Sovereign circuits at work in Africa’s cities

by Phil Harrison

By sovereign circuits, I mean the actors, social and political relationships, financial flows, and technical arrangements involved in translating the intentions of an agency owned by one government into an investment within the jurisdiction of another. 

As Schapendonk and Ekenhorst (2019) explain, the idea of ‘the circuit’ shifts analysis away from place-bound study to an appreciation of mobility, circulations, multi-locality, inter-linkages, and diversity in organising elements. It is a concept that may be traced back to Karl Marx’s ‘circuits of capital’ (Harvey, 2018), but which has reappeared in less structuralist versions in the works of Alain Tarrius (1993) on‘circulatory territories’, Ray Hudson (2005), Viviana Zelizer (2021), and others. In this recent work, circuits of economic exchange are deeply embedded in social relationships. In our work we identify three transnational investment circuits at work in Africa’s cities – the (transcalar) developmental, private and sovereign circuits (see the blogs by Matt Lane and Sylvia Croese). These circuits are often entangled, with a single project sometimes linking to all three. The idea of the sovereign circuit draws also on ideas of sovereign investment (such as in Sauvant et al. 2012), and this is where I begin.

Sovereign investment is distinctive because it is at least partly underpinned by the goals or motivations of a foreign government, although these may synergise with interests within a receiving country. There are many instruments of sovereign investment such as grants, guarantees, export credits, concessional loans, commercial loans, and foreign portfolio investments, and a variety of institutions managing these investments including Sovereign Wealth Funds (SWFs), Public Pension Funds (PPFs), Development Finance Institutions (DFIs), and State-Owned Enterprises (SOEs).

SWFs and PPFs have emerged over the past two decades or so as major global investors, challenging claims that government investment is shrinking as neo-liberalisation takes hold. SWFs are largely concerned with the long-term financial stability and security of the countries in which they are established, while PPFs secure the interests of state employees. The world’s largest SWFs are in the countries financially dependent on a resource base such as Norway, Saudi Arabia, the United Arab Emirates, Qatar, and Kuwait, although Singapore, for example, has Temasek, an SWF with a notable presence in Africa. Mega-sized PPFs including the U.S. Social Security Trust Funds and Government Pension Fund of Japan. In their outward investments, SWFs and PPFs are profit-seeking, hold diverse portfolios, and do not act very differently from private investment funds, although a Vice President of the World Bank indicates that they are desirable investors because of their ‘long term horizons and lack of obsession with daily liquidity levels’ (Oteh 2017, para.4). In Sub-Saharan Africa, nearly one-half of SWF investment comes from East Asia, with the Middle East a distant second.  

The funding activities of DFIs are actively shaped by home governments, usually ministries of economic or foreign affairs. DFIs are development banks providing competitive loan funding to low- and middle-income country, although they may also provide grant funding. There is an intersection here between the developmental and sovereign circuits, but we distinguish the multi-lateral DFIs in the developmental circuits (including the International Finance Corporation, European Development Bank, Global Fund, and African Development Bank) from the bi-lateral DFIs in the sovereign circuits as they are more directly influenced by home country objectives which may include garnering geo-political support and leveraging opportunities for home country firms. In Africa, the most active DFIs are USAID, British International Investment (previously CDC), Agence Française de Développement (AFD), Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), KfW Development Bank (Germany), Japan International Cooperation Agency (JICA), Sweden International Development Agency (SIDA), and FinDev Canada. These agencies work differently - The AFD and KfW, for example, focus on soft loans; the USAID, British International Investment, SIDA and FInDev on grants; with JICA providing a mix (OECD 2022). As indicated in the table below, the total net ODA to Africa from countries operating within the development assistance framework of the OECD was USD 33 773 million which compares with the USD  37 504.8 million which came from multilateral institutions. China operates outside the ODA reporting framework developed by the OECD and does not have an established DFI. However, it does have large development funds active in Africa including the China-African Development Fund. Estimating China’s ODA equivalence is a complex matter given the channelling of funding through different agencies, with funding criteria that do not match those of the OECD’s Development Assistance Committee. 

Table One: Total ODA to Africa in 2020 from countries operating within the OECD development assistance framework (source OECD 2022)

# Note that this column is not an exact total of columns two and three as it is a net calculation, taking account of outflows from Africa to countries within the OECD framework

Table One indicates that bilateral ODA mainly takes the form of grant funding. In 2020 bilateral grant funding amounted to USD 30 369.6 million compared to the USD 20 842.5 million which came as grant funding from multilateral institutions. However, in terms of ODA loan funding the bulk comes from multilateral institutions (USD 21 042 mill) rather than bilateral flows (USD 6 343.7 mill). However, some countries, most notably France, focus on loans as the major source of ODA.

SOEs usually operate within a single sector (frequently banking, mining, energy, or construction). They not purely profit-seeking, responding to mandates of their home countries including securing access to critical resources for the long term or establishing a strategic presence in a key sector within a host territory.  However, they are required to maintain financial viability, and so their motives for investment are often mixed. China is overwhelming dominant within SOE-related investments in Africa. China’s Import-Export Bank, for example, dwarfs all other lending for infrastructure in Africa, including global multi-lateral agencies. 

While China’s large, mainly Beijing-headquartered national-level SOEs, play a clear role in relation to the foreign policies of the Chinese government, SOEs that are smaller or are at lower levels in the national hierarchy are often more focussed on supporting economic objectives.

While China is the giant, there are other SOEs present in African including, for example, Korea’s Exim Bank, India’s Exim Bank, Brazil’s state-controlled companies such as Petrobas and Vale, Malaysia’s national oil company, Petronas, and Russia’s SOES such as Rosneft and Lukoil. China was estimated to have contributed USD 25.7 billion of the USD 51.4 billion invested through sovereign sources in Africa’s infrastructure in 2018. The other major sovereign sources of infrastructure funding were the Arab Coordination Group at USD 2.4 billion, France at USD 1.9 billion, Germany at USD 1.6 billion, South Africa at USD 1 billion, India at 0.7 billion. (Infrastructure Consortium for Africa 2018).  

While sovereign funding is growing in importance, it is a complex and sensitive area of investment. Financial flows are often entangled in geopolitical rivalry, a problem complicated by deepening global tensions. There may also be concerns at eroding domestic sovereignty, enabling corrupt or extractive regimes or actors; the possibility of a backlash from local business where preference is given to the funding country’s enterprises; potential debt traps; and opaqueness of investor intentions. The positives include the significant addition of development financing in areas neglected by private investors. To assume that these flows constitute a neo-colonial imposition denies the agency and interests of national and local actors, and possibilities of synergy between national and foreign interests. We clearly need to understand the dynamics, and the mix of risks and benefits, in a more nuanced way. Who are the actors at work in shaping sovereign investments, and how, and by who, may the benefits of their activities be leveraged or strengthened in favour of interests in Africa? 

The concept of the circuit allows for a more complex understanding of the processes of sovereign investment. The circuit is an intricate ensemble of elements, flows and relationships. A key element, for example, is political support in the receiving country. Sovereign investment is often preceded by contact and negotiations at the highest level (head of state/government or ministerial) with bilateral agreements facilitating downstream processes. This may however not be needed where there is a well-established DFI presence and embedded protocols for negotiating new projects. However, host politics may not be stable, and sovereign actors may find themselves in shifting sands if one segment of the national elite replaces another. In Tanzania, for example, President Kikwete negotiated a massive Chinese investment in the Bagamoyo port development north of Dar es Salaam. The deal was, however, cancelled by his successor, President Magufuli, but with current hopes of resuscitation under President Hassan. In those African countries where governments are hierarchically structured, national commitment may be adequate but, in others, sovereign actors must deal with the complexities of securing support at different scales of governance and from different individual actors or political groupings. Sovereign investment also requires broader social legitimacy to avoid generating disruptive conflict. Land release for new projects is often contentious, especially where there is existing occupation by communities. Sovereign actors are therefore often dependent on host governments and other local actors for resettlement, payment of compensations, and the mediation of conflicts that arise.

There are also many technical elements to an investment, and each has pitfalls. There are, for example, the technical details of project financing (including the negotiation of guarantees, co-funding arrangements, or conditions of grants and loans); tendering processes; planning and building approvals; and management of contractors and labour. For host countries there are concerns including the preferential use of perhaps more experienced international contractors by sovereign funders, rather than supporting the development of local contractors, and the labour practices of foreign contractors For sovereign actors, common concerns include bureaucratic delays and poorly skilled labour, as well as securing business opportunities or employment for its own citizens and firms (Mazé and Chailan 2021). Maintenance of projects after handover is emerging a major concern in project financing and implementation.

It is through a careful empirical tracing of the workings of sovereign circuits that we can move beyond (the often normatively charged) generalisations around sovereign investment. To provide meaningful guidance on the management or regulation of sovereign investors, and how to secure wider public benefit from these investments, a nuanced and grounded understanding of the multi-actor motivations, decision-making mechanisms, and outcomes of sovereign investment circuits will be needed. In our project, we will be looking in detail at the sovereign circuits of finance, investment and contracting that connect through three cities – Dar es Salaam, Lilongwe, and Accra. 

References

Harvey, David (2018). Marx, Capital, and the Madness of Economic Reason, Oxford University Press.
Hudson, R. (2005). Economic geographies: Circuits, flows and spaces. Sage.

Infrastructure Consortium for Africa - ICA (2018) Infrastructure Financing Trends in Africa- 2018. ICA Report.

Mazé, D. and Chailan, C. (2021) A South-South perspective on emerging economy companies and institutional coevolution: An empirical study of Chinese multinationals in Africa, International Business Review, 30, 4, number S0969593120300421.

OECD. (2022). Geographical Distribution of Financial Flows to Developing Countries 2022.

Oteh, A. (2017) Foreword. In M. Rietveld & P. Toledano, P. (Eds.), The New Frontiers of Sovereign Investment. Columbia University Press.

Sauvant, K. P., Sachs, L. E., & Jongbloed, W. P. S. (Eds.). (2012). Sovereign investment: Concerns and policy reactions. Oxford University Press.

Schapendonk, J., & Ekenhorst, M. (2020). From Sectors to Circuits: Re‐Describing Senegambian In/Formal Practices in Europe, and Beyond. Tijdschrift voor economische en sociale geografie, 111(5), 705-717.

Tarrius, A. (1993). Territoires Circulatoires et Espaces Urbains: Différentiation des Groupes Migrants. Les Annales de la Recherche Urbaine 59–60, pp. 51–60.

Zelizer, V. (2021). Circuits within capitalism. In The economic sociology of capitalism (pp. 289-322). Princeton University Press.