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Interview

with Nils Flaatten, Chief Executive Officer, WESGRO – Destination Marketing, Investment and Trade Promotion Agency of the Western Cape

30.11.2011 / Energyboardroom

Before discussing the oil and energy scene in the Western Cape Province, we would first like to ask you for your broader view on the regional investment climate. In an earlier interview, Premier Zille pointed out that political stability has been a key factor to attract foreign investors to this region. In your view, would you first of all agree, and secondly, what other factors can you add?

The fact that the same political party controls both the City of Cape Town and the Western Cape Province indeed creates a lot of stability. The City itself is an important area, and is home to 3.5 million people of the 5.3 million that live in the greater Province.

The most important part of our investment profile starts at the national level. South Africa is home to the second most stable banking system in the world, ahead of countries such as the UK, France, Germany and the US. Furthermore, we also have a very sophisticated legal system.. As we also use the Common Law, it is relatively easy for people from the UK, Hong Kong or Singapore to understand our jurisdiction, as well as for us to reinforce it. Last year we were ranked first in terms of transparency and openness of the public budget. All in all, we have a very sophisticated financial and legal infrastructure to operate from and conduct any business.

South Africa’s national GDP growth has been hit by the 2008/9 events. While we have shown good recovery, we are not yet at the levels where we need to be. We need to be at growth levels in excess of 6%. Our fortunes are tied to what is happening on the African continent. At present, for example, the USA procures roughly 11% of its crude oil from West Africa, a figure they are trying to drive up to 25%, a quarter of its total supply.

On the African continent, we now also increasingly see the fruits of the shift towards more democratic systems. There is an increasing absence of the “big man” in African politics as younger and more progressive leadership is coming in. This has not only resulted in democratic reforms, but more importantly has led to more and more investment in the socio-economic development of their respective countries.

The South African businesses have got a very good footprint across this continent. Our country even used to be the biggest source of FDI, until oil and gas and a number of other sectors have drastically ramped up investment higher up the West Coast. Increasingly, the South Africans are now building hotels, retail chains, roads, are involved in agricultural projects, and so on. We know this continent very well.

The African markets are also opening up. When I lived in Hong Kong from 2000 to 2004, everyone was preoccupied with what would happen when China opens up. The negative people were worried about a collapse of the bank loans, lacking intellectual property rights protection, etc. Eleven years down the road, we see a completely different story however. The excitement I experienced in Asia at that time, is exactly what I am experiencing here now about Africa. In 10 to 15 years, we will have over 1 billion people on the continent spread out over 43 countries, of which 50% will be under the age of 35 and half of which will live in or near cities. As these economies become stronger with huge GDP growth rates of 12 to 18%, middles classes will increasingly develop and look for new products of high quality. For the next 3 to 5 years, pricing in the African continent will also not be perfect. There is thus a huge opportunity to make money, whether it is in hotels, retail or even agricultural machinery.

South Africa’s key value proposition is that our nation serves as a springboard to the African continent. Durban, for example, will focus on its port infrastructure and mainly look at the East Coast of the continent, starting with Mozambique and moving up to Tanzania and farther. In the Western Cape, Wesgro has been pushing for a West African trade corridor for nearly 8 years now. Cape Town is a springboard to do business in West Africa, starting at Namibia, Angola and higher up to Nigeria, Cameroon, Ghana, Cote D’Ivoire, etc. The IMF figures also show that these areas have got quite stable economic growth rates.

We have a sophisticated infrastructure and a significant African footprint. The most important aspect for foreign companies to be successful is to use the joint-venture model. If they want to get into Africa, we advise them to team up with a South African partner, get a footprint here to gain a better understanding of the continent, and subsequently expand across Africa. In the last few months alone, we have seen a huge increase in private equity firms coming to speak to us as they look for new opportunities. Furthermore, we have also seen a huge increase in companies in the manufacturing and light industrial area that want to come here. The economies of the global north, including Japan, have stalled and will only see growth rates of 1% to 1.5%. Companies, medium-sized ones in particular, have come to see the value of the African proposition and want to enter these markets using the aforementioned model. This area is where their new revenues are going to come from.

With development taking place along the coasts of Africa, we will also see increasingly stronger companies there. How sustainable is the advantage to have a South African partner? To what extent would we see companies looking for an Angolan partner in a few years, for example, which are geographically closer to the areas of exploration?

There, I do not see the same legal and financial infrastructure as the one we see in South Africa. Economies like the Angolan one first need to grow more and introduce more reforms, in order to give investors more guarantees. Our national government has begun signing Investment Projection Treaties with a number of countries, which makes it easier for people to transact.

There definitely are different entry points developing in or along Africa. Mauritius, Kenya and Morocco, for example, would claim that they are quite strong entry points. Nigeria is also spending significant efforts to achieve such positioning, and has introduced reforms to force up the capital adequacy rules of its banks and push for consolidation. Their governor of the central bank, Sanusi Lamido Sanusi, is also exceptionally smart and has managed to bring a lot of fiscal discipline to the country.

Overall, South Africa has a huge lead on these countries. Nonetheless, there is also enough space for multiple entry points. Investors will have to look at what footprint they exactly want to develop.

Surely, there must be some challenges as well. In terms of infrastructure development, Cape Town is for example restricted by the amount of available space, which is also why we see new areas such as Saldanha Bay further developing. What are some of the other issues that may still make some of the investors hesitate?

First of all, there are still some political issues that matter. There have been a lot of discussions about nationalization. Looking at the IMF and World Economic Forum rankings, South Africa has serious challenges around health, education, while some of the infrastructure will also acquire significant capital expenditures.

We do have a space problem with the Port of Cape Town, but I think that as a province and region we have other possibilities. Saldanha Bay is vastly underutilized at the moment. Transnet, the National Port Authority, is calling for expressions of interest to develop the back of port area, as well as adjacent properties around. There are vast opportunities to set up infrastructure such as a gas supply base where we can do more value-added manufacturing of some of our resources such as titanium, steel and zinc.

Going forward, power can be an issue in South Africa, whereas we could experience shortages at the end of 2012-2013, as the first new national power station will be completed and construction on the second will start. It is also clear that there is going to be an increase in the cost of electricity, which will possibly affect some financial models. However, it is important to point out that we do have some of the cheapest electricity in the world. At a national government level, a common challenge is implementation capacity. Sometimes, projects take a little bit too long to complete. The frustrating part is that we know that, as a nation, we can do it. We already proved this for the FIFA 2010 World Cup. But I think that some of us have fallen back into these old bad habits.

To come back to Saldanha Bay, you described the area as underutilized. Why do you think that is and what can be done to unlock this potential?

A key product line going through there is steel. Part of the bunkering capacity is also being underutilized, with an utilization rate of only around 15%. As mentioned before, there are the back of port and adjacent areas that can also be significantly further developed. We have just completed a feasibility study of setting up an Industrial Development Zone (IDZ), which is a partnership between the national government, the provincial government and the local municipality of Saldanha Bay. In a next phase, we will now build the business plan and start the filing process for the operating licenses. This is one of Africa’s deepest water ports. The way the infrastructure is already configured now, is that there are rather wide turning circles for the bigger ships.

The African Growth Story has given rise to several local success stories or so-called local “gems” in South Africa. Focusing on the oil and gas sector in particular, do you have any specific examples you would like to highlight to our readers?

One of them is Krew Investments, a company that has been founded with the support, input and ideas from Wesgro. We have got some very strong domestic service companies. The track record of companies such as SMIT Amandla Marine (with Dutch roots) is also remarkable. Their ability to tow heavy infrastructures in one of the world’s toughest seas is impressive. The local company Toprope is also a good example and has extraordinary capabilities to perform complicated tasks on elevated structures.

We also have a very strong marine engineering sector here, which can build complicated structures. Looking at the South African coast, you will easily recognize that we are used to working in deepwater environments. We understand how to work in a maritime environment where you need to stabilize platforms.

In an earlier interview, Western Cape Premier Helen Zille stated that South Africa has the potential to top oil and gas service hubs such as Singapore. How do you see this?

For geopolitical reasons, I think the Premier is right. Many people across the world do not really understand what the African Growth Story is about. This continent has 40% of the world’s agricultural area not yet cultivated, while it has the most rivers of all continents. By the end of 2030, we will have more middle income people on this continent than India. I think the Premier also realizes the strategic value of ports such as Cape Town and Saldanha Bay.

We are starting to see rigs coming to our ports that are not destined for the West Coast of Africa, but are actually going to South America. These rigs are being built in places such as South Korea or Singapore, whereas the route to Cape Town is being used as a sea trial. Once in Cape Town, everything is being fixed up and recalibrated before the journey continues. Interestingly enough, we have settled between Houston, Aberdeen and Singapore, which are the traditional rig fabrication and oil service centers. On this new route between Singapore or Korea and Brazil or Argentina, we are the closest support centre to rigs operating on the West Coast. It is also very clear that discoveries are now taking place on both the West and the East coast, for which the servicing is all moving to South Africa. If you analyze PetroSA’s drilling program, it is fair to say that we are coming up to speed.

Another thing to bear in mind is that new logistics routes are developing out of Cape Town. There are 2 new shipping lines that are using small to medium sized carriers doing short runs to Angola and Nigeria. We expect to see more such developments taking place. DHL, for example, has its Sub-Saharan African business headquartered in Cape Town.

Cape Town is also a gateway to the Antarctic. A lot of the international and arctic programs pass their ships through our port before they head south. Packaging all these elements together combined with the massive growth potential, I would indeed dare to argue that the Premier is right.

You said before that the joint-venture model should be seen as the way forward. What role do you see for Wesgro to support such setting?

We need to take the marketing profile of this city and province to the next level. We need to deepen our contact with the international investor community and with the companies that are active in the oil and gas services sector along the value chain. To be successful as an investment agency anywhere in the world, you really need to look at 3 key characteristics: responsiveness, information and networks. I can definitely say that this agency is highly networked when it comes to banks, law firms, consulting firms, and so on. We strive to be a trusted advisor and partner.

Thank you very much! Do you have anything else to add that we did not cover?

It is important to point to the level of education we also find in the Western Cape region. We have 4 universities in Cape Town, with asymmetrical qualities. The University of Stellenbosch is much better at electrical engineering than the University of Cape Town, which is better at civil engineering. We also have 2 graduate schools of business here. The UCT Graduate School of Business ranked 68th in the global top 100 ranking last year. We also have got a secondary school system that produces the most graduates out of all the provinces. There is thus young talent in combination with a range of established universities involved in applied and technical research. For the region, there is also a specific way of managing, and a specific value set. These universities are able to teach this new type of African management style. Further to that, Cape Town is also the center of innovation, design and creativity in this country. Along these strengths, information and communication technology have become part of the oil and gas service requirements too.

One big question in South Africa also remains whether the moratorium around fracking should be lifted. If the reserves that are out there prove to be true, South Africa will become an energy-independent country, which in turn will spur huge growth rates. Moreover, if these reserves will prove to be great, we can also become an exporter. This will surely be an interesting space to watch.

One last aspect is that when it comes to heavy machinery, South Africa has a huge track record in mining, which can be built upon for the oil and gas sector. Many of the big mining houses have started looking increasingly into oil and gas.

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