4. Private-sector Capacity and Oversight
Infrastructure delivery in many countries is dependent not only on the quality of public institutions responsible for public investment management, but also to a significant extent on the performance of private contractors. This makes oversight of the private sector crucial.
Characteristics of the local construction sector and local content
The participation of domestic enterprises in the construction of public infrastructure – sometimes referred to as ‘local content’ – is often seen as a way to increase the sustainability of public investments and generate skills, income and local employment. The organization Engineers Against Poverty defines local content in infrastructure as including ‘… the involvement of local enterprises and labour in planning, design and construction services, as well as the local added value in transactions occurring throughout a contractor’s supply chain’.77 The idea is most obviously applicable to contexts in which infrastructure financing comes from external sources and not, as in the case of Angola, predominantly from domestically mobilized resources; it is perhaps assumed that in the latter case the prioritization of local content happens automatically.
Angola nonetheless faces some of the same issues encountered by countries in which the local-content narrative is more relevant. Despite having become (temporarily) an upper-middle-income country in terms of gross national income (GNI) per capita, it has encountered capacity constraints similar to those of some low-income countries. Its combination of rapid GDP growth and high demand for reconstruction after the civil war exceeded the capacity of local enterprises, labour and supply chains. Moreover, the aforementioned lack of openness in the public finances, along with the existence of a patronage-based governance structure (in which money and favours are allocated by the well-connected to clients, including to foreign companies), has created an uneven playing field for private enterprises. Rent-seeking prevails, with very limited accountability in the delivery of public infrastructure.78
Traditionally, the construction of public infrastructure in Angola has been dominated by Portuguese and Brazilian companies. Chinese companies are a more recent, but significant, presence. Some would argue that the government, despite officially being in favour of the participation of domestic actors, has failed to use the reconstruction phase to develop an Angolan construction industry capable of competing with foreign companies. A growing number of Angolan enterprises are reportedly involved in infrastructure development, but it is hard to verify this because there is no public registry of enterprises carrying out work for the government. There is also a culture of secrecy in the sector.79 Companies undertaking construction work for the government are now legally required to register with it, but the law does not require these details to be publicly accessible.80
Moreover, it is not necessarily straightforward to distinguish between a foreign enterprise and a domestic one. The recently modified law on private investment defines an Angolan company as one legally constituted in Angola, with headquarters in the country and at least 51 per cent of its capital stock owned by Angolan citizens.81 For practical reasons, foreign companies with (or aiming to achieve) a consolidated presence in the country will thus typically prefer to legally form an Angolan company, as this offers a range of advantages. While it is possible to operate as a foreign company by setting up a representative office, such a firm would not be entitled to make investments. In addition, in some sectors (power and water, hotels and tourism, transport and logistics, civil construction, telecoms and IT, media) it is a legal requirement for foreign companies to use Angolan partners when making new investments.82 Opting for locally owned companies or joint ventures is also favoured because a range of other incentives are available to domestic companies. However, the mere act of foreign companies setting up operations through local partners reveals little about the true level of local content in the country. Nor does it reliably indicate whether localization is likely to have positive implications for the quality of infrastructure in the long term, its maintenance or the skills development of Angolans.
Foreign access to the lucrative Angolan market has historically been highly constrained, so the notion of ownership has not traditionally been linked to any requirement for the Angolan counterpart in a joint venture to contribute proportionate levels of investment capital. Anecdotal evidence suggests that in some instances the relevant authority would simply designate (through the now-defunct National Agency for Private Investment, ANIP) a local partner for the foreign company entering the market. When ANIP was shut down in 2015, a new Agency for Promotion of Investment and Exports of Angola (Agência para a Promoção de Investimento e Exportações de Angola Nacional) – APIEX – was created.
Although it took over some of ANIP’s functions, APIEX focuses more on promoting investment opportunities. Significantly, it has no role in authorizing investments. That authority is now vested in sector ministries and, for high-value projects, the presidency. Meanwhile, a Technical Unit for Private Investment (Unidade Técnica para o Investimento Privado) – UTIP – was formed to advise the president on investments above US$10 million, the approval of which lies beyond the scope of individual ministries, according to the new private investment law. However, the devolution from ANIP to line ministries and the presidency of the authority to approve foreign investments may not necessarily improve past practices.83
One of the challenges of boosting local content has been to cope with the sheer volume and pace of work associated with the massive reconstruction effort in the country, as existing capacity in the private sector is limited.
In terms of restructuring supply chains, the government has experience from the oil sector, where significant efforts have been made to increase local content. Policymakers saw it as imperative to first strengthen local content in this sector, given its dominance in the economy, but the concept has been widened to other sectors, including construction. One of the challenges of boosting local content has been to cope with the sheer volume and pace of work associated with the massive reconstruction effort in the country, as existing capacity in the private sector is limited. For example, the agreements on credit lines with China initially called for 30 per cent of labour and materials to be locally procured. However, Angolan industry was unable to meet demand. There were also significant challenges, due to cultural differences, in terms of Angolans adapting to Chinese working practices and expectations. For these reasons, the Angolan government retreated from the original local-content requirements.84 Similarly, the public procurement law established that 25 per cent of spending on goods, services and works should go to micro, small and medium-sized enterprises. However, by 2015 the share of procurement spending accounted for by such firms had reached only 2.6 per cent, partly due to difficulties over the reliability of supplies and services.
Addressing the skills gap
In addition to the rules on legally constituting as Angolan companies, foreign firms face requirements to train and use local labour. A policy requiring the use of Angolan labour in companies at all levels of staff seniority, including management, has been in place for more than a decade. Oil companies had to adapt to this requirement in the 2000s when the ‘Angolanization’ policy was put into effect. This stipulated that 70 per cent of labour (including senior management) must be Angolan. Field research has found that the 70 per cent rule is generally easily met in the construction sector: typically, 80–90 per cent of the workforce in large construction companies is made up of Angolan nationals, as projects employ thousands of people and it is too expensive to bring in large numbers of foreign experts.85 No official data are available disaggregating the number of staff by level of seniority, but anecdotal evidence points to a higher percentage of foreign (typically Portuguese) staff at management level. Even if such data existed, however, the picture would be obscured by the existence of a very high number of holders of dual Angolan and Portuguese nationality. (More than 200,000 Portuguese citizens have dual nationality of some kind, although the statistics do not reveal the other nationality held; nor do the figures indicate whether Portuguese is considered the primary or secondary nationality.)86
In light of the above, one can argue that the origin and legal location of construction companies are perhaps not the most important factors in the development and sustainability of infrastructure in Angola. It is neither a low-income country with a negligible market size, nor reliant on externally funded infrastructure development involving foreign construction companies that typically remain in the country only in the short term. Indeed, several characteristics of the Angolan market have created incentives for foreign companies to seek a longer-term presence. It is a sizeable and historically lucrative market, access to which is difficult and thus prized. It has a huge infrastructure gap, and strong political commitment to funding construction. Although this commitment was driven to a significant extent by the oil boom and related fiscal revenue, which has subsequently declined, Angola remains one of the largest economies in Africa. Companies are likely to try to sit out the crisis, waiting for conditions to improve (this constitutes another reason for reform of both public investment management and the wider business environment). In this scenario, sustainability, economic growth and poverty reduction are likely to be addressed predominantly by investment in reducing the skills gap – i.e. through training and education, including via apprenticeships, internships and other types of on-the-job training.
Currently, some companies make systematic efforts to train staff and develop a more proficient and committed workforce by offering enrolment in vocational training programmes.87 At government level, the 2013–20 National High- and Mid-Level Staff Training Plan (PNFQ) has been launched.88 It targets eight cohorts/areas of activity: higher education graduates; secondary education graduates; training of teachers and researchers for high-level education; training of primary and secondary teachers and education specialists; training of public-sector staff; training in entrepreneurship and business development; public support of scholarships; and professional job training. Both training conducted by companies and the strategic approach of the government are important in efforts to start addressing the skills gap in Angola.
Challenging business environment
Angola ranks as one of the worst countries in the world for doing business. It ranked 140th out of 144 economies in the 2014–2015 Global Competitiveness Index (GCI), developed by the World Economic Forum.89 The GCI measures a range of indicators across 12 categories or ‘pillars’ that, in addition to traditional markers of competitiveness such as macroeconomic environment, labour market efficiency and infrastructure, include indicators related to health, education and innovation. Angola’s strengths lie in its market size and macroeconomic environment (the 2014–15 edition drew on data from before the onset of the country’s economic and fiscal crisis). The country’s four most problematic factors for businesses are a lack of access to financing, an inadequately educated workforce, an inadequate supply of infrastructure, and corruption.
Angola ranked 140th out of 144 economies in the 2014–2015 Global Competitiveness Index (GCI), developed by the World Economic Forum.
Inefficient bureaucracy is a further significant constraint to doing business in Angola, both for foreign companies and for local small and medium-sized enterprises.90 The World Bank’s 2016 Doing Business rankings estimate that it takes 203 days to obtain the construction permits required to build a warehouse in Angola.91 This compares to an average of 162.2 days for sub-Saharan Africa. On the other hand, the cost of obtaining the permits in Angola is comparatively low. The cost – assessed as the percentage of the warehouse’s value – is only 0.5 per cent in Angola, compared with an average of 6.6 per cent for sub-Saharan Africa. There was broad agreement among stakeholders interviewed for this research paper that neither the time nor the cost referenced in the rankings reflect the reality on the ground, and that endemic corruption in the sector is the main problem.92 Few private actors can afford to wait 203 days to obtain a construction permit, and they will therefore seek alternative ways to speed up the process when dealing with public officials. This creates a fertile environment for the extraction of rents. Unfortunately, the endemic and entrenched nature of rent-seeking and corruption in Angola means that these practices will be difficult to root out.
Corruption
Angola is one of the most corrupt countries in the world, ranking 164th out of 176 countries in Transparency International’s Corruption Perceptions Index in 2016.93 Equally, Angola is near the bottom of the World Bank’s 2016 WGI, with a percentile rank for control of corruption of 5.77 (the scores range from 0 for worst to 100 for best).94 There is little doubt that corruption has had a negative impact on infrastructure delivery in Angola. A significant study by Åkesson and Orjuela (2017) documents extensive corruption in the construction sector. Based on 55 in-depth interviews, the study examines systematic corrupt practices among Angolan officials and Portuguese immigrants, including representatives of companies in the construction sector who ‘… talked very openly about corruption as an intrinsic part of conducting business in Angola …’.95 In one highly telling quote, an interviewee working for a large construction company revealed corruption in the procurement process:
There are always envelopes. And you have to know the people who are responsible for the competition [procurement process]. Then when you win the contract you share the profit with them. The Angolans only accept companies that give [bribes]. Other companies will not enter.96
In a similar vein, interviewees in the study indicated that bids were often submitted with significantly inflated values to enable payment of kickbacks, and that this resulted in the extraction of massive rents from the public finances. They also indicated that projects were deliberately set up so that the infrastructure being built lacked durability, as this provided the possibility for profitable repeat business (infrastructure being more lucrative than other types of public expenditure).97 Such practices have dramatically increased the cost of the limited infrastructure that has been completed in the past 15 years, and have reduced opportunities for public savings that could have helped cushion the impact of the post-2014 economic crisis.
Box 3: The importance of connections, or socios
International companies that are successful in Angola have one thing in common. They have good business partners, or socios as these are called in Portuguese. The Portuguese word is used here because it has a certain meaning in the Angolan context which is not well captured by the English translation ‘business partner’. Historically, the term has been associated with persons from the elite being appointed as partners in foreign investments – in some cases without contributing anything other than their presence as a co-owner. In the oil sector, the use of socios has been linked to the practice of ‘carried interest’ transactions, in which stakes in extractive ventures are offered to domestic business partners on the understanding that the cost will be paid back with future oil revenue. Today, and perhaps particularly in the construction sector, the socio concept relates to individuals with ‘access’ and ‘connections’ to the right, powerful people within the system who are therefore in a position to solve problems in a speedy and effective manner.
Corruption is an impediment to foreign investment, economic growth and the establishment of a level playing field that would allow local-content legislation to have an impact beyond the established elite. The increased importance of international anti-corruption legislation, such as the UK Bribery Act 2010 and the US Foreign Corrupt Practices Act 1977, means that foreign companies are worried about corruption even prior to attempting to enter the Angolan market. While the US legislation has a degree of international reach, as those who make corrupt payments through the US financial system can already be prosecuted in the US, countries like Portugal and Brazil need to pursue similar anti-corruption legislation.98 In Brazil, the recent ‘Lava Jato’ scandal – which had links to Angola and 14 other countries – is expected to provide political momentum for reforms. From a purely Angolan perspective, addressing corruption needs to be a priority as the government seeks to attract foreign investment.
Paradoxically, several individuals interviewed for this paper from different sectors expressed the view that bribery is relatively ‘inefficient’ in Angola. That is, the act of bribing someone cannot be relied on to deliver the expected outcome. This is partially due to the obvious fact that corruption is illegal, making it problematic to seek redress should services not be delivered. The other difficulty is that it is often impossible to know who is in a position to actually deliver a particular favour or service, and who is just pretending to be in a position to do so. Moreover, the status of different power brokers is in constant flux. Instead, interviewees indicated that the key to effective business relationships in Angola is to have a powerful and well-connected socio (‘partner’, see Box 3) who can open doors and solve problems.
Opportunities for international business – the UK prosperity agenda
What does all this mean for the UK? Over the next couple of years, Angola will have to continue to overcome the shock to the economy caused by lower oil prices and complete a significant political transition, following the installation of João Lourenço as president in September 2017. Both developments open potential opportunities for reform, which in turn could enable UK companies to enter a market of significant size and strategic importance on the African continent. The Angolan government’s focus on diversifying the economy away from dependency on oil opens opportunities beyond the extractives sector, and British expertise and standards in many other sectors are well regarded. Angola might indeed be one of the countries that (as suggested by its inclusion in the High-Level Prosperity Partnership) the UK would do well to consider building stronger ties with as it leaves the European Union.99
That said, there remain significant challenges for UK companies seeking to invest in Angola – not least, the critical need to identify a strong business partner; the risks of becoming involved in collusion and corruption; and more basic issues such as language barriers and complex visa requirements. Health, security and safety issues are also of concern. Most of these challenges can be overcome, and some are likely to be addressed through reforms in the near future. It is key, however, that British companies maintain very high standards on due diligence and in their anti-corruption policies.
77 Wells, J. and Hawkins, J. (2008), Increasing local content in the procurement of infrastructure projects in low income countries, London: Engineers Against Poverty, p. 7, http://www.engineersagainstpoverty.org/documentdownload.axd?documentresourceid=23 (accessed 9 Feb. 2018).
78 Vines, A., Shaxson, N., Rimli, L. and Heymans, C. (2005), Angola: Drivers of change: an overview, London: Royal Institute of International Affairs, p. 7, http://www.gsdrc.org/docs/open/doc87.pdf (accessed 9 Feb. 2018).
79 Companies were extremely hesitant to engage in the research, with only companies contacted through the Portuguese embassy responding positively to interview requests. Efforts were made to obtain contacts with companies through the Regulatory Institute for Civic Construction and Public Works (IRCCOP). This institution had previously committed to disclosing information about companies. However, only company names, without contact details, were provided.
80 Government of Angola (2015), Diário da República, I série N.º 136, Decreto Presidencial n.º 189/15, de 5 de Outubro de 2015.
81 Government of Angola (2015), Diário da República, I série N.º 115, Lei 14/15 de 11 de Agosto de 2015.
82 Robles, J. (2018), ‘Doing business in Angola’, Thomson Reuters Practical Law, http://uk.practicallaw.com/9-517-9446 (accessed 22 Feb. 2018). As always, there seem to be exceptions to the rule, such as with the Portuguese companies Teixeira Duarte and Soares da Costa. Odebrecht, a Brazilian conglomerate, has only recently moved to set up legally as an Angola company.
83 In March 2018, further reforms were made to the foreign investment promotion regime, with APIEX being renamed AIPEX. It is beyond the scope of this research paper to analyse the most recent changes.
84 Interview, Luanda, October 2015.
85 Interview, Luanda, October 2015.
86 Agencia Lusa (2014), Cresce número de portugueses a pedir nacionalidade angolana e moçambicana, SAPO, 24 de Abril de 2014, http://noticias.sapo.pt/nacional/artigo/cresce-numero-de-portugueses-a-pedir-nacionalidade-angolana-e-mocambicana_17479990.html.
87 The research team visited one of these training centres. At a first glance, it was very impressive, with good conditions offered, although the activities presented were related to training of car mechanics and retail and not specifically to construction. Site visit and interview, Luanda, 3 November 2015.
88 This is the official English translation from the Portuguese Plano Nacional de Formação de Quadros. ‘Quadros’ perhaps translates better into professional or skilled persons. The plan is aimed at strengthening human resources within many professions in the private and public sectors.
89 Schwab, K. (2014), The Global Competitiveness Report 2014–2015, World Economic Forum, p. 13, pp. 108–09, http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2014-15.pdf (accessed 2 Mar. 2018).
90 Ibid., p. 108.
91 World Bank (2016), Doing Business 2016, p. 184.
92 Several interviews, Luanda, February 2016.
93 Transparency International (2017), Corruption Perceptions Index 2016.
94 World Bank (2017), Worldwide Governance Indicators.
95 Åkesson, L. and Orjuela, C. (2017), ‘North–South Migration and the Corrupt Other: Practices of Bribery among Portuguese Migrants in Angola’, Geopolitics, DOI: 10.1080/14650045.2017.1379510, p. 14, https://www.tandfonline.com/doi/pdf/10.1080/14650045.2017.1379510.
96 Ibid.
97 Interview, Luanda, February 2016.
98 This was the main link used in the 2015 FIFA corruption scandal. See, for example, Rose, C. (2015), ‘The FIFA Corruption Scandal from the Perspective of Public International Law’, American Society of International Law, 23 October 2015, https://www.asil.org/insights/volume/19/issue/23/fifa-corruption-scandal-perspective-public-international-law.
99 The UK’s Department for International Trade has produced a guide to doing business in Angola, available at https://www.gov.uk/government/publications/exporting-to-angola/doing-business-in-angola-angola-trade-and-export-guide.