USD 178M annually). The investor climate may also vary within a single Sudan 23.9 2015 2590 country.2 3Somalia.4 itself remains very challenging; but AIDI 2014 Each2016 market is different1750 – and local conditions evolve , an autonomous region within Somalia, is AIDI 2016 swiftly. There is a wide range in the level of market peaceful and more open. Country-wide ‘doing business’ 551 Electrical Machinery Imports in the Horn of Africa Africa Infrastructure Development Index (AIDI)* readiness, and each market needs to be individually rankings will not always reflect the local nuance. Some 470 USD Millions; 2016 14.7 Score out of 100 understood (see country profiles and full report for more regions in the country may be difficult to do business in. 13.7 23.9 351detail).353 Recent development and efforts to secure peace 2015 2590 23.4 AIDI 2014 in the Horn present a new dynamic for investors. Sudan, Public stakeholders2016 are 1committed750 to streamlining the AIDI 2016 7.9 8.3 7.6 having had sanctions lifted in 2017, has great opportunities investment process. There6 is.4 an appreciation from public to invest (alongside a large domestic market). However, stakeholders that in order to successfully attract5541 .investment3 4.9 106 110 3.2 3.4 doing business in neighbouring South Sudan remains into the various markets, the creation of and470 support for 14.7 33 43 35 19 13.7 challenging. Whilst Eritrea remains largely closed to over- investment promotion agencies will be essential. This is 351 353 seas investment, the peace deal with Ethiopia in July 2018 evident in various markets (e.g., Somalia, and South Sudan) 8.3 Djiboutihas broughtEritrea renewedEthiopia optimismSomalia and momentum,Sudan Southand we where entitiesDjibouti haveEritrea been establishedEthiopia Somaliato provideSouth the Sudan 7.9 7.6 Sudan Sudan 6.4 expect that the foreign investor climate will soon improve. necessary interface with investors. 4.3 4.9 106 110 3.2 3.4 33 43 35 19

South Korea’s exports to the Horn of Africa (2016) Djibouti Eritrea Ethiopia Somalia Sudan South Djibouti Eritrea Ethiopia Somalia South Sudan USD Millions Sudan Sudan

Somalia Hyundai and Kia cars are available in Sudan; Sudan and there is a local manufacturing plant Ethiopia for two Hyundai lines ’s exports to the Horn of Africa (2016) USD Millions Source: International Trade Centre, 1 Dalberg analysis.

Somalia Note: South Sudan figures negligible; 92 Hyundaino reported and Kia data cars for Djibouti are available or Eritrea. in Sudan; Sudan 38 and there is a local manufacturing plant Ethiopia for two Hyundai lines 2 5 1 11 ½ 92 18 44 11 38 33 22 18 2 17 13 6 1 3 1 4 8 4 5 11 Vehicles Mechanical Plastics Electrical Organic Pharma Rubber and Optical and ½ Machinery Machinery Chemicals Steel Medical18 44 Equipment 11 33 22 18 17 13 6 1 3 1 4 8 4 The Horn of Africa Opportunity 3 Vehicles Mechanical Plastics Electrical Organic Pharma Rubber Zinc Iron and Optical and Machinery Machinery Chemicals Steel Medical Equipment Country Profiles

The transition markets in the Horn Ease of Doing Business Score of Africa, and the focus of this report, 49.6 are Sudan, South Sudan, Djibouti, 44.5 Eritrea and Somalia. 32.9 22.9 However there are many regional entry points, which can 20.0 provide a stable platform for a region-wide investment, and to build experience with local market dynamics. These the Horn of Africa region, and include Ethiopia, Sudan South Djibouti Eritrea Somalia , the Democratic , and . Sudan Based on data from regional private equity flows, a third of Note: Ease of Doing Business is an annual ranking and score investors make multi-country investments, rather than in published by the World Bank on the business and investment climate any one market. in each country. A score is provided, from zero (poor) to 100 (comparable to the best any country has performed in the ranking’s history). Countries are also ranked regionally and globally. For more details, see www.doingbusiness.org

Sudan

GDP GDP Per Capita USD 95.6B USD 2,899 growing at 4%

FDI Inflows, 2016 Population USD 1,063M 39.6M growing at 2%

South Sudan

GDP GDP Per Capita USD 9B USD 759 growing at -6%

FDI Inflows, 2016 Population USD -17M 12.2M growing at 3%

4 The Horn of Africa Opportunity Country Profiles

Djibouti

GDP GDP Per Capita USD 1.7B USD 1,9 2 8 growing at 7%

FDI Inflows, 2016 Population USD 160 M 0.9 M growing at 2%

Eritrea

GDP GDP Per Capita USD 2.6 B USD 583 growing at 9%

FDI Inflows, 2016 Population USD 52M 4.5M growing at 2%

Somalia

GDP GDP Per Capita USD 6.2B USD 500 growing at 2%

FDI Inflows, 2016 Population USD 339M 14.4 M growing at 3%

The Horn of Africa Opportunity 5 Target Sectors

1- Vehicles

FDI inflVehiclesows into are the the H onumberrn of Afr oneica export from Korea to the Vehicle Imports into the Horn of Africa USD Millions;Horn ofincluding Africa, Ethiopia especially in Sudan and Ethiopia. In USD Millions; 2016 East and North there is a trend towards 4,794 FDI inflows into the148 H1 orn of Africa 2015 1392 Vehicle Imports into the Horn of Africa developing local assembly4, 329plants and present USD Millions; including Ethiopia USD Millions; 2016 opportunities for the Transitions States to be part of the 2016 3,633 1481 automotive value chain. There are now seven domestic 4,794 3,009 2,827 4,329 1031 2015 1392 assembly plants in Ethiopia (alongside three outside the 2016 Horn, in Kenya). The local growth of the middle class 3,633 continues to support domestic demand for vehicles, 3,009 2,827 1031 and high entry tariffs for vehicle exports supports the 527 economics of local assembly. 375 2012 2013 2014 2015 2016 282 527 141 114 112 64 21 7 375 2012 2013 2014 2015 2016 282 141 114 112 Djibouti Eritrea Ethiopia Somalia South Sudan 64 Sudan 21 7

Djibouti Eritrea Ethiopia Somalia South Sudan 2- Electric Machinery Sudan Electrical Machinery Imports in the Horn of Africa Africa Infrastructure Development Index (AIDI)* USD Millions; 2016 Score out of 100

2015Electrical machinery2590 is the number one Korean export Electrical23.4 23.9 Machinery Imports in the Horn of AfricaAIDI 2014 Africa Infrastructure Development Index (AIDI)* USD Millions; 2016 Score out of 100 2016globally. Major Korean1750 electrical and electronics brands AIDI 2016 already have a strong foothold in Africa — for example 2590 23.9 Samsung has 35% of overall smartphone551 market. The 2015 23.4 AIDI 2014 assembly of electrical goods for47 0large domestic markets 2016 1750 14.7 AIDI 2016 13.7 (e.g., Sudan and Ethiopia) is likely to be attractive, 353 551 351 particularly for bulky white goods. LG has already 470 14.7 invested in a local assembly plant in Sudan for washing 7.9 8.3 7.6 13.7 6.4 machines. 351 353 4.3 4.9 106 110 3.2 3.4 7.9 8.3 7.6 • In33 Sudan,43 Haggar Holdings Company is35 responsible19 6.4 for the assembly and distribution of Samsung 4.3 4.9 106 110 3.2 3.4 products. Ethiopian firms Techno Mobile and G-Tide Djibouti Eritrea Ethiopia Somalia Sudan South Djibouti 33Eritrea43 Ethiopia Somalia South 35Sudan19 manufacture handsets for the EthiopianSudan and East Sudan African markets Djibouti Eritrea Ethiopia Somalia Sudan South Djibouti Eritrea Ethiopia Somalia South Sudan Sudan Sudan

South Korea’s exports to the Horn of Africa (2016) USD Millions 6 The Horn of Africa Opportunity South Korea’s exSomaliaports to the Horn of Africa (2016) Hyundai and Kia cars are available in Sudan; USD Millions Sudan and there is a local manufacturing plant Ethiopia for two Hyundai lines Somalia Hyundai and Kia cars are available in Sudan; Sudan 1 and there is a local manufacturing plant Ethiopia for two Hyundai lines 92 38 1

2 92 5 38 11 ½ 2 18 11 5 44 11 33 ½ 22 17 18 1 13 6 3 1 18 11 4 8 44 4 33 Vehicles Mechanical Plastics Electrical Organic Pharma Rubber22 Zinc Iron and Optical and 17 18 6 1 3 1 Machinery Machinery Chemicals Steel Medical 13 8 Equipment 4 4 Vehicles Mechanical Plastics Electrical Organic Pharma Rubber Zinc Iron and Optical and Machinery Machinery Chemicals Steel Medical Equipment FDI inflows into the Horn of Africa Vehicle Imports into the Horn of Africa USD Millions; including Ethiopia USD Millions; 2016 4,794 1481 4,329 2015 1392 2016 3,633 3,009 2,827 1031

527 375 2012 2013 2014 2015 2016 282 141 114 112 64 21 7

Djibouti Eritrea Ethiopia Somalia South Sudan 3- Infrastructure Sudan

ElectricalIn Machinerypost-confl ictImports situations, in the construction Horn of Africa is generally Africa Infrastructure Development Index (AIDI)* USD Millions;the 2016fi rst sector to receive FDI as reconstruction and Score out of 100 expansion of infrastructure investment are a priority, 2590 23.9 2015especially in both energy and transport. For example, 23.4 AIDI 2014 2016Djibouti has recently1750 announced a USD 442M invest- AIDI 2016 ment from the UAE to build a new 5port.51 In addition, Sudan is seeking to commission the development of 470 14.7 several renewable energy (solar & wind) projects, 13.7 351 353supported by government incentives, which have undergone feasibility studies and are ready for investor 7.9 8.3 7.6 consideration. South Korean fi rms have also been 6.4 4.3 4.9 involved in energy infrastructure,106 110 including hydroelectric 3.2 3.4 ,33 43elsewhere in the continent. The region’s35 19 infra- structure plan, the “Horn of Africa Initiative” crafted by the Intergovernmental Authority on Development, has Djibouti Eritrea Ethiopia Somalia Sudan South Djibouti Eritrea Ethiopia Somalia South Sudan prioritised interconnectivity on transport Sudanand energy Sudan via interconnection links. Infrastructure investment can also strengthen the broader business ecosystem to Source: African Development Bank, World Bank, Infrastructure Consortium for Africa, Dalberg analysis enable higher value investment (e.g., manufacturing). South Korea’s exports to the Horn of Africa (2016) AIDI is based on four components: (i) Transport; (ii) USD• There Millions have been improvements in the status of infrastructure in the Horn. Between 2014 and 2016, Electricity, (iii) ICT, and (iv) Water & Sanitation. These Ethiopia and Sudan had the largest gains, for components are measuredSomalia by 9 indicators that have an countries Hyundaiin the Horn, and Kia in cars the areAIDI available primarily in Sudan; due to impact on productivity andSudan economic growth. The AIDI and there is a local manufacturing plant Ethiopia improvementsfor two in Hyundai ICT infrastructure lines measures the following indices: total paved roads, total road network, number of internet users, electricity • The governments 1of Djibouti, Ethiopia, Eritrea and generation, access to improved water sources, improved Somalia have stated an intention to increase infra- sanitation facilities, total phone subscriptions, fi xed-line structure92 investment in their national development phone subscriptions, mobile phone subscriptions, plans. Recent38 external investments have largely gone number of internet users, fi xed broadband internet to Ethiopia for electricity generation and transmission subscribers and international internet bandwidth. 2 projects valued at USD 1.9B 5 11 ½ • The Horn of African Initiative has facilitated some 18 infrastructure44 investment although some gaps11 remain. Projects under preparation33 still require an investment 22 of USD 1.4B and projects that still1 need7 to be1 8 6 1 3 1 13 8 prepared require a USD 1.3B investment 4 4 Vehicles Mechanical Plastics Electrical Organic Pharma Rubber Zinc Iron and Optical and Machinery Machinery Chemicals Steel Medical The HornEquipment of Africa Opportunity 7 Tier-two Sectors As well as our priority sectors of vehicles, electrical machinery and infrastructure, there are many other opportunities in other parts of the economy. We have profiled three further examples below.

Textiles Agriculture

Opportunities for garment manufacturing are available in This is the largest single sector in the Horn of Africa Sudan, Eritrea and Djibouti — although the level of existing (approximately 35% of total GDP), with the number textile industry in each of these countries varies. The one export from the Horn to Korea. Agricultural transfor- opportunity to invest is enhanced by the preferential trade mation is also key for the AfDB as it strives to boost food agreements available to Least Developed Countries. For security through its ‘Feed Africa’ focus, one of its five example, the European Union initiative “Everything But strategic priorities, the ‘High Fives’. However, in South Arms” grants duty and quota free access to the European Korea, agriculture contributes just 2% of the economy. Union; and the Africa Growth and Opportunity Act (AGOA) South Korea has deep technological expertise, and so grants preferential access to the United States. South there may be opportunities to boost food production using Korean firms are taking advantage of these in other markets technical support and transferrable innovation. In 2016, (for example, South Korean firm “Sea-A” has set up a Lotte Confectionary became the first Korean food company textiles plant in Haiti to take advantage of preferential trade to enter the African market, when they set up their agreements) — and there is opportunity to bring Korean operations in Kenya. investment to these sectors in the Horn of Africa. A delegation of Korean textiles manufacturers visited Ethiopia and Kenya in 2016, both of which serve as entry points to the wider Horn of Africa, to conduct initial field work on the suitability for textiles investment.

Extractives

In the more challenging markets in the Horn of Africa (i.e. Eritrea, South Sudan, Somalia), oil and mining (especially ) have historically been the source of the majority of private sector investments. Typically these kinds of investments are investor-led rather than facilitation-led, given the need for detailed groundwork assessments.

There are “huge opportunities for Korean investment in

the Sudan.” — Minister of Information for Sudan

8 The Horn of Africa Opportunity Mutual interests

Both Korean investors and private sector players in the Horn of Africa have expressed interest in increasing their connections, particularly through new investments. Each has its own reasons to find these investment opportunities appealing, but both are ultimately aligned in that additional Korean investment in the Horn of Africa is welcome.

From the Korean perspective, many investors are looking to diversify away from their current geographic portfolio i.e. South East . The Horn of Africa represents a sizeable market that has demands for the types of services Korean companies are placed to offer.

At the same, public stakeholders in the Horn of Africa are investing domestically to ensure their business envi- ronment is attractive to foreign investors, like the Koreans. They are taking steps to set up the necessary infrastruc- ture, such as industrial parks with subsidized utility costs, provide a seamless investment process through one-stop- The Horn of Africa represents a sizeable shop services to set up businesses, and prove additional market that has demands for the types incentives such as tax holidays, custom duty exceptions or priority access during foreign currency shortages. of services Korean companies are placed As these countries continue to implement favourable to offer. policies, the attractiveness of the region will grow.

Transition countries in the Horn of Africa are also keen of Africa are excited not only by access to these products, to engage with Korean investors, as compared to their but also by the possibility of knowledge transfer from such peers. Korea’s level of technological innovation is admired. a well-regarded player. Countries in the region also find Korean products are considered great value for money – the possibility of combining low-cost funding from KEXIM although slightly higher priced than competitor products, bank, albeit limited, with project execution capabilities, they are more durable and reliable. Countries in the Horn an attractive value proposition.

The Horn of Africa Opportunity 9 The Way Forward – Overcoming Current Barriers

Despite this mutual interest to grow their relationship, there Korean investors looking to invest in the region could are challenges that hinder both sides from fully engaging. benefit from adjusting their risk appetite and streamline These are typically based on past investment experienc- their decision making to allow them to better compete with es or perceptions on the political and business environ- other players. Transition countries in the Horn of Africa ment. Continued efforts from both transition countries in often view Korean investors as more onerous to deal with, the region to strengthen their business environment, and due to required investment of time and capital to close a from Korean investors to adapt their approach to suit the deal. Korean investors generally have a lower risk appetite specific regional context, are required to overcome these compared to other emerging market actors i.e. Chinese, challenges. Indian and Turkish players. This is compounded by the fact that Korean conglomerates are often highly bureaucratic Transition countries could significantly enhance the attrac- and hierarchical, meaning that country level heads and tiveness of their markets to Korean investors by providing middle level managers are not empowered to make deci- a more stable policy environment and ensuring their sions. Investment related decisions are reserved for senior governments are a reliable partner for investors. Korean executives in the head offices which creates delays and businesses are often weary of conducting business in the can lead to local stakeholders quickly growing frustrated Horn of Africa given the past and current political environ- and pursuing alternative partners. ment. The high turnover within government departments can result in a lack of clarity and changing business poli- In addition, Korean companies could explore and offer cies, specifically around establishment of an international additional financing solutions that are better adapted to business and foreign investment policy. Moreover, Korean the needs and capabilities of local partners, and are more businesses are hesitant to collaborate on government competitive relative to other actors. Korean investments are projects due to these changes. often seen as more financially expensive by local part- ners. Most Korean companies do not provide funding for Additionally, transition countries in the region could their projects and expect local partners to secure private implement policies to strengthen the supply of key inputs funding from development banks, therefore limiting the to allow Korean business to operate effectively. Most of the number of local parties they are able to collaborate with. countries in the Horn of Africa have a constrained supply This limits possibilities to invest in countries like Somalia, of foreign currency and Korean businesses have previously Somaliland and Eritrea, that have limited to no engagement experienced trouble securing letters of credit to finalize with international development partners. In trade rela- business deals or accessing foreign currency to meet their tionships, Korean companies expect upfront payments or operational needs. The region also suffers from a short- provide short credit facilities, which does not match with age of highly skilled manpower, and certain tech intensive the credit offerings provided by competitors i.e. Chinese Korean businesses must provide their own capacity and Indian companies. On top of this, Korean projects are building to successfully operate. Unfortunately, due to limit- 15-20% more expensive, on average, than the competition, ed infrastructure, Korean investors struggle to find interna- albeit higher quality. The higher price coupled with lack of tional staff that are willing to relocate to the . Without financing options causes many African businesses to seek the required capital and human resources, it can be alternative partners. difficult for Korean businesses to flourish. The Korean government also has a role to play in creating an enabling environment for Korean investment in the Horn of Africa. In contrast to , Korean companies have argued that they have limited government support when pursuing overseas investment opportunities particularly in Africa. Furthermore, Korean foreign policy prohibits travel to some transition countries, thereby making the possibility of business collaboration difficult.

While these markets can be highly challenging, there is a strong potential for outsized returns. As the Horn of Africa continues to improve its political and business environment and Korean companies become more comfortable with the region, the possibility for investment will continue to grow even further.

10 The Horn of Africa Opportunity Conclusion

This report outlines the investment opportunity in the Horn of Africa, alongside some of the most promising sectors for Korean investment. Investing in the markets listed in this paper, which are still in transition, may allow the investor exposure to opportunities which are not commonly available — and allow the investor to gain a strong foothold in high-growth markets before they become mainstream. Of course, all investments carry risk, and full analysis of any opportunity must be conducted before launching the venture.

To find out more, please visit: https://www.afdb.org/en/topics-and-sectors/ initiatives-partnerships/fragility-resilience/ promoting-private-investment-in-transition-states/

For support with investment facilitation, to understand the local markets better, or to request a copy of the full report, please contact the African Development Bank, on the details below.

AFRICAN DEVELOPMENT BANK

Albert Mafusire Principal Country Economist for Somalia [email protected] +254 20 299 8396

Jorge Retana de la Peza Fragility and Resilience Officer [email protected] +225 20 26 44 97 www.afdb.org

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