The Inconvenience of Political Risk
A Case Study of Public-Private Partnerships in the Sub-Saharan African Aviation Industry
Research Project: The Political Economy of Trade and Investment Master Thesis
University of Amsterdam
Graduate School of Social Sciences Student: V.M.C. Mohrmann
Student number: 5741041
Thesis Supervisor: Professor J. Harrod Second Reader: Dr. D. Muegge June 27, 2014
Abstract
‘It turns out that political economy is a much more complicated subject than its trendy modern
offspring, economics’ (Schumpeter, The Economist; 2011).
This thesis focuses on the political economics of political risk. This thesis explores the relationship between political risk and public-private partnerships in Sub-Saharan Africa (using a comparative case study of two recent public-private partnerships in the Sub-Saharan aviation industry). As Sub-Saharan African governments struggle to bridge the growing infrastructure gap, they have increasingly begun to invite foreign and domestic private sector entities to enter into long-term contractual agreements for the financing, construction and operation of capital-intensive infrastructure projects. This thesis reveals that investing in such a partnerships can be highly profitable for the private sector, but that such investment agreements simultaneously increase private sector liability to higher levels of political risk. The influence of national politics and political risks in Sub-Saharan Africa should therefore not be under-estimated by those looking to partner up with governments in this region. It is important for the private and public sectors to acknowledge political risks associated with a public-private partnership and create a feasible risk matrix in which the consequences of political risk are defined and allocated to the party that can best manage such risks. Despite the presence of political risks however, public-private partnerships remain the most realistic way to bridge the infrastructure gap in Sub-Saharan Africa. With improved risk management strategies, patience, determination, and with the understanding of all stakeholder objectives, there is no reason as to why public-private partnerships would not greatly contribute to the effective integration of air transportation into the region’s political economy.
I would like to thank my supervisor Professor J. Harrod for his patience with my endless curiosity and for his dedication to helping me succeed. I would like to thank Dr. D. Muegge for agreeing to be my second reader. I would like to thank my family and friends, especially H. Mohrmann and W. Casteleijn for their support and solid advice. Finally, I would like to thank A. Pottas, T. Westerhuis, the project director of an Western-European company, and H. Mohrmann for taking the time out of their busy schedule for an interview; you have all greatly contributed to this thesis.
Table of Contents
1. Introduction 4
2. Methodology 8
2.1. Literature Review 8
2.2. Interviews 8
2.3. Comparative Case Study 8
2.3.a. Justification of Cases 9
2.3.b. Case Analysis 9
2.4. Limitations and Disclosures 11
3. Theoretical Framework 12
4. Background 14
4.1. Political Risk 14
4.2. Political Risk and Foreign Direct Investment 17
4.3. Political Risk and Public-Private Partnerships 18
5. Comparative Case Study: Nigeria and Senegal 25
5.1. Background 25
5.1.a. Background: Sub-Saharan African Aviation Industry 25
5.1.b. Background: Aviation and Public-Private Partnerships 28
5.2. Comparative Case Analysis 35
5.3. Senegal Case: Blaise Diagne International Airport 35
5.3.a. Political Risk Analysis Senegal 35
5.3.b. Case Study 38
5.3.c. PPP Case Assessment: Senegal Blaise Diagne International Airport 41
5.4. Nigeria: Murtala Muhammed Airport/Domestic Terminal 43
5.4.a. Political Analysis Nigeria 43
5.4.b. Case Study 46
5.4.c. PPP Case Assessment: Nigeria Murtala Muhammed 49
Airport/Domestic Terminal
6. Comparative Analysis 52
6.1. Comparative Results 52
7. Challenges and Short-Term Goals 56
7.1. Government Challenges: Public Perception and PPP Regulations 56
7.2. Private Sector Challenges: Risk Management and Risk Insurance 57
9. Conclusion 60
9. Bibliography 62
8.a. Primary Sources 62
8.b. Secondary Sources 65
1.Introduction
March 2011 Ahmed Ezz was one of the most powerful businesspeople in Egypt. He controlled nearly 40% of the country’s steel production, fulfilled an important political role in the National Democratic Party, and was BFFs1 with General Mubarak’s son and heir (Schumpeter, The Economist; 2011). One month later Ezz had been pitched out of the playing field when during the Egyptian Revolution, protesters torched his company headquarters. Western companies having invested in Egypt’s steel production and Ezz himself, were left with empty cash registers and a broken network. This is one of many examples where national politics have ruffled the business climate and upset private investors. Quite naively, it seems that it has become almost customary for corporations to regard globalization as a process that marginalizes national politics. This notion has triggered the trend among multinational companies such as IBM and Ford to over-estimate their footloose position (Baylis, 2001: 446) and to downplay the importance of political risk management (Schumpeter, The Economist; 2011). Yet the recent wave of faltering political systems in Africa, the Middle East and more recently Ukraine, will remind companies of how silly such thinking about a global corporate world, can be. While the corporate world is rightly excited by the promised growth in Sub-Saharan Africa, ignorance towards local politics and political risks in the form of makeshift institutions, volatile currencies and fragile regimes, may cost a company an inerasable blow to their assets and bottom line. According to Jo Jakobsen, professor at the Norwegian University of Science and Technology, ‘…multinational companies today probably face a much broader array of risks than during the nationalization wave of the 1960s and 1970s’ (Jakobsen, 2010; 481). Other political scientists such as Ian Bremmer (2006), Janie Chermak (1992), Llewellyn Howell and Brad Chaddick (1994) concur Jakobsen’s claim, and state that especially in today’s non-polar economic system, ‘political risk is, or should be, a concern of any investor considering investment in a foreign country’ (Chermak, 1992; 167). Rather curiously however, Llewellyn Howell and Brad Chaddick have in their article Models of Political Risk for Foreign
Investment, claimed that there has been a significant and constant decline of the direct use of political
risk assessment by corporations since the 1980’s (Howell, Chaddick, 1994; 71). It has been argued by companies that academic research on market surveys, cash flows and foreign exchange analysis, and theories on comparative economic advantage are not designed to forecast major political upheaval (shock events) that repeatedly recur in developing markets; nor are they conducive to tracking the less catastrophic, but equally threatening regulatory deteriorations the foreign private sector faces in Sub-Saharan Africa (Howell and Chaddick, 1994; 72).
Companies are drawn to expand into Sub-Saharan Africa in search of lower costs, high ROI’s2, and access to scarce resources. Even skeptics accept that the investment prospects in Sub-Saharan Africa are beyond good: in the World Bank Africa Competitiveness Report, Sub-Sub-Saharan Africa’s GDP is stated to grow by about 5% this year, much faster than almost anywhere else (The World Bank, 2013; 3). Wolfgang Fengler, an economist at the World Bank identifies three main causes to Africa’s economic rise: first, the continent has an attractive demographic growth; second, the speed
1 BFF: abbreviation for the term ‘Best Friends Forever’
2 Return on investment: a performance measure used to evaluate the efficiency of an investment. If an investment does not 2 Return on investment: a performance measure used to evaluate the efficiency of an investment. If an investment does not have a positive ROI the investment should be not be undertaken.
of urbanization is creating efficiency gains and luring investors into expanding capital cities; and finally, the explosive usage of technology has created a opportunistic new market. But Mr. Fengler also warns that things will get harder and Africa needs to focus on building up its still shaky infrastructure (‘africa’s infrastructure deficit is not a new one, but rather it is an expanding problem…’ (Pan African Chamber of Commerce and Industry; 2014)), if it is to keep up with its exponential growth (The Economist; 2012). Infrastructure development is crucial to continuous economic development; as for example, new airports ease the process of trade and attract foreign direct investors. Yet due to the consequences of the crisis, equity markets and currencies in Sub-Saharan Africa have weakened and infrastructure projects have come to face strict financial regulations: not only through the higher costs of financing, but also through lower debt to equity ratios and more conservative risk allocation structures implemented by local governments. Bridging the severe infrastructure gap will thus depend on innovative approaches to both raising additional finance and using infrastructure more efficiently and more intelligently (PricewaterhouseCoopers, 2011; 6). Local governments set on facilitating such developments have therefore increasingly begun to invite foreign and domestic private sector entities to enter into long-term contractual agreements for the financing, construction and operation of these capital-intensive projects.
From a more corporate perspective, partnering with Sub-Saharan African governments in such infrastructural PPPs also has its perks. PPPs are not only to be categorized as solely philanthropic endeavors because such investments often also function as a powerful medium to help companies create and capture opportunities by boosting the demand for certain projects, as joint-investors or creative opportunities for risk-sharing in developing a new and profitable market. According to McKinsey Consultancy, one of the top four global strategy consultancy’s, public-private sector opportunities in the infrastructure sector, and especially in aviation industry, offer direct profits for the involved private party in the form of high-level returns on investments and relative secure revenue streams (McKinsey Consultancy; 2010). The increasing involvement of the private sector in realizing infrastructure projects has created a new attitude toward infrastructure investment in Sub-Saharan Africa where, ‘the new private management philosophy is transforming the tradition concept of a “cost recovery…orientated organization” to a “profit and commercially oriented…organization” (Enriquez; 2002)’ (Nathan Associates Inc., 2014; 171). PPPs thus seem to function as a gateway to bilateral benefits and consequently, public-private partnerships have emerged over the last decades as one of the most popular ways to increase (aviation) development in Sub-Saharan Africa.
Yet the choice to get involved in a PPP is according to some, such as Faranak Miraftab (2004) and Najja Bracey (2006), still considered rather controversial. Miraftab and Bracey claim that those private corporations investing in a PPP are far too naïve and that such investment structures are routinely driven by ideology instead of careful analysis (Miraftab, 2004; Bracey, 2006). Najja Bracey, economist and speaker at the Global Conference on Business and Economics 2006, states that notwithstanding the substantial potential gains to be gotten from a successful PPP, their successful realization is a significant challenge it itself. Bracey claims that PPPs are often faultily placed on a pedestal as ‘…about 50 percent of these deals in emerging markets never reach the financing stage, and of those financed, about half need to be renegotiated as the projects are built and implemented’
(Bracey, 2006; 2). A recent study done by Deloitte Consultancy (another top global consultancy firm) provides a reality check on the popularity of PPPs as the report reveals that the level of PPPs in Sub-Saharan Africa is indeed surprisingly low: ‘with currently only about 4% of the total infrastructure projects being jointly owned by the government and a private party’ (Deloitte, 2013; 4).
What is the reason behind this limited PPP success? It is been argued that such complex alliances with government bodies might be commercially interesting but that PPP investments, given their long term commitments, expose companies to higher levels of political risk. Experienced private investors in infrastructure projects, and especially those involved in the aviation sector, know all too well that there are significant and unique risks associated with these investments (Schumpeter, The Economist; 2011). Such projects typically involve huge upfront costs, take longer to complete, and are reliant on reasonably predictable future cash flows to meet financial obligations and provide reasonable returns. Due to the fact that airports and aviation investments usually have some quasi-independent operating agency (where only part is privatized and the majority of revenues is regulated by the government), the relationship between the private and public sector is especially tense and levels of accountability are high; which can frustrate effective funding, management and procurement of a project and can increase the cost of doing business. In some Sub-Saharan markets, macroeconomic, legal, institutional, and regulatory concerns may also add another layer of complexity to project structuring when authorities may have limited experience in dealing with the private sector prior to financial closing of the transaction and lack the experience of managing a PPP after the closing (Multilateral Investment Guarantee Agency, 2013; 10). Such inefficiencies make capital projects in Sub-Saharan Africa prone to confiscation, expropriation, cancellation of licenses, termination or default on contracts, and sovereign non-payment fuelled by factors such as debt or equity arrangements, corruption, bribery and external pressures, decentralization, regulation changes; all of which political risks that can‘… tap into the cash flow of companies operating within national borders’ (Culp, 2012; 1).
A reason for higher levels of political risk in PPP investments could arguably derive from shifting power structures. In 1971 Raymond Vernon, late professor of International Affairs at Harvard University, indicated changes in relative power between the host government and the private party during the life of a joint project. His theory, obsolescing bargaining, focuses mainly on extraction projects. Yet he highlights some important points relevant to a majority of PPPs: in the beginning of a project the firms hold the majority of the power because the host government, owing the lack of capital and expertise to the private sector, is unable to adequately develop project. However after the project is running and profitable, the power structure can suddenly change and the host government can use its new bargaining point to renegotiate the terms of the contract to its liking (Vernon; 1971). Since then, Susan Strange has also shed light on these complex and changing power structures: as the government is no longer the only source that can provide public services, and as governments are actually becoming more depended on the involvement of the private sector, new structural relationships have developed in which the private sector has gained a more prominent role (May; 1996).
Nevertheless, with the promise of serious growth of PPPs in the coming years (Interview Andre Pottas; 2014) it has become crucial to identify whether political risks are possibly the main restraint on the emergence of successful PPPs in Sub-Saharan Africa. In order to avoid the repetition of another Mr. Ezz and millions of dollars in sunk costs due to political risk mismanagement, this thesis addresses political risk on a more specific level. In order to address the influence of political risks in PPPs, this thesis aims to construct a more integrated approach transcending country specific analysis, and instead creating an analysis of political risk across countries. This thesis will start off describing the methodology and research design of the thesis. Second, this thesis will create a theoretical framework that places the focus of thesis in a broader context of political economics. Third, this thesis will discuss the literature on political risk in general, and on political risk in relation to foreign direct investment and public-private partnerships in specific. Chapter five focuses on the comparative case study: the thesis compares two case studies and assesses the influence of political risk during these similar public-private partnerships. Using the P3 Toolkit developed for PPP risk assessment by the U.S. Department of Transportation in 2012, this thesis will try to construct a broad political risk assessment by developing an analysis based on a combination of qualitative as well as quantitative data. The thesis will conclude by drawing results from the comparative case study and translating these results into more pragmatic advice for both the public and private sector. The research will try to analyze whether PPPs are an effective an efficient way to realize investments in the Sub-Saharan aviation industry and answer how political risks impact foreign and domestic private sector investment decision-making. In short, this thesis aims to provide an answer to the following question: how do
political risks affect public-private partnership investments? A case study of public-private partnerships in the Sub-Saharan aviation industry.
2. Methodology
This thesis is an empirical analysis of the available secondary and primary literature sources relating to the subjects of political risk, public-private partnerships and aviation development in Sub-Saharan Africa. The thesis also includes an extensive comparative case study and political risk analysis of two recent PPP cases in the Sub-Saharan aviation industry.
2.1 Literature Review
As a main source of data, the thesis primarily analyzes statements made in news articles, consultancy reports, private sector investment statements and annual reports of international organizations. This thesis also relates to two main strands of secondary literature: the literature on political risk and the literature on private-public sector partnerships. An extensive body of research on the subject areas of PPPs and political risk is readily available. This study does therefore not seek to replace or supersede such research, but rather aims to build upon it by focusing on a specific topic within this field.
2.2 Interviews
To complement the literature review and provide another source of valuable information and data collection data interviews were conducted with:
• Andre Pottas: Partner Corporate Finance Infrastructure and Capital Projects Africa at
Deloitte, South Africa
• Taco Westerhuis: Senior Economic Advisor at the Embassy of the Kingdom of the
Netherlands in Lagos, Nigeria
• Project Director of a West-European infrastructure investor, who is active in several African
countries
• Hans Mohrmann: Executive Vice President and Consultant at InterVISTAS Consultancy
Group
The interview with Andre Pottas and the project director took place via e-mail and telephone to resolve the relative time and space obstacles. The interview with Taco Westerhuis was conducted in a face-to-face meeting during his visit to the Netherlands. The interview with Hans Mohrmann was conducted in a face-to-face interview.
2.3 Comparative Case Study
Comparative analysis is a fundamental scientific method used to test the validity of theoretical propositions and establish relations among two or more empirical variables or concepts. A comparative analysis is most often made based on a case study. A case study provides valuable insights on isolated cases, which can then be compared according to the comparative method. For example: a comparative political analysis often uses countries as case studies to emphasize similarities and/or differences.
In this thesis, the case studies will be compared using dynamic political risk factors. These dynamic political risks have the potential to undergo change and to rapidly deteriorate. Dynamic political risks indices the four themes of governance framework, political violence, business and
macroeconomic risks, and societal forced regime risk. Within these four themes, this thesis will focus on the following political risks: sovereign non-payment, political interference, exchange transfer risk, political violence, and supply chain disruption. The Multilateral Investment Guarantee Agency (MIGA) has identified such risks as the top political risk concerns for private investors (Multilateral Investment Guarantee Agency, 2013; 39).
2.3.a Justification of Cases
This case studies focus in public-private partnerships in the Sub-Saharan aviation industry. The thesis focuses on the aviation industry because aviation development plays a key role in economic development and in supporting long-term growth: airports, airlines and general aviation activity helps to facilitate a country’s integration into the global economy. Aviation development has become practically important for countries in the Sub-Saharan region that are trying to spur intra-African trade, create employment and close the enormous infrastructure deficit.
Critique on previous political risk analysis concerned the specific focus of such studies: ‘…the analyses do not allow testing of effect across countries’ (Howell, Chaddick, 1994; 71). This thesis will therefore compare public-private partnerships in two different counties. This is also because most companies doing business in the aviation sector chose to do business in a broad range of geographies.
Thus in order to contribute a relevant and practical thesis, this thesis analyzes and compares two similar and recent PPPs that have taken place in Nigeria (completed) and Senegal (near completion):
• Nigeria Murtala Muhammed Airport/Domestic Terminal • Senegal Blaise Diagne International Airport
Nigeria and Senegal offer some of the most profitable investment opportunities for both the foreign private sector as well as the public sector (The World Bank, 2013; 11). These countries promise positive and significant economic growth for the coming years and have become increasingly dependent on well-functioning and modern aviation services. These countries are also hosts to a significant amount of tourists each year (tourism contribute to 1.6%, 5.3%, of GDP respectively [World Travel & Tourism Council, www.wttc.org]) and are consequently home to some of the busiest Sub-Saharan African airports. Conversely, these countries are subjects for a highly interesting comparative case analysis because these Nigeria and Senegal have simultaneously been categorized as countries with high levels of political risk (AON Political Risk Atlas; 2014).
2.3.b. Case Analysis
Using the quantitative political risk figures as determined by AON Insurance, The Economist Intelligence Unit, Standard & Poor, OECD and the Multilateral Investment Guarantee Agency (assessing the present political risks and their likelihood of occurrence), this thesis produces a qualitative risk analysis of the PPPs in Nigeria and Senegal by using the successful P3 Toolkit developed for PPP risk assessment by the U.S. Department of Transportation in 2012. The P3 Toolkit
includes analytical tools and guidance documents to assist in educating public sector policy-makers, legislative and executive staff, and transportation professionals in implementation of a PPP. The P3 Toolkit is used to proactively address the potential obstacles that may hinder project success, as well as take advantage of opportunities to enhance success or save costs (P3 Toolkit PPTA Risk Analysis Guidance; 2012; 1). The qualitative approach requires historical data from previous PPP projects (hence the recent cases). The P3 Toolkit includes methods for prioritizing the identified risks, allocating the political risks, assessing the probability of occurrence, and takes into account the time frame during which a risk may occur. Using these methods, the comparative case conclusions may contribute to the development of adequate risk management skills and foster understanding of how political risk can influence PPPs and how new PPPs initiatives in the aviation industry may be realized in a more efficient and effective manner.
Using the following assessment graphs and tables, the case analysis will reveal which political risks are likely to occur and which have an impact on the PPPs:
Table 1: Risk Matrix Example
Risk PPP Type Impact Phase Risk Probability Risk Description Consequence of Risk Ability to transfer risk Treatment Options
Probability range: the following range has been selected to define the probability of risk:
• Greater than 70% (but below 90%)
• 40%-70%
• 20%-40%
• 5%-20%
• 0%-4%
Cost impact: The following option has been selected to define the cost impact as a percentage of the
baseline project cost estimate: • Greater than 25%
• 10%-25%
• 3%-10%
• Less than 1%
Schedule impact: The following option have been selected to define the schedule impact in terms of
the period of time that the project would be delayed (or expedited) if a particular risk event were to occur:
• Greater than 52 weeks • 16 to 52 weeks
• 4 to 16 weeks • 1 week to 4 weeks • 0 to 1 week
Expected risk impact categorized according to the P3 Toolkit methods in tables below:
Table 2: Cost Consequence
Table 3: Schedule Consequence
(Virginia DOTs PPTA Risk Analysis Guidance, September 2011; P3 Toolkit PPTA Risk Analysis Guidance, 2012)
3.4 Limitations and Disclosures
The author wishes to disclose the following limitations that are applicable to this thesis:
First, the author realizes that i.) legal; ii.) environmental; iii.) regulatory; and iv.) financial factors play an influential role in investment projects; therefore thesis chooses not to incorporate those factors. Because political risk is by itself a controversial yet highly important and contemporary issue, the author has chosen to limit the thesis by discussing the influence of this topic only. Second, the author would like to disclose that this thesis only focuses on PPPs in airport development investments. Therefore this thesis does not cover investments made in airlines or other kinds of aviation or transportation sector investments. This rationale is that direct investments in airports are similar in nature as these are expensive capital-intensive projects to undertake for both the private and public sector. Third, the author would like to mention that the political risks used in the analysis have been captured in a specific time frame: political risks profiles are fluctuant and change over time, thus this thesis may not be representable for the distant past, or for the long-term future.
3. Theoretical Framework
There are multiple kinds of PPPs with different risk allocation structures used in the aviation sector: in some PPPs, the cost and demand of using the service is borne exclusively by the private sector, in other types these risks are allocated to the public sector, and yet in other PPPs these risks are shared between the government and private sector. These varying structures allow for different kinds of structural relations. Considering the diversity in possible structural relations within a PPP, this thesis will fore mostly rely on Susan Strange’s famous theory on structural relations to analyze PPP relationships and determine whether political risks play an influential role in such structural relations.
Before Susan Strange’s theory gained popularity in the 1980’s, Raymond Vernon, late professor of International Affairs at Harvard University, indicated the changes in relative power between the host government and the involved company during the lifecycle of a joint project (Vernon, 1971; Chermak, 1992; 170). His theory, obsolescing bargaining, focused mainly on extraction projects, but he highlights some important points relevant to the changing power structures in infrastructure PPPs as well. He claims that in the beginning of a project the private sector holds the majority of the power because the host government lacks capital and expertise. However after the project is up and running the power structures can suddenly change (Chermak, 1992; 170). The knowledge and expertise of the involved private company become less relevant the further the project advances and construction is completed. As the project moves forward, the private sector loses leverage while it’s investment commitments have increased. Infrastructure investments are sunk costs (due to the fact that capital investments cannot be moved). The public sector can then use its improved bargaining position to renegotiate the terms the PPP agreement to its liking (because it may feel that is has forgone large revenues and think the country is being ‘cheated’ of a portion of the country wealth). Vernon argues that firms involved in capital-intensive PPPs will become increasingly vulnerable to the reactions of host governments that seek to temper the pace and impact of globalization on their institutions, workforce, and economy (Vernon, 1971; Chermak, 1992; 170).
While Vernon’s theory was highly relevant during the nationalization wave in the 1960-1970s, Susan Strange’s theory on structural power has since then become more widely appreciated among political scientists. In her theory on structural power she argues that when depending on the structural interaction with a particular sector of the international political economy, actors decision-making may vary. Strange claims that the ‘structural power lies with those in a position to exercise control over (i.e. to threaten or to preserve) people’s security, especially from violence…with those able to decide and control the manner or mode of production of goods and services…with those able to control the supply and distribution of credit… structural power can also be exercised by those who possess knowledge, who can wholly or partially limit or decide the terms of access’ (May, 1996; 7). She discuses the continual bargain being struck between the authority (public sector) and the market (private sector). In her theory, Strange highlights the power struggle between the corporate sector and government in providing adequate services to the public: as the government is no longer the only source that can provide public services and as governments are actually becoming more depended on the involvement of the private sector, new structural relationships have developed in which the private sector has gained a more prominent role. Arguably, private sector involvement in an capital intensive
investment project could erode the public remit ‘to operate’ and threaten the powerbase of the public sector (in reach of political patronage).
According to Strange, this development is of importance as is it the balance of power that determines the structural relationship shifts and may change the outcome of a PPP (especially in a concession contract –frequently used in airport development- where the shift in power between private and public partners is often not acknowledged (Pozzo di Borgo; 2012)). Strange argues that the market working of supply and demand can no longer determine the course of such a such a structural relationship, unless it is allowed to do so by sector that has the economic authority. In Sub-Saharan Africa it can be argued that the government still directs the investment flows in the infrastructure sector as the government still owns, funds and construct most of the majority of the projects themselves (Deloitte, 2013; 4). Yet Strange stresses that is not only the direct power of authority over markets that matter, but also the indirect effect of authority that can influence the context or surrounding condition within which the market functions (May, 1996; 6). An example of a form of indirect authority is political risk. The political risks are a form of indirect authority; expropriation and contract cancellation for example, can have a huge impact on the context and surrounding in which the private sector functions. The looming presence of indirect market authority (whether exercised or not) makes the investment climate for the private sector less attractive and introduces a complicating factor to structural power relations in a PPP.
While Strange’s explicit discussion on political risk (or risk in general) has been limited (May, 1996; 7), she has in her writing implicated that in a structural system political power is used to both avoid risks, redirect risks elsewhere, and extend the opportunities of the public sector. The perception of political risk, the mitigation and management of political risk, as well as the allocation of such risk have thus become a very important matter in analyzing structural relationships. By using Strange’s theory on the structural power dilemma and Raymond Vernon’s theory of obsolescing bargaining, this thesis will examine the potential influence and effect of political risk as the indirect market authority in public private partnerships investments.
4. Background
In order to understand the implications of political risk for public-private sector partnerships in Sub-Saharan Africa, this chapter addresses the concept of political risk in general and more specifically in relation to foreign direct investment and public-private sector partnerships.
4.1 Political Risk
The high-strung politics of the 1980’s and millions of dollars lost by corporations in the heyday of nationalization processes in the 1970’s triggered the initial academic curiosity in the subject of political risk. At first glance, politics and business may seem strange bedfellows as each sector answers to different constituents and focuses on dissimilar short and long-term objectives. Yet in an increasingly non-polar global business environment, national politics have become more important than ever before. Ian Bremmer, political risk guru, states that investment risks are currently more likely to stem from political situations than from the economic environment (Eurasia Group and PricewaterhouseCoopers, 2006; 1). Politics influence how markets operate and often the most unpredictable economic events have a political origin (as the result of flagging political willingness or capacity to maintain a consistent and predictable economic environment) (Eurasia Group and PricewaterhouseCoopers, 2006; 1). All companies should therefore factor in the political environment and associated risks into their investment plans. Yet for corporations investing abroad in emerging markets, political risks can seem so abstruse and amorphous that many companies lack a solid and consistent framework for evaluating their exposure.
Before discussing such frameworks however, it is essential to define the concept of political risk. All companies, even those with limited international operations, are exposed to political risk. Levels of political risk exposure increase as firms expand internationally or as the size of an operation grows. While the political risks that can affect a firm are many and varied, companies should be particularly aware of the following red flags: change in government leadership, rapid economic change, fluctuant currencies, unstable political bodies, unions and other advocacy groups, regulatory changes, violence, and social unrest. Ian Bremmer, founder of the Eurasia Group and pioneer in the field of political risk, claims that such political risk derive from the individual preferences of political leaders, parties and fractions, as well as their capacity to execute their stated policies when confronted with internal and external challenges, changes in the regulatory environment, local attitude to corporate governance, reaction to competition, and taxes (Eurasia Group and PricewaterhouseCoopers, 2006; 16). Mr. Bremmer also claims that the concept of political risk can be more concisely defined as the following: ‘any political change that alters the expected outcome and value of a given economic action by changing the probability of achieving business objectives’ (Eurasia Group and PricewaterhouseCoopers, 2006; 5).
While even the definition of political risk remains slightly ambiguous, the definition used by researches almost always falls in either one of two categories:
a. The first category is based on the (host) government interference with business operations. Political risks are defined to arise from the tensions of national government, which interfere with or prevent business transactions, or change the terms of agreements,
or cause the confiscation of partially foreign owned business properties. David Jodice also defines the concept as ‘…changes in the operation conditions of foreign enterprises that arise out of political process, either directly through war, insurrection or political violence, or through changes in government policies that affect the ownership and behavior of the firm. Political risk can be conceptualized as an event, or a series of events, in the national and international environments that can affect the physical assets, personnel, and operations…’ (Jodice, 1985; 5) of a company. What distinguishes this definition is the spectrum of possible influences it encompasses; it is not the what which is important but rather the effect of the event on the firms operation condition.
b. The second category is based on the definition of events where political acts constrain the firm. While there are differences among them, Robert Green (1972), Robert Hersbarger and John Noerager (1976), Lee Charles Nehrt (1970), Rita Rodriguez and Eugene Carter (1976) all associate risk with either environmental factors such as instability and direct violence or expropriation, discriminatory taxation, and public sector competition. Among this cluster of authors are those such as Stefan Robock (1971), Franklin Root (1968) and Fred Weston (1972). They argue for a focus upon the diction between risk and uncertainty (Kobrin, 1979; 67). They argue that the previous definitions lack a probability aspect: whereas uncertainty is usually associated with an event which may occur, risk by definition is the probability that the event will occur. These academics claim that political risk should be defined among the likes of ‘the probability that the goals of a project will be affected by changes in the political environment (Prast and Lax, 1982; 183). In this definition it is the what which is more important than the effect.
Despite the struggle on creating an acceptable definition of political risk, the subject of definition is one of the oldest areas of political analysis and has been practiced by corporations and traders for decades, if not thousands of years (Howell and Chaddick, 1994; 71). ‘…Before the first world war, in the seventieth century to be precise, attempt were already made by international companies to deal with various sorts of risks including political risks’ (Kamga Wafo, 1998; 14). In the first academic articles published on the subject (prior to the 1950’s) political risk was viewed mostly as a diplomatic problem. Attention was mainly focused on compensating confiscation rather than on the political factors determining the probability of a political risk (Chermak, 1992; 167). It was not until the mid-1950’s that the first models appeared that explored the impetus for political risk. Martin Bronfenbrenner and Raymond Vernon where among the first to conceptualize the term into a more constructive assessment: whilst Bronfenbrenner confined his model solely to acts of confiscation, while Vernon on the other hand, took a very different approach and evaluated changes and appearing dangers in the relative power between the host government and the firm during extractive projects (Chermak, 1992; 170). During the 1960’s and 1970’s and more specifically after the fall of the Shah of Iran in 1979, academic research in political regained new popularity as confiscation, expropriation and nationalization became critical concerns for companies with foreign operations as newly independent
states managed their lack of capital by simply taking it (Haendel, 1979; 3). The number of occurrences that reduced the profitability of a project or forcefully dictated an ownership change rapidly increased.
Yet such previous research remained somewhat particularistic in their approach, and has more recently been criticized. According to some, such as Stephan Robock, the process of political risk assessment is now known as what is often referred as a ‘soft science’, and many disagree with the conceptualization, assessment and projections of professionals in the field (Howell and Chaddick, 1994; 71). According to Stephan Robock, the field gained this reputation because it lacked credibility for companies demanding a more pragmatic and less theoretical approach to political risk (Robock; 1971; Howell and Chaddick, 1994; 71). In reaction to such critique, political scientists and economists have now written extensive articles and books on the development, calculation and management of political risk in order to ‘...facilitate integration into the planning or decision-making process’ of a corporation (Korbin, 1979; 68). Literature on the subject has evolved to now include more measurable work, as such done by Franklin Root and Ahmed Ahmed, who used quantitative empirical analysis to study the determinants of direct foreign investment in the manufacturing sector (Root and Ahmed, 1979; 751), as well as works by Thomas Anderson and Kurt Brannas, who have econometrically modeled the cross-country variation in nationalization frequencies of specific sectors for a certain period of time, between a variety of countries (Anderson and Brannas; 1992).
Political scientists (such as Ian Bremmer-pioneer on the subject and founder of Eurasia Group) and the science of political risk has in light of corporate demand entered a more commercialized political risk trajectory; which includes commercial political risk analysis firms, political risk consultancies, and political risk insurance groups. Independent risk assessment corporations such as MIGA, Political Risk Series, The Economist Intelligence Unit, AON Insurance and other risk insurance companies, now regularly produce reports on certain politically risk sensitive countries for corporations that do not have the internal capability, or for those corporations demanding external advice. Several respected periodical publications, such as The Economist, have also commercialized the production of political risk reports. It has been argued that such publications are incredibly important in the risk analysis business because of both their clientele and their professional character. These reports provide data for public domain, which can be very useful in setting the groundwork for a contemporary political risk analysis (Howell and Chaddick, 1994; 74).
It seems as if academic research dealing with factors, models for investment and predications of major political conflict, has continually fallen short in adequately providing useful analyses. Academic research remains specific to country level analysis and lacks in providing pragmatic advice on how to deal with political risks. Companies have therefore adopted a broad array of methods to evaluate political risk, which shows that neither qualitative nor qualitative approaches have by themselves guaranteed indicators of effectiveness. Yet it seems, as Ian Bremmer claims, that firms considering foreign investment mostly resort to the commercial market for quantitative political risk evaluations and information on political risks insecurities.
The above discussion by no means exhausts the political risk literature. However, it provides an overview of the type of historic and current risk, as well as the trends within the subject of political risk.
4.2. Political Risk and Foreign Direct Investment
‘There is political risk in emerging markets because you never know how a newly elected government will act or behave’ (Interview Infrastructure Project Director; 2014). Anticipating risks associated with foreign direct investment requires asking the right questions about how an institutions’ or leader’s preference might determine certain policy and investment choices. Such personal (and politically charged) choices will in turn determine economic outcomes, and can in retrospect make some foreign direct investments decisions look foolish (Eurasia and PricewaterhouseCoopers, 2006; 16).
Political scientists have addressed such questions in a vast amount of research. There have been two main approaches within the literature on political risk and foreign direct investment (henceforth FDI): the first approach places and emphasis on economic variables and explanatory factors of FDI, whereas the second approach focuses on the importance of political factors as a determinant of FDI. Yet ‘both the economic-orientated and political-oriented empirical studies on the determinants of FDI are based on the same assumptions, namely that FDI is supply determined, that is, determined by the decision of mutational enterprises. Thus there is no real market envisaged for FDI. The demand on in the host countries is implicitly assumed to be indefinitely elastic’ (Kamgo Wafo, 1999; 61). However, the link between political risk and foreign direct investment deserves special attention as such a link may be seen as a particularly important channel through which host governments are able to promote economic and productivity growth (Acemoglu, 2005; Bénassy-Quéré, 2007 (Hayakawa, 2011; 15).
Empirical studies based on surveys consistently found that executives consider political risks to be a major constraint in FDI allocation decisions (Green (1972) and Kamgo Wafo (1999)). ‘Senior management reported that political risk (especially political stability) is the most important variable influencing their foreign investment decisions aside form market potential (Kamgo Wafo, 1999; 62). However, earlier studies of political risk and FDI based on statistics have failed to establish such a relationships: the earlier research includes the works of Green (1972) and Kobrin (1976) who examined the relationship between the number of new manufacturing subsidiaries stabiles in each country, and several variables measuring political structure and unrest: ‘Korbin found a systematic relationship between FDI and market-potential related variables, but all political variables were found not be related to the flow of FDI’ (Kamgo Wafo, 1998; 62).
Yet research conducted in the twentieth century does disclose a correlating relationship between levels of FDI and political risk. The availability of data and data processing has revealed a more unilateral conclusion on FDI and political risk. A study done by Elizabeth Asiedu in 2006, exposes that ‘…large local markets, natural resource endowments, good infrastructure, low inflation, an efficient legal system and a good investment framework promote FDI. In contrast, corruption and political instability have the opposite effect’ (Asiedu, 2006; 74). Matthias Busse and Carsten Hefeker also analyze the linkages between political risk and FDI inflows: Busse and Hefeker measured data from 83 developing countries from 1984 to 2003 using different mathematical and econometric techniques (such as the Arellano-Bond GMM dynamic estimator). ‘The results shows that government stability, internal and external conflict, corruption and ethnic tensions, law and order, democratic accountability of government and quality of bureaucracy are highly significant determinate of foreign
investment inflows’ (Busse, Hefeker, 2005; 397). Research done by Jo Jakobsen also states that political risks have not become any less relevant during the last decades: Jakobsen claims that foreign investors should not under estimate the threat op expropriation (especially in PPPs that involve strategic and semi-governmental assets such as airports). While some may label expropriation as an ‘old risk’, Jakobsen argues that in no way should this ‘old risk’ be taken lightly. He claims that if there is one lesson to be pulled from the literature published during the nationalization era, it is that foreign presence in a strategic sector of the national economy ‘…is likely eventually to spur anti-foreign capital sentiment and actions’ (Jakobsen, 2012; 488).
Mashrur Khan and Masfique Ibne Akbar have completed one of the latest studies done on the impact of political risk factors and FDI: they have tracked the relationship between political risk and FDI for 94 countries from 1986 to 2009. Their research reveals that ‘…most political risk indicators have a negative relationship with FDI for the world as a whole and also, the high income countries, but the relationship was stronger for the upper middle-income countries’ (Khan, Akbar, 2013; 147). According to Kazunobo Hayakawa, researcher at the Bangkok Research Center Institute of Developing Economics, good governance does indeed exert a positive influence on economic growth, making institutional underdevelopment and high country risk key explanatory factors for the lack of foreign financing the in the developing economies (Hayakawa, 2001; 16)3. The author also finds that ‘…in particular, socioeconomic conditions, investment profile, and external conflict seem to be the most influential components of political risk in attracting foreign investment’ (Hayakawa, 2011; 17).
4.3 Political Risk in Public-Private Sector Partnerships
PPPs and political risk have undoubtedly become an integrated part of the investment landscape in Africa. ‘Governments are looking to public-private partnerships (PPPs) to radically improve infrastructure networks in their countries and enhance service delivery to their people. They are hoping that this development model — where the state shares risk and responsibility with private firms but ultimately retains control of the assets — will improve services, while avoiding some of the pitfalls of privatization: unemployment, higher prices and corruption’ (Farlam, 2005; i). However, since PPPs became fashionable about thirty-five years ago (Bovaird, 2004), the concept has been strongly contested: on one side it has been argued that PPPs are the solution to the Sub-Saharan infrastructure gap (Bovaird, 2004; Farlam, 2005; Linder, 1999), while on the other side it has been claimed that PPPS dilute political control over decision-making and undermine competition between potential providers (Miraftab; 2004).
Broadly speaking, the literature on public private partnerships falls into three groups: first there is an engineering or technical dimension; the second includes an economic, finance and public policy review; and third there is a volume of government and independent reports (Grimsey and Lewis, 2002; viii). This thesis will mainly focus on the second and third strands of literature to include consultancy and global intuitional reports. Such reports derive from one of two camps: either from a neoliberal perspective or from a neoconservative perspective. Both camps however argue that the public sector
3
However, the influence of political risk on foreign direct investment should always be considered in relation to the returns on investment that investment project might bring: if a project is guaranteed high levels of profitability, the economic opportunity will almost always trump the political risks that threaten foreign direct investment.
should no longer be the only provider of public services and that private sector firms and communities should takeover certain responsibilities (Linder, 1999; 35). According to Peter Farlam, researcher at the New Partnership for Africa’s Development and Governance Project at the South African Institute of International Affairs, PPPs in theory ‘…may have the potential to solve Sub-Saharan Africa’s profound infrastructure and service backlogs’ (Farlam, 2005; i). PPPs potentially bring the efficiency of business to public service delivery, avoid diseconomies associated with political patronage, and avoid the contentious aspects of full privatization or ‘sale’ of strategic government property. Yet along with Miraftab and Bracey, Farlam is in his same report also spectacle of PPPs. He claims that over the last 15 years, the success rate of PPPs in Sub-Saharan Africa has been mixed as ‘…the process is complex, and governments should not expect PPPs to function as a magic bullet...’ (Farlam, 2005; 33), nor as a panacea to all their investment problems.
Despite its rising popularity, the concept is still defined in multiple ways: ‘generally, PPP typology is rather vague all over the world as any concrete PPP scheme is a unique relationship between public and private’ sectors (Tomova, 2009; 1). Most generally speaking, one may refer to PPPs as: ‘a working arrangement based on a mutual commitment (over and above that implied in any contract) between a public sector organization with any organization outside of the public sector’ (Bovaird, 2004; 200). But fact that there no single fashioned, definite, internationally agreed upon definition for PPPs (World Bank, 2012; 11) has often led to misunderstandings between the government and private sector (Interview Taco Westerhuis; 2014). Considering the focus of Sub-Saharan Africa in this thesis however, it would be most appropriate to refer to the definition of PPPs used in that region as it reflects their understanding of PPP structures. The thesis will for practical purpose therefore refer to the following definition of PPPs: ‘a contract between a public sector institutions and private party, in which the private party assumes substantial financial, technical and operational risk in the design, financing, building and operation of a project’ (Farlam, 2005; 1).
Yet such vague definitions of PPPs are seldom used by the parties involved in the project. Most often, PPPs are defined according to their specific structure. PPPs are first off usually sub-divided into two specific types: where the private party performs a function previously carried out by the government where the deliverable is an ‘availability’ and the public sector is responsible for making ‘availability payments’ to the private sector (often called a Private Finance Initiative, or PFI). In this case the private party is not liable to any commercial risk. In the case of the infrastructure and airport development private parties are depended on commercial risk revenues and therefore these PPPs are not PFI’s. Regardless of such terminology debates, these partnerships involve locking in long-term collaboration and risk sharing between both parties allocating the costs and rewards of the project. Much of the political risks associated with a PPP project derive from the complexity of the arrangement itself in terms of documentation, financing, taxation, technical details, and sub-agreements during which the nature of the risk alters over the duration of the project (Argawal, 2010; 14). Even the most generic PPP structures already indicate how complex a PPP investment may be:
Figure 1: Generic PPP Structure
Source: South African National Treasury (National Treasury PPP Unit, 2007; 9)
PPPs can involve existing brownfield projects (which is the lease of an existing facility that needs to be converted or adapted to a new use), or they can involve proposed new facilities, which are known as greenfield projects (this thesis will concentrate on greenfield projects in airport development). For brownfield projects, a public entity generates a capital inflow by transferring the rights, responsibilities and revenues attached to an existing asset to a private sector entity for a defined period (P3 Toolkit PPTA Risk Analysis Guidance; 2012). Risks for the private entity may be lower, since limited construction is involved and traffic volumes and toll revenues can be more accurately based on historic traffic patterns. In the case of a greenfield project, a public agency transfers all or part of the responsibility for project development, construction and operation to a private sector entity. Greenfield projects generally present higher risks to both parties than do brownfield projects because of the greater uncertainty surrounding traffic forecasts, site ownership, permitting, financing, and construction. While traffic risks may be lower for a hybrid project (a combination of a greenfield and brownfield project) relative to a greenfield project, they may still be significant due to difficulties in forecasting the users’ willingness-to-pay.
Besides categorizing greenfield and brownfield projects, a difference is also made in the internal structure of a PPP (Afolabi, 2011; 30). Such internal structures typically include ‘…Build Operate Transfer-BOT or similar contracts. A concession contract, a management contract or another type of contract...under certain conditions for a fixed period’ (Nathan Associates Inc., 2014; 172). ‘Other types’ of contracts include different procurement models (all with their own range of risk). These models include: DBB’s (design-bid-build), DBFs finance), and DBO (design-build-operate), BOT (build-operate-transfer) and DBOT (design-build-operate-transfer). The risks allocated to the private sector depend on the kind of structure that is used:
Table 4: Risk according to PPP structure:
(Virginia DOTs PPTA Risk Analysis Guidance, September 2011; P3 Toolkit PPTA Risk Analysis Guidance, 2012)
Whilst an outright divestiture or a simple management contract would be the easiest way to involve the private sector (as it may involve no capital investments form the private sector), concession contracts are a more common form of joint ventures between the sectors. Concession contracts are more complex but attractive for partnerships because concessions allows for the state to keep the strategic asset in their hands whilst placing the service-provision and construction responsibilities in the hands of the private firms (and gives the private operation the rights to all future cash flows as well). Doug Andrew and Silvia Dochia, consultant at the World Bank Infrastructure Economics and Finance Department, state that BOT and ‘long-term concessions for airports are the predominant model today, with governments often taking a minatory shareholder in the venture. Careful attention to policy design, regulatory issues, and management of concession will continue to be important in ensuring that private participation delivers efficient and effective airport infrastructure services’ (Andrew and Dochia, 2006; 1).
While opportunity thus definitely presents itself in various PPP project structures (greenfield, brownfield, DBOT, and concession agreement) in the infrastructure-and especially aviation sector, Robert Taylor (advisor at the International Finance Corporation) nevertheless claims that investing hand in hand with the government never goes without the accompanying political risks (as can be noted in Table 4). The key-defining factor in what makes an agreement a PPP is thus the complexity in sharing the long-term uncertainty involved between the private and public sector. It is thus essential for both government and private sector to identify the political risks that may arise during the project. Such uncertainties, or political risks, can include any of the following:
• Confiscation, expropriation or nationalization of assets • Change in law/regulatory regime
• Governmental decision-making/political interference • Change export/import embargoes/licenses/taxes • Physical damage to assets from political violence • Termination of or default on contracts
• Non-payment or moratorium due to exchange transfer and currency inconvertibility • Non delivery/shipment of goods
• Calling of on-demand bid or contract bonds and guarantees for unfair or political reasons • Forced abandonment or divestiture
financial institutions • Violent conflict • Bribery
• Capital controls • Social unrest
• Social and environmental impact
These risks are usually categorized (by the public as well as private sector) in one of three ways: • Transferrable risks: risks fully transferrable to the private sector. For example: sunk costs. • Retained risks: risks for which the government bears the costs. For example: the risk of delay in
gaining project approvals.
• Shared risks: risks that are shared based on a combination of the above two allocations due to the nature of the risk. For example: traffic risk.
Pierre Bozzo di Borgo, Principal Investment Officer at the International Finance Corporation (IFC) such specific risks can be divided and allocated to the involved parties in the following manner:
Figure 2: Risk Allocation
(Source: Pozzo di Borgo, 2012;17)
The graph shows that the private sector’s risk portion is significantly larger than that of the public sector: the private sector is liable to high sunk costs, to unexpected costs and political interference. The public sector only carries part of the financial responsibility but is fully responsible for any regulatory, legal or policy changes that affect the PPP. From the public agency’s standpoint, PPP projects are considered to be a means for transferring the project risks to the private sector. However, transferring all of the risk to the private sector entity does not necessarily produce the optimal outcome, particularly if there is no potential upside for the private sector entity; in such cases, it will only increase the private sector entity’s required return on investment as it will not be able to efficiently manage all of the risk transferred to it (P3 Toolkit, 2012; 37). Additionally, the private sector entity may
lose interest in the project during the development phase, which may lead to failed tenders. If the private entity does accept the more excessive risk, it could face financial difficulties during operations, and cause delays or decline of service quality and construction efforts. Both the public and the private sectors have tolerance levels for risk, but they also require a certain amount of returns to balance the risk/reward profile in order to be considered attractive by the public and private sector. In other words, if there is a risk of loss (downside risk), there should be an opportunity for higher gains (P3 Toolkit, 2012; 2). An unappealing risks share can often be addressed through such a well-developed risk matrix to avoid for example, risks during a vanilla turnkey project (where the contractor is obliged to complete construction against a set price). Risk allocation during a PPP is therefore best ‘…envisioned as the practice of finding an equilibrium point, where the level of risk to be borne by the public agency and the private sector entity is acceptable to both’ (P3 Toolkit, 2012; 2).
The table below shows that PPPs are most likely liable to different kinds of political risk during the development and operational phase of a project. This is probably because the risk of doing business is at that stage highest as the level of political interference rises and gives way to multiple kinds of political risk threats.
Table 5: Political Risk Timeframe
(Virginia DOTs PPTA Risk Analysis Guidance, September 2011; P3 Toolkit PPTA Risk Analysis Guidance, 2012)
The literature on PPPs make it clear that investing hand in hand with the local government (especially with authoritarian governments and governments in emerging markets in general) in infrastructure partnerships always include certain political risks. While the International Financial Corporation even goes to say that the public sector is the biggest risk in itself during such projects and that ‘politics is and will always be the main cause of death for such infrastructure project orientated transactions and PPP investments…(IFC, 2009; 2), others such as Peter Farlam claim that PPPs can, despite all apparent political risks, improve the quality of governmental public services and the quality of strategic
assets belonging to the national economy which can boost the regional economic growth. Among other supporters of PPPs (such as the World Bank, and a Andrew and Dochia) Farlam also claims that PPPs will not only add value for the government, but also deliver profits and high returns to the investing private sector party.
5. Comparative Case Study: Nigeria and Senegal
To effectively analyze the significance of political risks in determining the success of public-private sector partnerships, this thesis focuses on comparing two case studies. Given the potential of PPPs in Africa’s infrastructure sector and the considerable importance of the aviation sector in particular, this thesis explores the relationship between PPPs and political risk in Nigeria and Senegal’s aviation sector. Through a comparative case analysis this research will try to analyze whether the PPPs are an effective an efficient way of realizing investments in the Sub-Saharan aviation industry and explore how political risks impact foreign and domestic private sector investments by providing an answer to the following question: how do political risks affect PPP investments?
5.1 Background
To adequately assess the role that political risk play during PPP investments, the case studies require certain amount of background information. The following sub-chapters focus on history of the aviation sector in general and more specifically on the history and current state of public-private partnership in the Sub-Saharan Africa aviation industry.
5.1.a. Background Sub-Saharan Aviation Industry
From a historical perspective the African aviation market was initially characterized by international routes to and from the continent dominated by non-African carriers (with the notable exception of South African Airlines) (Bofinger, 2009; 262). The graph below shows the frequency of such flights within the Sub-Saharan region. The graph clearly figures that South Africa and Kenya are the aviation hubs; the graph also shows that there is plenty of opportunity for future aviation development in Sub-Saharan Africa. The limited amount of flights from West to East shows that sub-Sub-Saharan Africa can still clearly profit from better air transport services that can facilitate further regional integration.
Figure 3: Main Sub-Saharan Africa Airline Routes
