1. The Investor
ABC Consumer Products of Europe is an international conglomerate that draws from its worldwide technology and resource base to invest in various markets around the world. In the COMESA region, ABC has long had six separate investments in oilseed and vegetable oil products, each operating as individual national investments serving national markets. There is little or no cross-border or export activities from any of the six.
Because of COMESA’s movement toward a single market, ABC’s strategists in Europe are considering the possibility of rationalizing operations to take advantage of comparative and competitive advantage in different countries. Instead of having a fully integrated operation in each country to serve a small market, they would like to put pressing facilities in one or more countries, high grade refining in another, seed development and production in another, and so on.
2. Opportunities in the Industry
Consumption of vegetable oils, particularly cooking oils, is universal throughout the COMESA region. Although consumer buying power is low, virtually all consumers purchase oils and will continue to do so. Production of oilseeds does not meet demand, so any increase in production can be absorbed locally and displace imported oils, which constitute 50% or more of some markets. Internal barriers in the region have made it difficult or impossible to capture economies of scale that would otherwise result in higher productivity and production, and lower costs of local production that could compete more effectively with imports. The single market potentially offers very attractive opportunities to a cross borer investor with the resources to approach the market as a whole.
3. Investment Process
ABC first must build a central management team to oversee COMESA-market operations from a regional perspective. They intend to move some existing managers from their current locations to the new regional headquarters, which will be in one of the country capitals. To rationalize their operations, they will want to consolidate some disparate smaller production unites into fewer, larger units. This will require them to close plants that are not or will not be profitable under the existing framework and to invest in new production units, either expanding capacity of existing units or investing in new plants. This will also entail the sale and purchase of real estate and equipment, which must be financed.
4. Decision Process
Cost of Investment: Some countries are offering very strong incentives for new investment and modernization, while dis-investments (closing plants, reducing jobs, selling off property) may be very costly. They anticipate that they will be unable to sell their real estate in a timely manner due to bureaucratic delays – some of which may be punitively applied because of the dis-investments – and that they will have retrenchment costs for employees who cannot be transferred to new locations or industries.
They will also be building larger, sub-regional silos, warehouses, and distribution centers. They plan to upgrade equipment, which they expect to be welcomed by host governments; indeed, they expect significant tax reductions through incentives. The investments will require bringing in foreign technicians who can operate and maintain the equipment, and believe that it will take form 2-5 years to train locale technicians who can take over some of the functions. A number of managerial and technical positions will be permanently staffed by expatriate employees to ensure that the standards of ABC Oil Europe are maintained, but they believe that they have sufficient experience to handle this without undue difficulty.
ABC is also prepared to invest in larger tankers and long-haul vehicles, which will be used to move materials and products throughout the market.
Revenues: ABC perceives that they will be able to sell more oil by lowering prices, creating brand loyalties and out-competing importers of refined Asian oils, thus capturing a larger market share in cooking oils. To the extent that the market continues to be unable to supply sufficient raw materials for pressing and processing, they also believe that they will be able to continue to supply the shortage with Asian crude oils, which can be refined more efficiently through one or two single refineries. They also believe that they can finally create a seed improvement and seed sales unit that was not economically viable under the old system.
Cost of Doing Business: ABC is assuming that the unnecessary costs of doing business will disappear with the reduction of tariffs and non-tariff barriers. The most important constraints that have fragmented the investment to date occur at the borders. Differing and unpredictable tariff rates, long processing delays, and unpredictable customs categorization have kept the company from crossing borders frequently in the past. Moreover, the cost of transport due to poor road infrastructure has also been problematic and this will not necessarily change under the regional scheme.
Risk: ABC believes that its greatest risk is in tariff changes, import/export barriers, and corruption. They can hedge the risk of crop failures by having supplies of crude oil for their refineries, but are unsure of whether they can truly guard against policy changes. Currently, their markets in some of the Great Lakes Region are damaged by illegal smuggling of untaxed imports (with official complicity), and they must compete with foreign oils that are illegally labeled as COMESA origin products, which benefit by paying reduced inter-regional tariffs.
The discussion of ABC Consumer Products centers on the cost of doing business. As long time players in the individual marketplaces, ABC has created a profitable, if inefficient firm. It knows its marketplace, and its products are known. It sees an outstanding opportunity with the lowering of trade barriers. However, the success of the project is predicated on its ability to conduct business across borders seamlessly.
The investment shouldn’t go too badly, although there will be rough patches, particularly with regards to layoffs and downsizing. The sale of property may be time consuming, and while ABC may have the financial resources to absorb the costs of disposition of land, many smaller firms do not. The investment in improved facilities will likely go well, although in some cases, it has been noted that high technology investments are often stunted by planners and inspectors that do not have the knowledge to properly evaluate some of the components of the investment.
Transport costs in the region have started to recede. Some attribute this to the reduction of bureaucracy, the improvement of infrastructure, and the improvement of roads. Others suggest that it’s a result of increased competition in the trucking industry. Costs are still high compared to world standards, but should they continue to fall this project becomes more viable. Additional work needs to be done to harmonize axle-weight loading limitations for long-haul roads and to reduce border delays.
Another plus for ABC would come from the customs bonding schemes. By transiting borders with goods in bond, ABC could avoid the costly delays of multiple and untimely inspections of imports and exports, and the considerable bribes that can be imposed. It would also lower the costs and frequency of in-transit inspections that are often imposed through random roadblocks and inside some of the countries.
The oilseed industry is not immune to smuggling and corruption on a large scale, and many importers and manufacturers complain about the presence of foreign oils that come into the country duty free. The presence of on-again, off-again regulations, barriers, and duties create opportunities for increased corruption at the border posts and create additional costs for a company such as ABC. While Western companies are not immune to corruption (some even propagate it), many companies avoid it at great cost.
Companies such as ABC Consumer Products are very encouraged by the reduction of tariffs promised by COMESA, but are, at the same time very skeptical about the impact on their industries. Despite trade agreements that have come into effect years ago, disruptive tariffs have been imposed on short notice particularly on products that come from the agricultural industries. While COMESA does provide a means to debate such tariffs through a Court of Justice, interviewees were highly skeptical that the environment that they had one day would not change significantly the next.
This sort of investment would be next to automatic in a place such as the USA or EU. The impact of improved economies of scale is critical to an industry such as pressing, refining, and packaging. Unfortunately, a company such as ABC might hold off on such an investment until it feels confident that the increased economies of scale will offset the still high costs of trading a commodity across borders.
6. What COMESA Can Do
This is one investment in which the Department of the Investment Promotion and Private Sector Division of COMESA can play a significant interlocutor role between the private sector and multiple governments. The difficulty will be that in terms of investment and employment for this project, some nations will be winners and others will be losers.
The process of negotiating with multiple government departments (everywhere in the world) within a single nation is difficult enough, even for large-scale investors. Some countries are small enough that large investors have direct access to political leaders, which helps facilitate the process. This gets amplified when multiple governments are involved.
In this vein, COMESA can look at some of the many consumer products companies in the region and work with them to find solutions to expand their operations through rationalization. By doing this, COMESA will gain an even greater insight into some of the issues that investors face by running integrated operations.
COMESA has already been promoting a regional bond guarantee scheme, but not all of the countries and transport routes are ready for it. The scheme works best for products and industries utilizing container loads, so that not all routes will benefit equally at first. With that in mind, a pilot project on the Mombassa-Kampala highway or another major inter-modal corridor might be the best way to begin. COMESA could work to bring together a few countries at a time, then, assuming success, roll out the program to other routes while applying lessons learned in the first project.
Transport costs, though improving, are critical for success, especially for landlocked countries. There are still harmonization issues such as axle-weight loading, vehicle maintenance, and the freight clearance and inspection procedures at the border. The Yellow Card insurance scheme has wide support in the trucking industry, which notes that there are still occasional problems with enforcement, although the situation has dramatically improved over the past two years. Unfortunately, there is no adequate reporting mechanism to capture complaints about this and other infractions. COMESA can have an impact on enforcement in two ways. First, COMESA could upgrade its existing web sites to permit feedback on enforcement issues, including the filing of complaints. Second, COMESA could consider permitting jurisdiction over infractions. This may be less plausible, but something needs to be done to bring non-complying states into compliance, as they damage investment for every neighboring country, not just their own.