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The new attractiveness for international investment in Angola

Introduction

For many years, most international investment in Angola ran into two virtually insurmountable obstacles, which discouraged inversion acceleration.

These two obstacles were the need to count on Angolan partners for any important economic activity in Angola and the difficulties of repatriating investment profits. In practice this meant that the foreign investor risked seeing his share in a business in Angola taken by the Angolan partner and / or failing to recover the money he had invested, as well as the profits. It was a disheartening picture, which only allowed large global companies with sufficient leverage to make investments or encouraged obscure agreements between Angolans and foreigners, which normally took place outside the law.

It is clear that the Angolan economic recovery will have to rely largely on foreign reproductive investment. However, for foreign investment in Angola to become a reality, measures are needed to strengthen the protection of property rights and make financial movements more flexible.

An effort in this direction is being made by the present Government, which must be recognized and encouraged.

New framework for private investment in Angola

We have argued that the Angolan economic model designed since 2002, based on oil exploration and the extravagant stimulus of consumption, did not work. Successful models are generally based on investment (public and private) and exports. This is the path that the Angolan economy should pursue. However, the latest figures have not been encouraging. The indicators of foreign direct investment are bleak, as can be seen in the table below.

Figure 1- Foreign direct investment in Angola. Million USD

In view of this scenario of an abrupt fall in investment that started in 2015, but was more pronounced in 2017, the new Angolan Government, which took office at the end of that year, took several measures to stimulate investment, and above all, remove the mentioned obstacles: weak protection of property rights, mandatory local partner and difficulty in transferring profits.

The measures taken were of a political, legal and administrative nature.

  • From a political point of view, the President announced an effective policy to combat corruption and increase the rule of law and thereby tried to promote confidence in compliance with the Constitution and the Law, what was not occuring  in the past.
  • In legislative terms, the NEW PRIVATE INVESTMENT ACT (Law no. 10/18, 26th of June), which no longer requires partnerships with Angolan citizens or companies with Angolan capital, is of fundamental importance. Therefore, there is no longer the antecedent danger in which the Angolan partner, at a certain point, grabbed  everything for him. In addition, the NEW PRIVATE INVESTMENT ACT in its Article 14 guarantees that the State respects and protects the private property rights of private investors; Article 15 establishes that the Angolan State guarantees all private investors access to Angolan courts for the defense of their interests, with due process, protection and security being ensured.
  • Similarly, the NEW PRIVATE INVESTMENT ACT guarantees the right to repatriate dividends and related amounts without weighing objective criteria or time constraints. And as an additional advantage, there is no provision for a supplementary capital tax rate on dividends and profits.
  • In administrative terms, it should be noted that in 2018, all requests for the transfer of dividends in excess of five million dollars (4.3 million euros) were granted to foreign companies operating in the country.
  • And, most importantly, since 2020, the importation of capital from foreign investors who want to invest in the country in companies or projects in the private sector, as well as the exportation of the income associated with these investments, have been exempted from licensing by the Angolan central bank.

There is a visible effort by the government to create more attractive conditions for foreign investment, this effort is reflected in the attempt to create a more favourable social and political climate, in the new legislation on private investment and in a greater liberalization of financial movements. The dangers of absorption by the local partner or the impossibility of transferring profits are thus mitigated.

Figure 2- New framework for attracting private investment in Angola

New foreign investments announcements. 1st quarter of 2020

The United States Secretary of State Mike Pompeo confirmed in February 2020 that several US companies are willing to invest more than US $ 2 billion in Angola.

The Africa-Korea Economic Development Association (AKEDA) will contribute US $ 2 billion to finance the construction of a thermoelectric power station in Benguela province, the institution’s secretary-general announced in Luanda, also in February 2020. Siwoo Chung informed that the amount is part of a global amount of US $ 5 billion that the association plans to invest in several projects in partnership with the Angolan State.

The German chancellor, on a visit to Angola, also offered broad support in the development of the country’s infrastructure, in unquantified values.

Swiss-based company Webcor is expanding the grinding company Grandes Moagens de Angola and plans to invest US $ 250 million in five years. Among the investments is a new factory, in the port of Luanda, which transforms 1200 tons of wheat into flour and bran daily. The regional administrator in Angola for the Webcor Group, says that the company has benefited from obtaining faster visas for investors and workers, lower costs and easier rules for investment.

Additional measures needed

It appears that there is a clear focus on the Angolan Government in creating a more attractive framework for foreign investment and that there are already some positive signs. However, this is not enough and additional measures are required, many of which are pragmatic.

  • The first measure is communication / information. It is necessary to transmit to the international business community, in a systematic and assertive manner, the new framework for investment in Angola, above all, the positive changes that it has undergone since 2018. This is a vital point, as there is a huge lack of knowledge of what is happening now.
  • Secondly, it is crucial to improve the legislation, namely, the one referring to property rights and the land law, seeking to provide the country with clear and effective rules that allow to know what belongs to each one and to avoid the constant disputes over property. . It is also necessary to modify article 19 of the NEW PRIVATE INVESTMENT ACT when it establishes that the transfer of dividends and profits abroad can only be carried out after the complete execution of the private investment project has been confirmed by the competent authorities. A declaration from the private entity that fulfilled these duties should be sufficient, which will be monitored later.
  • Finally, initiatives in the area of des-bureaucratization and dematerialization are important, as well as the definitive abolition of licenses by the central bank for transfers related to investment.

Figure 3- Additional measures to accelerate foreign investment

The opportunity for privatizations in Angola. 2020 analysis

Introduction

The privatization program currently underway in Angola has a scope never before outlined in the country and deserves extra attention by the international business community.

Legislation

The legal basis for the Angolan privatization program is found in the Privatization Act (Law No. 10/19, 14th of May) and ProPriv (Presidential Decree No. 250/19 5th of August). The Private Investment Act (Law 10/18, 26th of June) is also relevant.

Table 1- Basic legal regulations for privatizations

Privatization Act Law No. 10/19, May 14th
ProPriv Presidential Decree No. 250/19, August 5th
Private Investment Act Law No. 10/18, June 26th

Terms of reference

Under ProPriv, 195 public entities will be privatized during a 4-year program (2019-2022). These entities were grouped into four sectors: National Reference Companies, Sonangol’s Participating and Active Companies, Industrial Units in the Special Economic Zone (SEZ) and Other Companies and Assets to be Privatized. The sectors of activity that refer to privatizations are diverse: mineral and oil resources, telecommunications and information technologies, finance, transport, economics and planning, hotels and tourism, industries, agriculture, fisheries.

In the list of to be privatized companies, we have the country’s most important such as Sonangol (oil), Endiama (diamonds), Unitel (telecommunications), TAAG (aviation), Banco Económico (ex-Besa, bank), ENSA (insurance company)), CUCA (brewer) and also another type of more modest entities such as Centro Infantil 1 de Junho, Pungo-Andongo Farm or INDUPLAS (plastic bags industry). It is, therefore, a comprehensive and an extensive program.

Table 2 – Core elements of privatization

195 entities to privatize
4 years (2019-2022)
Key companies such as Sonangol and Endiama

Achievements

To date, the privatization program has been focused on small industries and entities. In 2019, Angola earned US $ 16 million due to the privatization of five factories, which costed the State approximately US $ 30 million. For 2020, the 2nd  phase of privatization embraces 13 plants located in the Economic Zone Luanda / Bengo. The factories operate in sectors such as ​​metal packaging, concrete, carpentry, plastic bags, paints and varnishes, metal towers, PVC tubes, metal tiles, PVC fittings manufactoring, absorbents and cement bags.

Also in progress is the privatization of several agricultural projects, as well as some assets belonging to Sonangol.

Advantages and opportunities

This vast privatization program is extremely attractive to foreign investors due to several reasons, namely:

  • IFC / World Bank Quality Assurance. The privatization program is being carried out within the framework of the IFC-International Finance Corporation, which belongs to the World Bank, that provides investment, advisory and asset management services to encourage the performance of the private sector in less developed countries. IFC guarantees a global projection of the project and the World Bank warranty seal in the procedures followed, in addition to being an experienced partner and knowledgeable of the global rules. In this way, the Angolan privatization process comes with an appreciable quality certification that can reassure foreign investors.
  • Institutional strengthening and property protection in progress. The present government is committed with the consolidation of institutions, the transparency of due process and the adequate protection of property rights through the promotion of the rule of law. This is not immediate obtained allowing to quickly remove the risks associated with losing investments in Angola.  However, it is a trend already in motion.  In this context, it is important to highlight the new Private Investment Act (Law no. 10/18, 26th of June) that expressly provides legal guarantees to investors, regarding their rights, property and also legal guarantees (articles 14 , 15 and 16 of the Law metioned). In addition, the same Act drops the local investment partner exigence for any foreign investment, which was a source of the greatest abuses and fraud in the relationship with the non-national investor. And the investment is no longer preceded by permission, preventing or delaying registration.
  • Economic reform towards free markets.The executive led by João Lourenço, with the support of technicians from the International Monetary Fund, is developing an economic liberalization program for the economy that increases competition between companies and reduces barriers to entry into the markets. This becomes accentuated connecting to the fight against corruption, which has the immediate consequence, in economic terms, of the breaking of the existing monopolies and oligopolies in the country and which limited competition, besides imposing higher prices and abusing practices regarding taxation. Consequently, in addition to the legal reinforcement, the economic component seems more prepared for a functioning market economy.
  • Atractive companies to be privatized. To privatize are companies with great worldwide attraction such as Sonangol, Endiama or Unitel. They are what can be called the Blue Chips of Angola, that will offer a very high growth potential to the investor once they are submitted to a strict management discipline, rationalized investment and optimization of their values. At a time when the African economy due to demographics and the complementarities with Asia that act as determinants, has an increased growth potential, it becomes a good bet to invest in large companies linked to natural resources and communications in Angola .
  • Small and medium-sized companies with lucrative niche markets. The interesting thing about the program is that the universe of companies to be privatized is vast and diverse. In this context, several small and medium-sized companies can be the basis for small investors who want to explore niche markets in Angola or Southern Africa from a platform that tends to be business friendly and eager in infrastructure development. In Africa, the potential of small and medium-sized enterprises is very large. Some surveys carried out in specific South African provinces, encouragingly, conclude that 94% of small businesses surveyed are profitable, while 75% of small business owners believe they earn more money running their own businesses than in any other alternative. The areas covered by these companies are very diverse: travel, tourism and hospitality; agribusiness; brewers; etc.
  • Business problems are not structural. The companies to be privatized suffer essentially two types of problems: incompetent management and lack of capital. Any new investor who provides professional management and fresh money to the company will be able to successfully exploit its potential. The markets are yet to develop and far from being mature, consequently, there is a very broad and stimulating path for companies with capital and professional management.
  • High rate of return on investment. Given the needs that are still emerging in the Angolan market and the possibilities that integration with SADC (Southern African Development Community) bring, the prospects for obtaining high profit rates are high. In fact, there is a low-cost labor force and with a very large market extension. These two factors predict growth and a good return on capital.

Table 3 – Reasons for attracting privatizations in Angola

• IFC / World Bank Quality Assurance
• Ongoing institutional strengthening and property protection
• Liberalizing economic reform
• Desirable companies
• Small and medium-sized companies with attractive niche markets
• Business problems are not structural
• High rate of return on investment

Problems to solve

The problems envisaged are of three types: bureaucratic-administrative and assessment of the real situation of companies. There is also a lack of clarity of purpose in relation to large companies and banks.

On the bureaucratic-administrative issue, it is important to highlight the multitude of coordinating entities. The President of the Republic appears as the leader and strategic coordinator, but then we have the Minister of State for Economic Coordination as the general coordinator of the program, the Secretary of State for Finance and Treasury under the Ministry of Finance as the operational coordinator, each Sectorial Ministry will have duties of sharing information and data of companies operating in the sector. The State Assets and Participations Management Institute (SAPMI) as manager and executor of the program, in addition to other institutions with specific roles. Perhaps because of this, all schedules have been exceeded. By mid-February 2020, around 50 companies were expected to be privatized. The number as seen earlier is much smaller. In fact, the privatization program has not reached an exciting dynamic phase, the so-called momentum.

“The Privatization Czar”

It is essential to give privatizations an accelerated dynamic. For this, the best solution is to nominate what can be called a “Czar of Privatizations”. Someone the President trusts  who, under his command alone, directs the privatizations with legal powers to instruct any minister or body and to override them by deciding to concentrate the competencies and powers for the privatizations.

Technical problems

The remaining types of problems are of a more technical nature. For many companies, there is no clear idea of ​​their values ​​or of any hidden losses that may exist. For example, in relation to banking, the previous due dilligence has encountered several situations in which unknown impairments are detected that require recapitalization or levels of non-compliance with some indicators of financial balance, namely excessive concentration of investments in low-profit properties.

No internal audit work has been done on the companies to be privatized. This obviously implies that investors are taking risks. The answer that cannot be given is that a thorough internal audit will have to be carried out for each of the 195 companies. This will be impossible and would require an endless delay in privatization.

Thus, it will be necessary to provide for possible state compensation mechanisms if impairments are found after a certain level, imputing liability below that level to buyers. At the same time, in doubtful cases, the State will have to sell at a sharp discount. And trust that appropriate private management will make it possible to solve most cases.

In fact, the essential point of the privatization program, more than obtaining revenues for the State, is to create professional management based on investment that contributes to the structuring of flourishing markets, so it is justified to sell at a discount or to support any previously undetected impairments. It is a risk that the State must accept in order to achieve the eagerly-awaited objective of creating a competitive free market economy.

Finally, in relation to large companies, the total privatization program must be defined and publicly disclosed with reference to the percentage amounts to be offered to the market, the dates and other qualifying conditions. There is still a lot of ignorance in the national and international markets about the privatization of these companies.

INVESTOR RECOMMENDATIONS:
◈ For large investors, the Angolan Blue Chips that are going to be subjected to privatization have vast potential for growth and rationalization of costs and organization, so they can provide very high rates of return on investment;
◈ For small and medium entrepreneurs there is a range of companies that can serve as a platform for launching moderate sized businesses;
◈ In general, given the positive Schumpeterian social climate that is being created, there is a strong recommendation to participate and buy in the privatization process in Angola.
 
RECOMMENDATIONS TO THE ANGOLAN STATE:
◈ To avoid delays and some administrative and decision confusion, a “Czar of Privatizations” should be instituted, managed directly by the President of the Republic and with delegated legal powers that will allow him/her to carry out the privatizations;
◈There must be mechanisms to compensate for the lack of internal audit by companies;
◈ Capital repatriation mechanisms for investors must be clarified;
◈ Clarification is required with dates, percentages and specific conditions for privatizations to take place in major reference companies (Blue Chips).