Downstream expansion: Natural resources are funding moves to diversify the economy

Faced with stagnating oil reserves, Gabon’s long-term economic growth depends on the successful diversification of the economy. Barring any major new discoveries, Gabon’s oil output is forecast to fall significantly over the course of the next 20 years, exerting pressure on a government that currently depends on oil revenues for 58% of its budget.

To encourage non-oil growth, the authorities have placed the private sector and foreign direct investment (FDI) at the heart of the government diversification strategy, setting the country on a mission to promote foreign investment in a range of domestic downstream industries that can generate significant value-added from the nation’s natural resources.

EMERGENCE: Emerging Gabon is the government’s strategic plan to diversify and develop the nation’s economy. The plan focuses on three key sectors that correspond to Gabon’s comparative advantages. The Green Gabon component focuses on developing value-added industries in the wood, agriculture and tourism sectors. Meanwhile, Industrial Gabon concentrates on adding value to Gabon’s rich and underexploited mineral and hydrocarbons resources by developing the nation’s capacity for increased in-country processing. Finally, Service Gabon targets education and the development of a research and innovation industries in health, finance and other services. Massive state-led infrastructure investment serves as the enabling platform for these three pillars.

However, the government has been actively courting the private sector to play a meaningful role in the diversification process and reduce the fiscal burdens that limit activity in the sector. According to Pierre Biteghe, the director-general of the Chamber of Commerce, “The president has been clear in that he believes that the private sector, not the state, will be the principle engine of the economy in the future.”

CHALLENGES: Despite the government’s willingness to encourage private investment in the country, challenges still remain. For one, the long history of public control over the economy has left in place a number of lingering barriers to the creation of a dynamic and modern private sector is open to foreign investment. One primary problem is that Gabon suffers from a glaring lack of infrastructure necessary to facilitate commerce – from roads and ports, to electricity and water supply – as the provision of infrastructure in Gabon has suffered from years of inefficient investment and lack of proper maintenance. For example, the dearth of paved roads in the interior can limit the ability of firms to reach construction sites during the rainy season, stalling projects for many months, while damaged roads also restrict access to neighbouring markets.

A second challenge to private sector investment is the bureaucratic barrier of a large and inefficient civil service. While many sectors, such as electricity supply and the postal service, experienced a degree of privatisation under the direction of the IMF and World Bank in the 1990s, the hand of the state remains present in almost every sector of the economy. This can pose a challenge for private investors as the public sector is hindered by a lack of technical competency and a tendency to move at a slow pace.

Third, the regulatory and legal environment in Gabon can also act as an impediment to investment. For example, until recently, obtaining a property title could take as long as three years, making it difficult to secure property rights and financing for a business. Corruption has also traditionally been a concern in Gabon, and as a result the nation was ranked 100 out of 183 countries in Transparency International’s Corruption Perceptions Index, which examines the perceived levels of corruption in a survey of experts’ opinions.

Finally, Gabon suffers from severe structural unemployment. Many Gabonese workers do not have the skills or experience to meet the growing demands of companies relocating to Gabon. At the same time, pressure from unions has pushed the government to become more stringent in regulating its policy of “Gabonisation”, which prioritises the hiring of local Gabonese workers.

REGULATORY REFORM: Pascal Yembiline, the principal country economist for the African Development Bank, told OBG, “There is a clear willingness on the behalf of this government to implement reforms that will create a more dynamic private sector. While not all seeds have yet borne fruit, there is evidence of progress.”

A strategic country plan, done in conjunction with the AfDB, focuses on private sector-led development in Gabon through targeted investments in enabling infrastructure and programmes to improve the business climate. In particular, the AfDB is working with the government to improve regulation of the job market, while it is also training civil servants to better understand and implement public-private partnerships (PPP). With regard to infrastructure projects. Additionally, the AfDB is funding the construction of inter-regional roads and is supporting the creation of Coder Gabon, a privately owned hydropower producer. Similarly, the World Bank has advised the government on the drafting of two new laws, one governing PPPs, which has been completed and is awaiting legislative approval, and a second that will improve the public procurement process, which is still being finalised. In 2011, the government changed the legal structure of the Chamber of Commerce and replaced its management with leaders from the private sector. The goal is to create an entity that understands business is an effective champion of the private sector, and provides information about opportunities and local partners for foreign investors.

The government has also restructured the Private Investment Promotion Agency, renaming it the Centre for Enterprise Development (Centre de Dé veloppement des Entreprises, CDE). The CDE aims to be a one-stop shop for creating a legal business entity and providing financial, tax and legal support. The goal of the organisation is to enable the creation of a business in 14 days or less, although much work remains to be done to reach that goal. The CDE will be opening up an office at the Nkok Special Economic Zone (SEZ) specifically to serve foreign investors. The investment regulations currently in place are quite favourable to FDI. For instance, there are no restrictions on foreign investment outside of the mining and petroleum sectors, and firms are free to repatriate after-tax profits.

GOVERNMENT PARTNERSHIPS: From palm oil to thermal power plants, there are myriad investment opportunities. However, given the history of public-sector control, there remains a desire on behalf of the government to maintain public involvement in many industrial projects. For example, the state has invested with Singaporean firm, Olam International, to build the $200m SEZ in Nkok, outside of Libreville. The SEZ offers a variety of subsidies and will target companies interested in wood processing as well as other industries. Olam is also building an SEZ in Port-Gentil, which will focus on oil and gas related industries.

The country head of Olam Gabon, Gagan Gupta, is upbeat about his experience working with the government. He told OBG that the strategy of co-investing in PPPs is a positive move for the country, and preferable to the use of subsidies, as seen in Nigeria. For its part, the government has demonstrated a strong commitment to building successful projects.

To facilitate relationships with the public sector, the government created the National Agency for Public Works (Agence Nationale des Grands Travaux, ANGT), which plays an oversight role in addition to coordination and planning. The agency, which is managed by American firm Bechtel, has helped alleviate chronic payment problems and accelerated the approval process. According to Eduardo Cejuela Antero, the director-general of Accionas in Gabon, a multinational Spanish construction firm, the ANGT is easy to work with. “I was happy with the ANGT. The tender process has improved over the past two years as the documents required for different tenders have been standardised. The rules are the same across the board.”

RESULTS: Initial results have been promising. Foreign direct investment, which was estimated at $1.4bn in 2010 by the UN Conference on Trade and Development, has risen by some estimates to about $3bn in 2011. In addition to Olam, which is also investing in palm oil and rubber plantations, a variety of multinational firms have decided to set up shop. The Indian extraction firm, the Abhijeet Group, will use Gabon as a platform for reaching the rest of Africa; Indian giant Tata is investing in the SEZ in Port-Gentil; and Israeli power construction company Telemania has an office in Owendo. Société d'Investissement pour l'Agriculture Tropicale, an agricultural firm, is investing and Samsung, BHP Billiton, and Ivanhoe have each expressed an interest in the country as a focus for investment and as a stepping stone to the region.

With the recession in Europe and slowing Asian economies, international firms are looking to Africa, a region that is expected to grow at a healthy rate throughout the coming decade, in spite of its limited financial depth and modest infrastructure network. Political stability, a growing economy and a government dedicated to reform are making Gabon a popular destination for international firms seeking a foothold in the region.