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by EOS Intelligence EOS Intelligence No Comments

Commentary: Thomas Cook’s Demise – An Eye Opener for Tourism Sector?

There are few people who would not recognize Thomas Cook, as the company carved its name as a premier travel company in the UK as well as globally. Its name became synonymous with travel for many customers, as reminiscent from its slogan of “Don’t just book it, Thomas Cook it”. Unable to strike a deal to refinance its burgeoning debt, Thomas Cook, UK’s oldest package tour company, shut down operations this Monday, facing compulsory liquidation, and sending passengers as well as the tourism sector into panic. While the announcement may come as a shock, warning signs of the company’s jeopardized existence have surfaced several times over the past decade.

Thomas Cook has been in the news for large part of this year, as the company reported a record pre-tax loss of GBP1.5 billion, with the auditor raising concerns about Cook’s ability to manage a recovery. The company has been trying to secure funding of GBP900 million from banks and the Shanghai-based conglomerate Fosun, while also offloading parts of its packaged tours and airlines business.

However, an inability to secure an additional GBP200 million funding as working capital to cover cost of operations for winter season, which is traditionally characterized by low demand, meant that the company failed to secure its near future. As a result, Thomas Cook entered compulsory liquidation, fate it would have faced earlier, had it not funded its operations through accrued debt over the years, which eventually led to the company’s collapse.

Thomas Cook’s debt problem

It is not the first time that Thomas Cook has to run for its life, with serious doubts rising about the company’s existence already in 2011. At that point, Thomas Cook managed to survive by securing some expensive credit facilities, as well as restructuring and cost-cutting. However, all this came at a cost. High interest paid on these credit facilities left a heavy burden on cash flows.

The company showed signs of recovery in the following years, even posting a pre-tax profit in 2015 and bringing net debt to more acceptable levels. However, due to market conditions and other contributing social and economic factors, the company’s tour operator business displayed a particularly weak performance, suffering massive losses in 2018. These losses resulted in the company struggling to maintain working capital, as well as witnessing net debt increasing close to GBP350 million by end of 2018, with the trend continuing in 2019.

Other contributing factors

While debt remained the largest problem, other factors contributed to Thomas Cook’s demise. Proliferation and growth of budget airlines and hotel offerings such as Airbnb had already increased competition for Thomas Cook, impacting the company’s bottom line, as customers were shifting to these low-cost options.

Demand was also impacted by the 2018 heatwave in Europe, with customers from UK and Northern Europe preferring to stay at home instead of travelling to other warmer European countries, such as Spain and France, which are key contributors to Thomas Cook’s business. Total demand has also been impacted by the lack of clarity around Brexit, with customers delaying their travel decisions under the growing economic uncertainty.

Impact on the tourism sector

The collapse of a major player such as Thomas Cook is expected to impact the tourism sector, albeit primarily in the short term. Thomas Cook had developed relationships with hotels and businesses in key destinations, which are dependent on the company’s customers for majority of their revenue during peak seasons. Thomas Cook’s collapse will negatively impact these players, at least in the short term. In the long term, however, business is expected to return to normal as these companies will develop new relationships.

While customers may look to Thomas Cook’s competitors for their travel needs in the short term, limited capacities (or partnerships) are likely to make the competitors unable to take up this additional demand unless they are paid a premium for it.

EOS Perspective

The collapse of Thomas Cook highlights the challenge that traditional tour operators face in the current tourism market. Customers are shifting from traditional packaged tours to offers that allow them to decide their own destinations, and make bookings through lower-cost online service providers. Traditional players, which generate most of their revenue through offline sales channels, have been put under pressure to evolve their business model, to adopt an online channel that offers more convenience and flexibility to their customers.

Emergence of innovative travel platforms, such as Airbnb, has also put pressure on the bottom lines of these traditional players, impacting their ability to invest in new business opportunities without accumulating debt. Thomas Cook is not the only one impacted. Recently, SOTC (formerly known as Kuoni) has also been in the news for its negative debt position.

Thomas Cook’s case, however, comes as an eye-opener for the tourism industry players, clearly showing that they cannot continue to take on excessive debt. More conservative approaches and cost management need to be considered to build a profitable, and more importantly, sustainable business.

by EOS Intelligence EOS Intelligence No Comments

Europe Fights Back to Curb China’s Dominance

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Given the swiftness of China’s economic development in the past three decades, transitioning from an impoverished and insular country to one of the formidable economic powers of the world, it has taken some time for Europe to accept China’s growing power and influence. Not only does China sit on largest currency reserves worldwide, but it has also become a significant provider of foreign investments, including in EU nations. This has recently strengthened China’s influence over the EU, which has created a sense of caution amidst European policymakers.

How is Europe benefiting from China’s growing investments?

Europe-bound Chinese investments were six times higher than Chinese investments in the USA – in H1 2018, Chinese investments in Europe stood at US$ 12 billion as compared to US$ 2 billion in the USA. For some of the economically struggling EU countries, Chinese investments are critical for developing and upgrading infrastructure, including energy plants, railways, motorways, and airports.

China’s Belt and Road initiative, under which cross-border infrastructure will be developed, will reduce transportation costs across Europe and China, creating an opportunity to facilitate trade expansion, regional integration, and attract foreign investments.

Besides infrastructure development, the investments are likely to create job opportunities and enhance economic competitiveness across Europe.

Then why is China’s growing influence alarming Europe?

Europe now sees a range of threats that China’s rising dominance in the region could bring along. Recently, the European Commission labelled China as economic competitor seeking technological leadership and systemic rival encouraging alternative models of governance. Europe realizes that China pursuits to shape globalization to suit its own interests.

The EU is deeply concerned regarding China exercising divide and rule tactics to strengthen its relationship with individual member countries that are susceptible to pressure, which could eventually harm the European cohesion. Recently, Italy signed the Belt and Road initiative, a landmark move against the counsel of western European nations, such as France and Germany, thus, raising questions on cohesion of EU countries.

The other concern is China’s rising influence over key governments of EU nations, thus, empowering itself with political leverage across the continent. China has already yielded political returns by wearying EU unity, particularly, when it is related to European policy on international law and human rights. In 2017, Hungary broke EU’s consensus by refusing to sign letter on human right violation against China. During the same year, Greece blocked an EU statement, which condemned China’s human rights record, at the UN human rights council.

Besides politics, China has also spread wings across key sectors of economy such as infrastructure, high-end manufacturing (including critical segments such as electronics, semiconductors, automotive, etc.), and consumer services, among others – growing dominance of China across these sectors is another cause of worry for the EU.

Europe also condemns China’s discrimination against foreign businesses, rendering limited market access to European firms and employing a non-transparent bidding processes. European firms operating in China face several trade and investment barriers such as joint venture obligations and discriminatory technical requirements that entail forced data localization and technology transfers. On the other, European markets have been open to foreign investments leading to massive Chinese FDI. However, lack of reciprocity harms European interest and could lead to unfulfilled EU-China trade ties.

The EU also criticizes China’s Belt and Road project for its lack of respect for labor, environment, and human rights standards. Other concerns include non-transparent procurement procedures with majority of contracts being awarded to Chinese companies without issuing public tenders, meagre use of domestic labor and limited contractor participation from host country, and use of construction materials from China – all of which undermine Europe’s interests.

Europe Fights Back to Curb China’s Dominance

How is Europe responding to China’s actions?

Europe is adopting strategies to limit China’s influence and reach across Europe and beyond, in African and Pacific countries.

Development of EU-Asia Connectivity Strategy

The EU’s new initiative, EU-Asia Connectivity Strategy, is an implicit response to China’s Belt and Road initiative, signifying a crucial first step to promoting European priorities and interests in terms of connectivity. The initiative aims to improve connectivity between Europe and Asia through transport, digital, and energy networks, and simultaneously promote environmental and labor standards.

The EU’s initiative emphasizes sustainability, respect for labor rights, and not creating political or financial dependencies for the countries.

Robust FDI screening process

European nations have been increasingly alarmed due to state-owned Chinese companies acquiring too much control of critical technologies and sensitive infrastructure in the continent, while China shields its own economy.

For the same reason, EU parliament is developing an EU-level screening tool to vet foreign investments on grounds of security to protect strategic sectors and Europe’s interests. The regulation will protect key sectors such as energy, transport, communication, data, space, technology, and finance.

While the EU still remains open to FDI, the regulation will protect its essential interests. Nonetheless, stringent investment screening procedures are likely to limit foreign investments in the continent, particularly from China.

Tackling security threat posed by China

In March 2019, the EU Parliament passed resolution asking European institutions and member countries to take action on security threats arising from China’s rapidly rising technological presence in the continent.

The resolution is likely to impact the ongoing debate of whether to eliminate China’s Huawei Technologies from building European 5G networks. The EU is concerned that the Chinese 5G equipment could be used to access unauthorized data or sabotage critical infrastructure and communication systems in the continent.

To minimize dependence on Chinese technology firms (such as Huawei Technologies), EU countries would need to diversify procurement from different vendors or introduce multi-phase procurement processes.

EU countries expanding footprint to counter China’s reach

Since 2011, China has invested US$ 1.3 billion in concessionary loans and gifts across the Pacific region, and has established its supremacy by becoming the second largest donor. China has been trying to build its influence, as the Pacific is bestowed with vast expanse of resource-rich ocean and the regional countries have voting rights at international forums such as the United Nations.

To counter China’s reach and ambitions across the Pacific countries, European nations such as the UK and France plan to open new embassies, increase staffing levels, and engage with leaders in the region. The UK plans to open new high commissions in Vanuatu, Tonga, and Samoa by the end of May 2019 and France is looking to meet and engage with Pacific leaders during the year.

Investment in Africa to limit China’s influence

As a strategy to curb China’s growing influence, the EU plans to deepen ties with Africa by boosting investment, creating jobs, and strengthening economic relations. The plan is to create 10 million jobs in Africa over the next five years. Europe is also aiming to establish free trade agreement between the two continents.

In recent times, China has been blamed of neo-colonial approach towards Africa, which is aimed at emptying the continent of its raw mineral in exchange for inexpensive loans, extensive but inferior infrastructure, among others. Europe aims to curb such influence by attempting to do business ethically. 

EOS Perspective

Unnerved by flurry of Chinese investments in the continent, the EU is looking to regain its control over matters. Europe has adopted a defensive approach against China’s initiatives, reflected through measures taken to protect critical sectors using investment screening system. The EU understands the downsides of enormous Chinese investments/loans, which may seem hugely enticing in the beginning, but could saddle vulnerable countries in debt they cannot repay – for example, a Chinese-built highway in Montenegro is likely to increase the country’s debt to about 80% of its GDP.

Currently, the key issue is the fact that Europe is standing divided on the right strategy to respond to bolder and ambitious China. While countries such as Germany, France, and UK have grown skeptical of China and are revolting against it, Italy, Hungary, Portugal, Greece, among others, are generally China-friendly. Europe has certainly become stern and tougher on China, but cannot pursue its interests without standing united.

The current situation does not demand Europe opposing China outright, but rather ensuring fair business conditions and equal market access through dialogue and cooperation with China.

Nonetheless, the EU has been quite slow to wake up to the various challenges that excessively ambitious China brings to the table. However, if Europe is able to become united now, there is still a chance to build a decent Sino-European partnership that serves interests of both parties.

by EOS Intelligence EOS Intelligence No Comments

Tunisia’s Bruised Tourism Industry Starts to Recover

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The tourism sector of Tunisia has been in turmoil over the past few years. The terrorist attacks on Sousse beach and Bardo National Museum in Tunis in 2015 crippled the industry, which had been witnessing a healthy growth before these events. As the Tunisian government and tourism industry players have been implementing strategies to revive the industry, some progress has been witnessed. However, the damage to the country’s image was grave and it is yet to be seen if the measures being taken will put the industry back on the growth trajectory.

Grave repercussions to the sector

Post Tunisia’s political revolution in 2011, the government started promoting tourism both domestically and internationally, and by 2014, the tourism sector contributed 15.4% to the country’s GDP. However, the terrorist attacks in 2015 in Sousse and Tunis killed nearly 60 foreign tourists (including 30 UK nationals) and significantly tarnished the image of Tunisia as a safe tourist destination.

The concerns over safety, reinforced by travel bans and no-travel recommendations issued by some EU countries, resulted in a drastic fall in the number of overseas tourists arriving in Tunisia. A travel ban issued by the UK authorities was particularly damaging to the local tourism sector, as UK had been the key demand-generating market for Tunisia. Between 2014 and 2017, the number of incoming travelers from the UK declined by 93% to 28,000 and many renowned UK travel companies, including Thomas Cook and TUI, discontinued their services in Tunisia.

The tourism sector had always been crucial for Tunisia’s economy and was one of the country’s key employment sectors, employing over 200,000 people before the attacks. The sudden decline in country’s tourism industry impacted cash inflow, business operations of several tourism industry players, and further destabilized the already faltering economy of the country.

The Recuperating Tourism Sector of Tunisia

Government reaction and first results

After two years of struggle, the Tunisian tourism market started showing first modest signs of recovery in 2017, following measures undertaken by the government to boost tourist footfall in the country. The Ministry of Tourism’s initial steps to help the industry survive included covering of social security contributions for tourism entities such as hotels, resorts, restaurants, etc., by the government, with the intention to help the providers maintain their employees and stay afloat. While this helped reduce the impact, the country still saw a massive loss of jobs in travel and tourism in 2015.

Simultaneously, the government tried to address the most pressing issue directly responsible for the decreased demand for Tunisian tourism services – traveler safety. To make tourists feel safe, the government tightened security around touristic sites, particularly in Sousse and Tunis. Additional surveillance equipment was placed at airports, hotels, and resorts to enhance security, while sector staff and various security forces received training on detecting suspicious behaviors and on counter-terrorism. Over the following years, Tunisia also received help from western countries in raising its security standards and procedures.

While these initiatives were needed and welcome, preventing attacks of this sort in a country located in close proximity to conflict zones, requires massive funding and complete, deep overhaul of its security and counter-terrorism system at all levels. Regardless of whether the steps already taken are sufficient or not to truly ensure safety, they certainly offered greater sense of protection to tourists, a fact promptly and extensively communicated to target customers across British and other European media.

The government of Tunisia has also taken measures to balance out the losses by trying to diversify its demand markets. To attract tourist from outside Europe, visa requirements for countries including China, India, Iran, and Jordan were eased with the introduction of visa on arrival. This strategy helped Tunisia attract Chinese tourists, whose footfall increased 56% y-o-y in January-May 2018 period.

To fuel business travel arrivals, the MoT started granting one-year multi-entry visa to businessmen and investors of these countries as well. Further, the MoT also removed entry visa requirements for countries including Angola, Burkina Faso, Botswana, Belarus, Kazakhstan, and Cyprus.

In parallel, the industry realized the need to broaden the sector’s offering. One such initiative was to expand the premium and luxury tourism segment targeting (quite interestingly) particularly British affluent travelers (indicating a continuous bet placed on British customers). In 2017, Four Seasons Hotel Tunis was opened, a major step in putting the country on the luxury tourism map, followed by a few more luxury resorts openings. In several locations premium activities have been developed, including marine spas and golf courses.

Europe’s cautious return to holidays in Tunisia

The measures appeared to have worked, and in 2017, the industry witnessed growth of the number tourists by 23.2% y-o-y to reach 7 million. While the government actions were to some extent successful, it was the lifting of travel ban to Tunisia by EU countries including Belgium, the Netherlands, Poland, and the UK that was the main factor leading to growth.

Recovery was further supported by the return of travel companies such as Thomas Cook and TUI, which resumed operations in Tunisia. Moreover, an air service agreement was signed in late 2017 between the EU and Tunisia to increase the number of direct flights between European countries and Tunisia, which soon led to the return of European airlines including Air Malta and Brussels Airlines on these routes.

All these developments have helped to revive tourism sector and regain European visitors to a certain extent. The number of tourists, particularly, from France and Germany, increased by 45% and 42%, respectively, y-o-y for the period of January-May 2018. This growth in tourist footfall was a great sigh of relief for local industry players, whose businesses have suffered tremendously post attacks.

UK tourist, the most valuable visitor, reluctant to come back

Despite Tunisia’s attempts to diversify its demand markets, the country sees UK as the most important source of tourists for its tourism sector. According to the Tunisian Hotel Association, the market will not fully recover until the British visitors are back in numbers from before the attacks, which will also send a strong message to the world that Tunisia is safe for travel again.

Before the attacks, tourists from the UK formed the bulk of most valuable visitors to Tunisia with high spending capacity, the strongest inclination to spend on high-end accommodation and local cuisines, staying for longer duration in the country, and shopping extensively for locally-made products.

Rebuilding Tunisia’s image in the eyes of British tourists is therefore seen as of great importance. While some British tourists started to return to Tunisia (following tightened safety measures and an extensive publicity thereof) many UK travelers continue to remain wary, and in spite the lift of the travel ban, British arrivals have not reached pre-2015 levels. This reluctance is difficult to break, as UK tourists still do not fully trust that their safety will be ensured, a fear further underpinned by tensions in Tunisia’s neighboring Muslim countries (e.g. Libya).

Some issues remain unresolved

The inability to bring back the UK tourists at levels from before 2015 is still a major problem to the local industry. Although the government undertook several initiatives to improve tourist safety, these steps are likely to be insufficient to prevent such events in the future.

Amidst Tunisia’s frail economic conditions, the availability of sufficient funds to truly and permanently ramp-up security is limited. Moreover, Tunisia must be able to ensure ongoing counter-terrorism abilities as a preventive measure, a task requiring a systematic approach and continuous financing, without dependence on western governments. Considering Tunisia is surrounded by areas prone to continuously produce this sort of danger, ensuring the right intelligence and financing is likely to be a challenge.

Tunisian tourism sector is fighting several battles at the same time, and the blow it received in an aftermath of the attacks had broad repercussions. Various structural issues, which had been present before 2015, still persist. This includes a relatively large share of poor quality accommodation and hotel services, which are not up to par with international standards and expectations of a western tourist, therefore are detrimental to market growth. The 2015 events put several hotel operators under heavy debt and in fight for survival, which pushed upgradation of hotel facilities much lower on their priority list.

There is also a shortage of well-trained hotel and other tourist services staff, which makes it difficult for the Tunisian tourism industry to compete with countries such as Turkey, especially if the substandard service level is paired with outdated and poorer hotel amenities and services. Tunisia does have training centers, however the aftermath of 2015 attacks put the entire sector along with ancillary industries in a standstill, therefore several training center have not been functioning at full capacity. Recovery will take time and it will be a while till a sufficient number of well-trained hotel staff will become available.

EOS Perspective

With tourism playing a pivotal role in Tunisia’s economy, the country found itself in a very difficult position as a result of the attacks. The revival of tourist footfall since the summer of 2017 is definitely encouraging, however the industry is still not out of the woods and needs to continue to work along with the government to ensure the return of the tourists, by addressing the key issues – safety and quality of services.

This should also be a good moment for Tunisia to realize the risks of reviving the industry with the same over-dependence on limited variety of demand markets as before (i.e. UK), and intensify its efforts to diversify target markets across Europe and beyond.

Apart from introducing and maintaining fundamental changes to the safety of the traveler and to what the industry offers, the country needs to revamp the way it markets itself so that it can improve its image and boost tourism. In the past, public authorities and industry players have not paid much attention to promoting the country’s tourism market on social media, relying largely on tour operators and agencies. However, promoting a positive image of the country along with advertising tourist facilities through online channels might help Tunisia reach broader customer segments across markets, e.g. by influencer endorsements (quite a successful approach for Abu Dhabi and Turkey, to name just a few, in the past).

It is also important for Tunisia to look beyond traditional mass-market, organized tourism and explore other avenues of revenue. More focus could be put on promoting cultural tourism as well as access to Sahara Desert – key attraction for people visiting south of Tunisia. Local investors have already started working to develop offers with local cuisines and immersive desert experiences, along with authentic-themed hotels and restaurants.

Tunisia has also made the right (although modest) steps to address the issue of substandard hotel amenities and unclear standard of accommodation that can be expected by tourists. Changes are being made to classification of hotels, as the current star rating system is outdated and based on size and capacity rather than quality of services. Efforts are being made to re-classify hotels in line with international standards. Such reforms are crucial for the industry to ensure higher level of customer satisfaction.

Rebuilding damaged image is always a long and difficult process and Tunisian authorities must do whatever possible to prevent similar attacks in the future. If the public authorities along with the industry players continue to make efforts to pull the country’s tourism market out of the pit, the optimistic expectations about tourist arrivals reaching 12 million by 2028, with a CAGR of 4.6% over 2018-2028, are likely to become reality, bringing back much needed employment and revenue to the economy.

by EOS Intelligence EOS Intelligence No Comments

China’s Investments in CEE: Sharing Benefits or Building Own Dominance?

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In 2012, China unveiled its plan to invest in Central and Eastern European Countries (CEECs) through transregional platform called the 16+1 Cooperation framework. Since the launch of this framework, China has been proposing various policies of mutual benefit, making efforts to become an important trade and economic partner of the CEECs.  While investments are welcome, several EU leaders and political experts in the region criticize such deals. They point at a threat of China’s growing dominance in the CEECs, as well as at China not keeping its promises made during the launch of this framework and negotiations of various deals.

China promises mutual benefits

The 2008 crisis brought worsened economic conditions to the CEECs, which have since been seeking capital to stimulate investment and facilitate higher economic growth, along with expanding exports beyond traditional European destinations.

Owing to China’s position as one of the largest economic power houses and due to the CEECs’ high trade deficit with China, the countries in this region showed interest in Chinese investments and opened their doors for potential avenues to increase trade with China. China too has looked for diversifying its export destinations and expanding its brands internationally, and CEECs could help it achieve just that. Chinese motivation to focus on CEECs has been fueled by two key factors: availability of skilled and cheaper workforce in CEECs (as compared to EU average) as well as China’s desire to gain stronger strategic influence in business and politics arena in the region as against the EU and Russia.

In this mutual interest, China and the 16 countries (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, and Slovenia) signed a framework named 16+1 Cooperation in Warsaw in 2012. At the outset, this framework aimed at deepening the multi-lateral economic ties, intensifying infrastructural and cultural cooperation, and capitalizing on the emerging business opportunities for both China and the CEECs.

The scope of cooperation was set to cover projects in CEECs’ infrastructure through investing in transportation systems by establishing new rail routes connecting the 16 countries with other parts of the world (Asia, Africa, and Middle East). China also intended to focus on capitalizing on green technologies, expanding export and import of goods, bringing new technologies for manufacturing sector, enhancing exchange programs for science, architecture, literature etc., and improving cross-cultural relations with the 16 countries.

Framework institutionalization raises a few eyebrows

In order to execute all the cooperation plans, the institutionalization of this framework in the CEECs became the first task to accomplish. It began with launch of Permanent Secretariat at the Chinese Foreign Ministry in China in 2012, followed by opening of Business Council in Poland (2014), Secretariat of Investment Promotion in Poland (2014), New Silk Road Institute in Czech Republic (2015), Center for Dialogue and Cooperation on Energy Projects in Romania (2016), Regional Center of the China National Tourism Administration in Hungary (2016), Coordination Mechanism on Forestry Cooperation in Slovenia (2016), Association for the Promotion of Agricultural Cooperation in Bulgaria (2017), China-CEE Institute in Hungary (2017), and few more.

Such institutionalization in the form of CEECs national coordinators, establishment of several secretariats, and a number of associations and industry organizations for individual states, became a crucial step towards enhanced political and economic relations of China and CEECs, and paved the way for further projects.

On the other hand, however, it left room for criticism. Some organizations, such as Institute for Security and Development Policy, Sweden, pointed out that establishing these institutions in a scattered rather than centralized way will deeply affect proper coordination and flow of information about all projects and initiatives within the framework.

Other voices of criticism, mostly from EU diplomats, warned about the fact that these institutions will limit accessibility to the information for the public. These institutions tend to work in line with the Chinese culture which differs greatly from cultural norms in European (and thus CEECs) organizations. In CEECs’ political culture (prevalent to various degrees across the European region), institutions are expected to actively and symmetrically communicate information to the public, providing room for public criticism and ensuring transparent procedures.

However, in Chinese political culture, public consultation and individual opinion are not given such importance. This leaves many EU leaders to ponder whether China’s intentions are to actually enhance the Sino-CEECs relations or to grow its dominance over the CEECs and act as it pleases behind the veil of its own culture providing an excuse for limited transparency.

OBOR and 16+1 framework go hand in hand

One of China’s major initiatives (and perhaps the only one so far considered to bring real benefit for both sides) is the One Belt, One Road (OBOR) project, launched in 2013 (we wrote about it in our article OBOR – What’s in Store for Multinational Companies? in July 2017). Under this project, China is ambitiously investing in developing one road connectivity, and this plan includes connecting the 16 CEECs with Asia, Africa, and Middle East. According to National Development and Reform Commission of China, Chinese investment in OBOR is likely to reach anywhere between US$120 billion and US$130 billion and with the external investments, it is expected to be totaling to US$600-800 billion by 2022. The success of OBOR is likely to impact the economies of CEECs though increased trade not only with China but also with other countries in Asian Pacific region.

China’s Investment in CEE Sharing Benefits or Building Own Dominance

The Balkans remain important in China’s plans

As part of OBOR, China has increased investment in infrastructure development in CEECs countries, with the initial focus on a few Balkan projects, especially in Serbia, with which China have always had excellent bilateral relations. The country appears to be the central hub in the Balkans for OBOR, both at an infrastructural and political level.

China started with a couple of agreements for infrastructure development with Serbia. These included China’s first large infrastructure investment in the region – construction of “Mihajlo Pupin”, the second bridge over Danube River in Belgrade in 2014 by China Road and Bridge Corporation (CBRC). The bridge shortened the travel time between Zemun on the south bank and Borca on the north bank of the Danube River from more than an hour to just 10 minutes. It also considerably reduced traffic problem on the first bridge. The project was received well by Serbia and taken as a good sign of China’s efforts to strengthen relations between the two countries.

China and Serbia came together for three more deals under the 16+1 framework, leading to total Chinese investment of nearly US$1.06 billion. These included US$715 million for construction of Kostelac power generation unit and expansion of coal-fired plant complex started in 2013, another US$350 million for re-construction of 34.5 km long segment of Belgrade-Budapest railway line, started in 2014, and undisclosed-value project of construction of Surcin-Obrenovac segment on Serbia’s E763 highway developed by China Communication Construction Company (CCCC) in 2017. All the three projects are likely to be completed by 2020.

Another flagship project, which involved Serbia and Hungary, was the construction of China-Europe land-sea fast intermodal transport route that was initiated in 2014 and became operational in 2017. With these infrastructural developments, China showed it delivered on its promises, and took steps to facilitate an enhanced exchange of goods with the CEECs.

Asymmetrical distribution of opportunities also causes criticism

The fact that all these projects were developed predominantly by Chinese firms, has been a cause for concern for western European leaders who criticized Chinese companies for seizing all opportunities and profits. The critics point out that if China and CEECs are coming together for such projects, the local companies should be able to benefit and be given opportunity to contribute skillset and technologies to local infrastructure development.

On the other hand, according to numerous experts, several countries, including Serbia, lack the technical and financial capacity required for such projects. China’s perspective should also be considered here – as China is already investing in the CEECs in the development of infrastructure, it is only logical (and natural) that it would prefer to engage own firms in order to help their business and take back some revenue from the projects.

China strengthens its foothold through financing initiatives

Chinese investments in CEECs are not only limited to the infrastructure sector, but also include certain financing initiatives in the form of availability of loans and funds. During the launch of 16+1 Cooperation framework, China announced a special credit of US$10 billion to the 16 countries to be used as preferential loans for implementation of common projects. Apart from that, in 2013, China together with CEECs launched a Sino-CEE investment fund of US$435 million, which aims at contributing financially to the sustainable economic development of CEECs.

Further, various banks and financial institutions, such as Bank of China, China Development Bank, China Export-Import Bank, and Industrial and Commercial Bank, have opened their branches in the region. While the official reason for this was to provide financial support and availability of funds to the CEECs, a relevant reason was also for China to expand the reach of these financial institutions’ brands in the European market.

Chinese investments grow in size and breadth

It is clear that China’s interest in CEECs has been growing, as exhibited through the sectoral breadth of investment initiatives and the variety of investment modes. Chinese companies are also pursuing the path of acquisitions and joint ventures with CEECs-based companies, the key example of which was seen in 2016, when Polish waste management firm, NOVAGO, was acquired by China Everbright International (Hong Kong). The deal was signed up at a value of US$144.3 million and was one of the largest acquisitions by a Chinese firm in the environment sector in CEECs.

While it is expected that such acquisitions can certainly bring benefits to the local entities involved in the deal (through capital and technology transfers, and easier access to the Chinese market), some concerns have been raised that an intensive Chinese-dominated M&A activity is not healthy for the local market dynamics.

The extent of these investments and acquisitions resulted in year-on-year increase in China’s outward foreign direct investment (OFDI) stock in the 16 countries. According to data from the Chinese Ministry of Commerce, the OFDI stock in 2010 in CEECs was estimated at US$0.85 billion and it reached US$1.97 billion in 2015, depicting an overall increase of around 130% in five-year period. Overall, Hungary was the leading recipient of FDI in CEE region with US$571.1 million, followed by Romania with US$364.8 million, and Poland with US$352.1 million in 2015.

The increased FDI in these countries is partially also a result of their interest in attracting Chinese investments even before the 16+1 cooperation framework came into picture. Poland, for example, being the largest economy amongst CEECs, started promoting itself with Chinese firms since the EXPO 2010 in Shanghai. For long, Hungary seems to have made a point to maintain good relations with China, even before other CEECs intensified multilateral relations with China. Hungarian government also made efforts to attract FDI, including from China, by proposing deals such as introduction of special incentives for foreign investors from outside EU or residence visa programs for bringing in a certain level of investment in Hungary.

Trade intensifies, though less than expected

Not only has there been growth in Chinese FDI since the yearly 2010s, but also the trade between China and the CEECs has grown progressively. According to Department of European Affairs at China’s Ministry of Commerce, trade between CEECs and China was estimated at US$43.9 billion in 2010 and grew to US$68.0 billion in 2017, showing a growth at a CAGR of 6.5% during 2010-2017.

While this might seem impressive, it must be noted that at the time of the launch of 16+1 cooperation framework, China promised to increase the trade value to US$100 billion by the end of 2015, which is far from the actual results even by the end of 2017. This again led to the criticism by the western European leaders over China’s ability (and willingness) to deliver on its promises, indicating lack of credibility in Chinese assurances.

On the other hand, the numbers do depict growth in trade between China and CEECs from 2010 to 2017 as compared to the previous years. According to Chinese Ministry of Commerce, China exports to CEECs were US$49.4 billion and imports from CEECs were US$18.5 billion in 2017, with an increase of 13.1% and 24%, respectively, from 2016. China’s exports to CEE concentrate on technology (with high-tech products from telecommunication, service sectors, and e-commerce sectors). CEECs supply agricultural products including fruit, wine, meat, and dairy products to meet the growing demand of the large population of China. Further interest in expanding imports of agricultural and dairy products by China can be expected, and an increased ease of exporting to China is likely to help CEECs to reduce their continued trade deficit in the coming years.

EOS Perspective

The rising investments of China in the CEECs have been under scrutiny since formalizing the 16+1 cooperation framework in 2012. Ever since the launch, China has been taking a range of initiatives that on the one hand worked towards development of the CEECs, but on the other hand gradually built its dominance in various markets and sectors in the region.

It is clear that such steps are taken by China in order to strengthen its political and economic foothold in the region. European leaders continue to remain skeptical over the intentions of China, which might also indicate the EU’s insecurity about China capturing strong hold over CEECs markets and building its dominance, which potentially might be able to overpower the EU’s influence in the region (especially in the Balkans out of which several countries are not EU members).

From the development point of view, initiatives such as OBOR, China-Europe sea-land express way, Belgrade and Budapest railway line, and even the mergers and acquisition deals, certainly bring advantages not only for China but for the CEECs as well, through much needed funding of infrastructure projects as well as through increased trade revenue.

Although it is of paramount importance for European watchdogs to keep an eye on the ongoing trade imbalance and growing Chinese ownership in CEE enterprises, it must be noted that acquisitions of CEECs-based firms by Chinese firms have largely affected the business in a positive way till now, thanks to influx of capital and the possibility to get the base to expand in Asian markets. Under this framework, despite its inherent issues and associated risks, steps taken by China for future development in the form of ongoing projects, especially in the infrastructure sector, have the potential to create more opportunities for the parties involved to strengthen cross-regional trade and hence create a (almost equal) win-win situation for both China and the CEECs.

by EOS Intelligence EOS Intelligence No Comments

Zambia Government’s Pro-tourism Steps to Take the Sector to New Heights

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Zambia, like many other African countries, has struggled with the image of being underdeveloped, poor, and unsafe, a perception which has kept foreign travelers at bay. While these aspects do remain true to some extent, the Zambian government has initiated efforts to rebrand Zambia’s image as an attractive tourist destination. To this effect, the government is working on improving the country’s infrastructure as well as increasing marketing efforts to position Zambia as a premiere tourist destination to the world. With the right investments and policies, Zambia has the potential to become a popular tourist place within Africa, giving stiff competition to its neighbors, such as Zimbabwe, and to Africa’s key tourist destinations, such as Kenya. This goal might be achievable, considering that in addition to having a wide range of national parks and game reserves, Zambia is home to Victoria Falls (shared with Zimbabwe), one of the seven natural wonders of the world and a UNESCO Heritage Site.

Previously neglected tourism industry to receive a new push

While Victoria Falls remains Zambia’s most unique attraction, Zambia seems to have more on its tourist offer. The country boasts of around 23 million hectares of land being dedicated to diverse wildlife, in the form of 20 national parks and 34 game management areas (GMAs).

In addition, it is rich in other natural resources and tourist attractions such as waterfalls, lakes, woodlands, several museums, and rich and diverse culture, which gives tourists a taste of the land through many traditional ceremonies and festivals.

Despite all of this, tourism has never flourished in the country, although this might change now, as the government launched a National Tourism Policy 2015, aiming at positioning Zambia among the top five African tourist destinations of choice by 2030. The initiative is hoped to bring increased revenues from tourism needed by Zambia to improve its economic diversification, as the country has largely been dependent on revenues from copper mining and agriculture, a model only moderately sustainable at best.

The government has undertaken multi-pronged approach to put Zambia’s tourism on the map

Regions prioritization

In order to achieve this, the government is prioritizing two major regions, namely Livingstone (which provides access to Victoria Falls) and the Northern Circuit, situated in the Southern and Northern Provinces of Zambia, respectively. It is for this purpose that the government has opened up investments in the Northern Circuit region that encompasses the David Livingstone memorial in Chitambo, Kasanka National Park, beaches at Banguelu, Kasaba Bay, Lumangwe, and Kabweluma Falls, among other key tourism sites.

Appointment of investments facilitator

Industrial Development Corporation (IDC), a state-owned investment company undertaking the government’s commercial investments has assumed the job of facilitating long-term financing of several projects that will help boost tourism, in addition to acting as a co-investor alongside private investors in the sector.

Establishing of tourism development fund

The government has taken several other measures under the Tourism and Hospitality Act 2015 to provide the needed push to its tourism sector. It has established a tourism development fund, a special fund for the sole purpose of developing and funding the various spheres of the sector. To support this fund, in March 2017, the government introduced Tourism Levy, a tourist tax charged at 1.5% of a tourist’s (both domestic and international) total bill in respect to accommodation and tourist events. As per Zambia’s Ministry of Tourism and Arts (MoTA), the tourism fund collection through this tax equaled US$338,885 (K3.4 million) as of 31 August 2017.

An increased tourism marketing budget to the Zambia Tourism Agency (ZTA) for 2018 has been allocated to promote Zambia as a prime tourist destination. In April 2018, the ZTA hosted the Zambia Travel Expo (ZATEX), a tourism fair, which is one of the most important marketing platforms for Zambia’s tourism products. The fair hosted close to 60 international buyers (including both trade and media) from Southern and East Africa, the UK, Germany, the USA, China, France, India, and several other countries.

Hotels grading and licensing

In addition, the ZTA, which acts as the tourism industry regulator in Zambia, has taken up the task of licensing and grading hotels and other accommodation facilities in order to promote efficient service delivery and maintain a certain minimum standard in the tourism sector.

Under its 2018 National Budget, the government is also working on reducing bureaucracy and the cost of doing business in the tourism sector. To achieve this, the government, along with the Business Regulatory Review Agency, is expected to establish a Single Licensing System, which will act as a one-stop shop for obtaining a tourism license.

Quest to re-launch national airlines

Apart from investments and efforts to enhance efficiency and quality of ground infrastructure (such as accommodation facilities), the government has also announced the launch of national airlines, which were expected to commence operations in 2018 (later pushed to unspecified date in early 2019, hurdled by Zambia’s difficult fiscal position). The airline, a strategic partnership between the Zambian government and Ethiopian Airlines, was to have an estimated first year budget of about US$30 million.

Infrastructure investments

In similar lines to the Tourism and Hospitality Act 2015, Zambia’s 7th National Development Plan (NDP) (2017-2021) also outlines several key strategies and measures to boost tourism sector growth. Under the NDP, the MoTA (along with other sectors and ministries) aims at developing and upgrading several roads, bridges, and air-strips that interlink and ease access to the main wildlife reserves and other tourist destinations across the Northern and Southern Circuits. The NDP allocated US$870 million (K8.7 billion) towards road infrastructure development that is pertinent to growth in the tourism sector, such as the Link Zambia 8000, the C400, and the L400 projects.

In addition to this, the NDP allocated about US$94.7 million (K950.5 million) towards the construction of the Kenneth Kaunda and Copperbelt International airports. These airports, once established, are expected to position Zambia as a regional transport hub and in turn uplift tourism.

Furthermore, the government intends to develop requisite infrastructure with the aim to facilitate an increased length of stay, rehabilitate heritage sites, and strengthen wildlife protection.

Ensuring viability of wildlife tourism

The authorities have also realized the importance of rehabilitation and restocking of the country’s wildlife parks, where wildlife population has declined to levels that make it non-viable for safaris and photographic tourism. To achieve this, the government is looking into establishing strict anti-poaching rules and is exploring various public-private partnership models to aid conservation and develop national parks.

Development of non-traditional modes of tourism

To boost further awareness about Zambia’s tourism, the government aims to develop and promote ethno-tourism through events such as the Pamodzi Carnival, which showcase Zambia’s rich art and culture. Developing non-traditional modes of tourism, such as green tourism (covering eco- and agro-tourism), sports tourism, etc., is also on the agenda.

Boosting domestic private and business tourism

The government is also undertaking efforts to boost domestic tourism, by engaging and marketing to the Zambian middle class population. This will help open another revenue avenue for tourism, as local populations are likely to be easier to encourage and fuel the sector growth while Zambia’s international brand is still being developed.

Similarly, the government is also encouraging business tourism by turning several large cities, such as Livingstone and Lusaka, into premiere conference destinations. There is a huge untapped potential in the conference category that will help attract a host of domestic as well as bit of international business-based tourism to the region. In April 2017, the Zambia Institute of Chartered Accountancy (ZICA) bought 102 hectares of land in Livingstone to set up a 5,000-seat convention center, 10 presidential VIP villas, and an international-standard golf course at a cost of US$350 million. This will be the first international convention center of this scale in Zambia.

Zambia is also the host country of the African Union Heads of State and Government Summit 2022. The Ministry of Housing and Infrastructure Development is undertaking the construction of a 2,500-capacity international conference center in Lusaka, which will be the venue for the summit. The government has garnered support from the Chinese government to help construct the center.

 

Zambia Government’s Pro-Tourism Steps to Take the Sector to New Heights

The initiatives start to show modest results

In-bound international tourism on the rise

All these efforts have yielded visible results in the last couple of years and are expected to boost tourism in the future as well. This can be seen in the number of international tourists entering Zambia. While the number of international tourists visiting Zambia remained largely stagnant between 2011 and 2015 (registering a CAGR of only about 0.3%), the government’s initiatives brought an increased influx of tourists, estimated to have reached 1,057,000 by the end of 2018, in comparison with 931,782 in 2015 (registering a CAGR of about 4.3% during the period). International tourist figures are further expected to reach 1,585,000 by 2028, maintaining a CAGR of about 4.1%.

A nudge to the industry job creation

A similar trend is also visible in job creation in the tourism sector (both direct and indirect). In 2016, about 306,000 people worked in the tourism sector (including indirect jobs supported by the industry). Employment in the sector increased by about 2.5% in 2017 and was expected to further rise by 3.4% in 2018 to reach 324,500 jobs. The number of jobs created by the tourism sector is expected to increase to 448,000 by 2028, registering a CAGR of 3.3% during 2018-2028.

Early signs of increased contribution to the GDP

The total contribution of the travel and tourism sector (encompassing both direct and indirect contribution) to Zambia’s GDP was about US$1.79 billion in 2017, rising from US$1.4 billion in 2016. The sector’s contribution to the GDP is further estimated to rise to reach about US$1.87 in 2018 and is expected to reach US$2.9 billion by 2028 (accounting for 7.1% of total GDP).

Sprouting opportunities for investors

The government’s efforts and increasing tourist numbers also result in significant opportunity for investors to enter this sector. A large number of global hotel brands, such as Carlson Rezidor Hotel Group (Radisson), Marriott, Accor Hotels, South Africa’s Southern Sun, Protea Hotels and Sun International, as well as Taj Hotels, have already established presence in the country.

However, further scope for growth in the accommodation sector remains, especially in the 3-5 star category hotels that have 50-500 beds. As per African Hotel Report 2015, Zambia ranked as the 2nd best destination for Hotel Developers in Africa in 2015. During the same year, Zambia had a supply of 122 branded bedrooms per million population. This was well below the average in the Southern African region of about 350 branded bedrooms per million population.

Further scope exists in the development of conference facilities, tourist transport services, global cuisine restaurants, communication facilities, and other supporting infrastructure.

Investment opportunities are also present in the development of gaming venues, considering that gambling is legal in Zambia. This could help build a unique tourism offer that would combine city life and wildlife activities.

Investors are likely to find several reasons to consider investment in the country. Zambia offers easy access to a pool of English-speaking work force at competitive costs. The country has one of the lowest power tariff rates in Africa. Even after a 75% increase in power rates in 2017 (now ranging between US$0.05 and US$0.07), they are still much lower than rates in other countries in the region (where they range between US$0.06 and US$0.11 per kWh). Zambia is also well endowed with abundant water resources, which is essential to the tourism industry (as per World Bank, Zambia’s internal freshwater resource per capita was estimated at about 5,134m3, much higher than in its neighboring countries – Kenya (450m3), Zimbabwe (796m3), Botswana (1,107m3), Namibia (2,598m3), and Mozambique (3,686m3)).

Tourist safety and complex legislation hamper growth of the industry

While Zambia seems to have all the right ingredients to become a popular travel destination, there are several challenges that exist.

The key challenge is tourist safety. Zambia’s reputation has for long been affected by cases of tourists being targeted in financial scams or other types of crimes such as theft, murder, rape, etc. Continuous and consistent efforts to minimize such risks are essential to change the situation, which, apart from greater police involvement and law enforcement, should also include marketing campaigns voicing the benefits of tourism in the country to the local population.

Another challenge that the government must deal with is the level of bureaucracy and excessive number of laws governing various aspects of the tourism operations. Currently, some 10 pieces of legislation that affect tourism business are in force, most of which need to be simplified and harmonized, and in doing this, the government should use input from the local industry players.

The excessiveness in regulations is also paired with magnitude of charges and levies added on many activities, resulting in higher retail pricing. These include 16% VAT, 10% service charge on accommodation, food and beverage, and conferencing, 1.5% tourism levy, and 0.5% skills levy in addition to other levies, such as business levy, fire, health permit, food handling, etc. This leads to Zambian hotels being more expensive than hotels in neighboring countries. A prime example of this is found in Victoria Falls – Zambian tourism offer in Victoria Falls remains largely uncompetitive with regards to price in comparison to the offer on the Zimbabwe side of this major attraction.

EOS Perspective

With the ongoing government support along with growing interest in African wildlife holidays, Zambia has all the ingredients to emerge as a popular tourist destination in the future. China could be one of the key target markets for Zambia, as a large number of financially-capable Chinese tourists have shown keen interest in travelling deep into Africa. Zambia should also bet on business travel and conferences (both domestic and international) to form another lucrative revenue streams.

While efforts to boost tourism are being made in the right direction, with somewhat visible results, revamping such a long-neglected industry will take more than that. Ensuring the safety of the travelers is an objective that should remain on top of the government’s priorities list.

Further, it appears that some forms of tourism have been marginalized in the government’s focus areas, but should probably receive more attention in the long-term plans. Despite the fact that Zambia has about 35% of South African Development Community’s (SADC) water resources, little emphasis has been put on marine tourism development in the form of boat cruises (on lakes), fishing, etc. Similarly, considering the country’s rich wildlife and natural reserves, education tourism seems like an obvious segment to offer a great potential.

It appears that the required will and leadership from the government are in place to change the industry. However, Zambia’s current fiscal struggles (as it is coping with rapidly increasing debt and implementing austerity measures) might limit the resources needed to realize the plans and ambitions. This might lead to lost opportunities (much needed in this agriculture and copper mining reliant economy), as Zambia has the potential of becoming a popular travel destination, giving stiff competition to its neighboring popular travel destinations, Zimbabwe and Kenya.

by EOS Intelligence EOS Intelligence No Comments

China’s Investments in Africa Pave Way for Its Dominance

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Connecting nearly 70 countries through an extensive land network and sea routes across Asia, Europe, and Africa, the One Belt, One Road (OBOR) Initiative is the focal point of China’s foreign policy that is publicized as providing various economic developmental opportunities. Proposed by China’s President, Xi Jinping, in September 2013, the action plan and framework of the OBOR, also known as Belt and Road Initiative (BRI) was officially presented in March 2015. Since the unveiling, the initiative has gained huge momentum in certain parts of the world. Africa is one such region that has witnessed major infrastructural development across road and rail network, telecommunication, and energy sectors in the early stages of BRI.

Africa is keen on receiving investment from China to boost its economic development. Owing to its location, the continent, as such, is placed perfectly on the sea route as part of China’s global plan. Although the continent lies on the Maritime Silk Road, the sea route that connects Indian Ocean to Suez Canal via Red Sea, only few African countries are of direct strategic importance to China along the OBOR route (including Egypt, Kenya, Tanzania, Ethiopia, and Djibouti). However, in its growth strategy, China is involved in several projects to increase its presence across other African nations as well.

Focus on strategic sectors

China is focusing intensely on infrastructure projects in the initial years of this initiative, as strengthening the railway and road network across the countries and developing sea ports is crucial for the success of the project. However, the expansion plans are not only limited to logistics. China is also investing heavily in other sectors, such as energy, mining, and telecommunications.

China’s Investments in Africa Pave Way for Its Dominance

Logistics and industrial zones

China is involved in a number of mega infrastructure projects in Africa. Railway projects rolled out by Chinese companies across Africa are amongst the ones (along with road network and sea ports projects) that have gained momentum in terms of execution and become operational ahead of scheduled time. The Mombasa-Nairobi Standard Gauge Railway (Madaraka Express) in Kenya at a cost of US$3.2 billion, built by China Road and Bridge Corporation (a Chinese state-owned construction and engineering company) and funded by China Exim Bank (90% funding by the bank and remaining 10% by Kenya government) connecting Mombasa to Nairobi, became operational in June 2017 (construction of the railway line began in January 2015) as against the timeline of four years. In due course, the line will link Tanzania, Uganda, Rwanda, Burundi, and South Sudan to Ethiopia’s Addis Ababa Light Rail Transit (AA-LRT) built by China Railway Group Limited, a Chinese construction company. Initiatives such as this, when married with port connectivity across sea-based countries, will not only improve trade amongst nations within the continent but will also boost Africa’s commerce market by opening new trade routes with other continents.

Some of the railway projects initiated by China were planned long before OBOR came to play, however, they could still form a crucial part of the initiative. For instance, the Tanzania-Zambia railway line built in 1970 with the technical and financial aid from China, is now being revived again with the help of Chinese companies Plans are underway to link it with other ports and build an industrial economic belt along the railway line to utilize the line more effectively. Chinese government has given Tanzania-Zambia Railway Authority (TAZARA) a US$22.4 million interest-free loan to not only improve the operations but also to extend the line to other countries that include Malawi, the Democratic Republic of Congo, Rwanda, and Burundi. This line is of strategic importance to China in terms of better connectivity, which could lead to improved trade partnerships in the future, as this is the only railway line in Africa that connects three economic blocs, namely East African Community, Common Market for Eastern and Southern Africa (COMESA), and Southern African Development Community (SADC).

China is effectively planning for future stability of its position in the continent, as evident from its plan to build Africa’s largest free trade zone in Djibouti, considered as China’s gateway to the continent.

China is effectively planning for future stability of its position in the continent, as evident from its 2016 announcement to build Africa’s largest free trade zone in Djibouti, considered as China’s gateway to the continent, spread over an area of 48 sq. km. The port will be built by Dalian Port Corporation Limited, Chinese largest port operator, and is expected to handle US$7 billion in trade within two years of becoming operational. About 15,000 direct and indirect jobs are expected to be created from the project. Strengthening Djibouti air transport sector is also of crucial importance to China and in light of this, two new airports – Hassan Gouled Aptidon International Airport and Ahmed Dini Ahmed International Airport – are also being set up to boost connectivity between the two countries. Funded by the China Civil Engineering Construction Corporation (CCECC), a Chinese construction engineering company, at a combined cost of US$599 million, this paves way for the country’s economic growth and development by making it a trade hub.

Telecommunications

China Communications Services Corporation Limited (also known as China Comservice), a subsidiary of China Telecommunications Corporation, is planning to revamp the original Africa Information Superhighway to Trans Africa Information Superhighway, an information and communication technology (ICT) project. The 20,000 km long optical cable is expected to pass through 48 African countries and involves an investment of US$10 billion. With growing internet penetration in many African countries (as per World Bank report, Kenya had an internet penetration rate of 45.6% in 2015 which was above the world’s average of 44%), the ICT project offers huge potential.

Mining and energy

China has already been heavily investing in energy, power, and mining sectors in Africa as part of its FDI policy, and now under the OBOR initiative the investments are expected to rise further. China General Nuclear Power Holding Corporation (CGNPC), a Chinese player that develops, constructs, and operates power plants, started mining uranium in the western-central part of Namibia in 2016. Known as the Husab Uranium Project or Husab Mine, it is amongst China’s largest projects in Africa, and has received investment worth US$2 billion, expected to produce 6.8 million kilograms of uranium oxide every year.

Although China has been investing in Africa for development of renewable energy projects, China’s focal point on the energy and power sector under OBOR initiative is still diluted. However, investments across this sector can be expected to happen in the near future owing to abundance of natural resources in the continent.

EOS Perspective

China’s OBOR initiative seems to be successfully transitioning from a theoretical plan to reality, at least within African continent. It provides developing countries across Africa what they need the most – infrastructure (roads, railways, sea ports, airports, power plants, refineries) along with supporting various other sectors such as information technology, telecom, and financial services. Apart from streamlining infrastructural development in Africa, African countries can also benefit in terms of better trade within the continent as China plans to build high speed rails, ports, and roads across the continent as indicated in the memorandum of understanding (MoU) with the African Union (AU), signed in 2015. Though this means some good news in terms of job creation, infrastructural development, and overall growth, African nations need to strategically think and analyze how they can emerge truly stronger in the run for economic development, without the threat of being increasingly dominated by the Chinese influence.

Projects undertaken as part of OBOR are of great size and offer growth opportunities, but also involve large amount of investment, long periods of construction, and associated operational risks – we wrote about it in our article OBOR – What’s in Store for Multinational Companies? in July 2017. African domestic stakeholders should wisely chalk out their approach tactics and secure participation in implementation plans when partnering with Chinese companies, in order to favor their own economic and sustainable development as well as share in benefits. Governments and local leaders of each African country will have to play an active and important role in negotiating and finalizing business terms with Chinese companies, if they want these partnerships to benefit their country and local population in the long run.

African stakeholders should secure participation when partnering with Chinese companies, in order to favor their own economic and sustainable development as well as share in benefits.

While it cannot be denied that African countries are surely bound to benefit from the OBOR initiative, it is the Chinese companies leading these projects that will reap the largest benefits as well as China that will intensify and strengthen its economic hold in the region. Starting off with successful road and railway projects in Africa, Chinese companies are going to focus on sectors such as manufacturing and real estate in the coming years. Presence of natural resources in the continent is also likely to attract Chinese players in the mining sector. And with so much investment already happening in the initial phase of OBOR, Chinese players are planning for the long haul by developing large industrial zones to avoid issues related with labor costs and tariffs.

This sudden inclination of China towards developing and helping African nations seems overwhelming. It draws attention to the fact that China may try to overpower and dominate the economic and geo-political scenario across Africa in disguise of offering the countries development opportunities. With easy loans, with no stringent clauses related to intellectual property, legal matters, and human rights policies, all of which are conditions far more attractive than those that would be offered by China’s Western counterparts, China makes sure to have an upper hand in all the projects that are undertaken as part of the OBOR initiative.

With loans from Chinese banks and projects led by Chinese companies, there is no doubt that the Chinese influence in the continent is already on the rise. While the immediate effect of growing Chinese dominance in Africa will first be realized in the countries that fall directly on the OBOR sea route (or are easily connected to these sea routes via road and rail), other regions, that are currently not on the OBOR map, are highly likely to also witness the rising control of Chinese companies in less than a decade.

It is also being speculated that if Chinese investment continues to grow at this speed, it can be expected that in relatively near future many sectors will be dominated by Chinese companies, leaving no room for African players to grow. This could lead to exploitation of African players by the Chinese side, local governments finding themselves under huge debt with Chinese banks hampering plans for domestic development, and leaving local people to deal with meaner jobs as all the high paid jobs would be retained with the Chinese – these are just a few of possible immediate repercussions, but the list might not end here.

If Chinese investment continues to grow at this speed, it can be expected that in relatively near future many sectors will be dominated by Chinese companies.

A drive such as OBOR definitely seems to greatly contribute to putting the African economy on a growth path by pouring the much needed billions of dollars to link China’s trade route to African countries through a strategized set-up of railways, roads, sea ports, and airports thus opening doors for investment in other sectors as well. In the short term, it is clear that African countries have more to gain than to lose when receiving huge investments from China as this drives the continent towards economic prosperity. But China’s intentions behind investing in developing African economies, under the disguise of OBOR initiative, might be more than meets the eye. In the long run, Africa’s economic scene may be China-dominated, not only reshaping the continents’ infrastructural and business scenario, but also initiating a new phase of globalization and development, which most of the African nations have been void off for a long time.

Amid these discussions of the extent to which African nations will let China take control in the name of growth, one thing is clear that China is a strong ally for African nations and the association can only be expected to strengthen under OBOR. Both China and Africa stand to gain from this association – China to notch up a step to reach its goal for global expansion by leaving an imprint on the continent that will be clearly visible for decades to come, and Africa, with regular investment from China, to work on the development and economic upliftment of the continent.

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Venezuela – Economic Crisis Strikes Consumers and Companies

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Venezuela, a country considered as a role model economy for other Latin American countries a few decades ago, has now fallen into deep economic, social, and political crisis that seems to never end. Venezuela’s economy, highly dependent on oil exports, witnessed a steep decline when global oil prices dropped dramatically during 2014-2017, followed by the government ill-treating national funds, and a massive reduction in import of goods. Under this scenario, several multinational companies, such as PepsiCo, Palmolive, and Coca Cola, chose to reduce or temporarily cease production in the country, which has led to increased unemployment. As a result, many Venezuelans started to flee the country in search for a better life quality, while those who chose to stay face low salaries, hyperinflation, empty supermarket shelves, and increasing violence as political turmoil is deepening amid opposition and criticism of the current government of Nicolas Maduro.

The root of the problem

Venezuela’s deep social and economic crisis is driven mainly by mismanagement of national funds and lack of investment in industries of national importance. For several years, the Venezuela’s government-established projects involved providing social aid for households with low income, and these programs were supported by revenue generated through oil exports. Therefore, as gas and oil sector revenue accounts for 25% of the country’s GPD, a steep plunge in global oil prices from US$85 in 2014 to US$36 in 2016 deeply affected Venezuela’s social projects turning them unsustainable.

Venezuela’s deep social and economic crisis is driven mainly by mismanagement of national funds and lack of investment in industries of national importance.

In addition, Venezuela did not invest in its oil industry, one of the main pillars of the country’s economy. Petróleos de Venezuela S.A. (PVDSA) the Venezuelan state-owned oil and natural gas company has witnessed limited investment, causing Venezuela’s crude oil production to decline from 2.7 million barrels per day in 2014 to two million in 2017, expected to further crumble to 1.4 million barrels per day in 2018. This also translated into a decrease in oil exports revenue by 64% during 2010-2015, deepening scarcity of funds and progressing economic instability in the country.

Venezuela - Economic Crisis Strikes Consumers and Companies

Plummeting imports in import-dependent economy

Venezuela has been highly dependent on imported goods and raw materials such as food staples and medicines, among other goods. After the fall in oil prices and decrease of crude oil production, Venezuela redirected a large percentage of the remaining revenue from oil export to repay foreign debt, drastically reducing import volume of goods. As a result, imports severely dropped from US$58.7 billion in 2012 to US$18 billion in 2016, leaving the country with shortage of wide range of goods, including pharmaceuticals, sugar, corn, wheat, etc.

Soaring inflation and unemployment

In addition, Venezuela established strict price control regulations as a way to counterbalance hyperinflation, which directly hindered production of goods by multinational companies. Consequently, several key market players reduced or partially stopped operations in the country as a way to avoid losing profits. In February 2018, Colgate Palmolive, a US-based consumer goods company, stopped production for a week after the government demanded that the company reduces the price of its products, which resulted in a large loss in profit for the company. Subsequently, the reduction of multinationals’ operations in Venezuela greatly increased the unemployment rate to 30% as of 2018, causing Venezuelans to opt for unreported employment or to flee the country looking for job opportunities. It is estimated that between one to two million Venezuelans will have migrated by the end of 2018.

EOS Perspective

Throughout 2017, the ministry of urban farming encouraged people to grow food, e.g. tomatoes and lettuce, at their homes and to start eating rabbits as a way to prevent starvation as a result of massive shortage of basic goods. Meanwhile, as a way to ease the situation, Venezuelan authorities sell a monthly bag containing corn flour, beans, rice, pasta, dried milk, and some canned foods at VE$25,000 – this is less than a dollar. These bags with food are distributed only among people registered in the communal councils and those who possess a Carnet de la Patria, a home registry system in order to receive the food. Additionally, president Maduro decided to open 3,000 popular meal centers as part of a nutritional recovery scheme seeking to feed hungry Venezuelans. However, none of these measures have clearly had enough impact to aid in the difficult situation amid the deepening crisis in Venezuela.

Migration to neighboring countries in Latin America has been the way many Venezuelans have found to escape the crisis. Argentina, Chile, and Colombia, among other Latin America countries, have received over 629,000 Venezuelans in 2017 alone, which is 544,000 more Venezuelans than in 2015. The mere number of fleeing people indicates the scale of the issue, yet the socialist administration of Nicolas Maduro refused to accept any help, aggravating the already strained political relationships with his Latin American counterparts. Further, Venezuela also refused to accept any aid from international institutions such as the WHO, which would help as a short-term solution or at least a relief for starving Venezuelans.

Moreover, Venezuela seems to be continuing to drown, as South American trade bloc Mercosur – one of the most important commercial blocs in the region, suspended Venezuela’s membership indefinitely in 2017. Such a measure translates into further reduction of imports into Venezuela from the bloc and, potentially, Venezuelans banned from legally migrating to any of the countries from the Mercosur bloc. So far, South American countries have welcomed waves of Venezuelans, but the dormant prohibition could negatively affect a considerable volume of the population seeking to flee from the crisis.

Venezuela seems to be continuing to drown, as Mercosur suspended Venezuela’s membership indefinitely in 2017. Such a measure translates into further reduction of imports by Venezuela from the bloc.

In addition, the USA issued an executive order banning any American financial institution from investing in Venezuela, that same year, which restricted the inflow of capital and increased the financial isolation of Venezuela from the North American markets.

This dramatic situation, both in Venezuela’s domestic as well as international arena, calls for president Maduro to reevaluate and encourage reforms that should empower small domestic producers, e.g. coffee makers, agricultural producers, among others, in order to reactivate internal consumption and counterbalance shortage of food and other supplies. Further, it is high time that the country’s leadership opens their borders to external help, however this seems unlikely to happen, considering that this would mean an acknowledgment that the socialist political management of the country has failed, and this in turn would play into Maduro’s opposition’s hands to easily overturn his government.

by EOS Intelligence EOS Intelligence No Comments

Commentary: USA to Re-Enter TPP but Only If It Calls the Shots

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When Donald Trump decided to pull the USA out of Trans-Pacific Partnership (TPP) in January 2017, it was a huge setback for the remaining 11 countries – we wrote about it in our article TPP 2.0 – Minus the USA in May 2017. However, after months of discussions and deliberations, the surviving members (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) planned to move the partnership ahead without the USA, finally signing the pact in March 2018 and naming it Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Soon after, while in talks over another bilateral trade deal with Japan, Trump said that he would join back TPP, if the USA was offered a deal it cannot refuse. Asserting on the fact that Trump government prefers bilateral trade agreements over multilateral, Trump made it clear, in an indirect manner though, that unless the pact brings massive benefits for the American economy, there is no way the country is joining back the TPP.

American reconsideration of getting back in the TPP is a strategic step to deal with its growing trade war with China. As per the initial outline of the pact, designed under Obama administration, it was supposed to eliminate or reduce tariffs on the ‘Made-in-America’ exports to TPP countries (e.g. automotive, ITC, agriculture products, etc.). However, by backing out of the TPP, Trump government ended up making a rod for its own back, and may have opened doors for China, if it wishes to enter the pact in the future. In order to safeguard its own interest against China, it seems that rejoining the pact would be a smart move on the USA’s part.

But the re-entry to the TPP will not be easy for the USA, and dictating its own terms for getting back into the agreement does not seem to work in favor of the Trump government either. With the member countries just signing their own trade deal very recently, setting terms and conditions for re-negotiating the pact again with the USA would be difficult and cumbersome. While some countries such as, Japan, Australia, and New Zealand appreciated the USA’s interest to return back to TPP, they are not very keen on altering the agreement, and even if the terms were to be amended again, this is unlikely to happen in the near future. Despite the fact that the American participation will make the deal stronger, member countries do not trust Trump’s trade policies and USA’s re-consideration of TPP membership again is being viewed with hostility, to a certain extent.

Taking into consideration the fact that the deal already took six years to finalize (five years prior to USA’s exit and one year to amend the agreement after its withdrawal), altering the deal again as per USA’s convenience seems unrealistic. The idea of starting negotiations from square one in order to fit in the USA, might be too much to ask for from the member countries. Now that the USA has lost an upper hand in the TPP, many countries may be in favor of the country joining back only if it accepts the existing agreement, which definitely does not seem to go down well with Trump. However, there is a slight possibility that member countries might be willing to contemplate the terms of the pact, if they are given better access to the American market (e.g. with the reduction in tariff rates), which is also unlikely to happen considering that the USA wants things to be its way.

Now that the trade agreement is already in place sans the USA, the American position to re-negotiate the terms has weakened. If this decision was made earlier, the country would have had a stronger bargaining power. Also, for the CPTPP member countries, unlike for the USA, bringing the existing agreement into force as early as possible is an immediate priority.

At this stage, the future of the USA joining TPP again is a question mark. Though both sides, the USA and the participating member countries, stand to benefit from this move – the member countries would benefit in terms of increased trade and the USA would be able to thwart China from entering the pact and to increase own exports – the current attitude and mindset of both sides seem to make the re-negotiations unlikely, at least under current circumstances. All participating countries are open to the USA re-joining the pact, provided it agrees to the terms originally negotiated, gives up wanting to call the shots, and agrees to mellow down its supremacy inclinations in the pact, none of which can be expected to be happening anytime soon, at least under the Trump administration.

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