After almost five decades of war and armed conflict, South Sudan achieved its independence from the Republic of Sudan in July 2011, making it the world’s youngest state. South Sudan has a climate which is well suited for agriculture, and possesses many untapped natural resources, including copper, gold, iron ore, silver and gold.⁽²⁾ Since its secession from Sudan, the government of South Sudan has made efforts to portray the country as one which is open to investment and has vast business potential. As is the case with other resource endowed Sub-Saharan countries, potential investors may find that the situation on the ground is paradoxical. On one hand, South Sudan does indeed have vast natural resources and investment potential while, on the other hand, it has a weak legal, regulatory and institutional framework. In addition to its weak institutional framework, violent internal conflicts may ultimately negate the county’s investment potential and the government’s efforts to attract investment and create an investment-friendly climate for business. However, for risk-tolerant investors experienced in doing business in fragile and conflict states, South Sudan remains a potential investment destination. This paper investigates the historical background that led to the creation of South Sudan, and analyses the country’s economic and investment potential.

South Sudan: A new state is born

South Sudan is bordered by Sudan, the Democratic Republic of Congo (DRC), the Central African Republic (CAR), Ethiopia, Uganda and Kenya. South Sudan became an independent state on 9 July 2011 after decades of conflict between the northern and southern parts of the Republic of Sudan. The conflict between the northern and southern regions dates back as far as 1953, when the United Kingdom (UK) and Egypt concluded an agreement to grant Sudan self-governance and self-determination. The creation of the State of Sudan through this agreement was in itself a violation of the right to self-determination because it culminated in the forced union of two regions that were vastly different in religion and culture and which had been administered separately by the UK and Egypt. The union was concluded without any consultation of or consent by the people of the south, who felt that they had been subjected to northern rule. The Arab-led Khartoum government further aggravated the feelings of forced governance by reneging on its promises to create a federal system of governance.⁽³⁾

In this regard, the major flaw in the 1953 agreement was the British failure to ensure equality between the north and south of Sudan.⁽⁴⁾ This inequality resulted in a state that was at war for most of its existence, expressed in two major civil wars, namely, the First Sudanese Civil War from 1955 to 1972 and the Second Sudanese Civil War from 1983 to 2005. The policies of the colonial era were not the only cause of tension between the north and south, even though they certainly aggravated existing tension and have, in general, caused internal conflicts in many African countries. The underlying cause of the animosity between the two regions of Sudan mainly related to ethno-religious tensions caused by the religious divide between Muslims and Christians and the ethnic divide between Arabs and Africans.

The two Sudanese civil wars were triggered by distinct yet fundamentally related issues. The inequality in governance between the north and south resulted in a lack of political, religious and cultural autonomy for those regions. The failure to create a federal state to share governance exacerbated internal tensions that ultimately triggered the First Sudanese Civil war. The war ended with the conclusion of the Addis Ababa Agreement in 1972, which provided a temporary period of peace in the country but failed to solve the problem of regional autonomy. The Second Sudanese Civil War was essentially a continuation of the first and revolved around disputes such as the sharing of natural resources. Disagreements on the exploitation of natural resources traditionally arise from tensions with respect to regional autonomy. As such, there is a common underlying issue in both wars, even though there may have been distinct triggers to both conflicts. Disputes over the exploitation of oil reserves were key triggers for the Second Sudanese Civil war.⁽⁵⁾ These disputes arose in the 1980s when then Sudanese President Gaafar Numeiri announced a plan to change the borders between the southern and northern provinces in an effort to bring the oil rich areas of the south under northern control. This move was rejected by the south as an attempt by the central government to control the oil rich areas and deprive the south of oil revenues.⁽⁶⁾ Further disputes arose relating to the demarcation of pipeline routes connecting the southern fields to Port Sudan and the construction of an oil refinery which the south demanded be located in its own region.⁽⁷⁾

The 22-year long civil war which Sudan emerged from in 2005 not only cost the country many lives but also displaced millions of people and left the economy of the south in tatters. Against a backdrop of violence, ethnic strife and political instability between the north and south, a referendum was held in South Sudan in January 2011 and garnered 98.83 % of all votes in favour of dividing Africa’s largest state into two states: Sudan and South Sudan.⁽⁸⁾ After its independence, South Sudan experienced a period of relative peace, but this has proved to be short-lived as the country is again on the brink of civil war as internal conflicts have again emerged. On 15 December 2013, fights escalated between army factions allied with President Salva Kiir and former Vice President Riek Machar.⁽⁹⁾ The trigger of the present conflict was an attempted coup, according to Kiir’s claims, which resulted in the arrest of several former ministers and officials of the Sudan People's Liberation Movement (SPLM) who had been dismissed in 2013.⁽¹⁰⁾ What began as a political dispute between two leaders has grown into a nationwide conflict between South Sudan's two largest ethnic groups: the Dinka, who largely support Kiir, and the Nuer, who back Machar.⁽¹¹⁾

The International Crisis Group, a Brussels-based non-profit organisation for preventing and resolving deadly conflicts, estimates that nearly 10,000 people have been killed in the recent conflict. The United Nations (UN) Office for the Coordination of Humanitarian Affairs estimates that 413,000 people have been internally displaced.⁽¹²⁾ The creation of the independent nation can never be a quick fix to decades of political and social strife. What is clear from the case of South Sudan is that secession from the north has not automatically led to peace and stability in the south. Nation-building at multiple levels is required to prevent the country from further disintegrating into full blown civil war.

Diversification of the economy of South Sudan to attract investment

The South Sudanese economy depends almost entirely on oil, with approximately 98% of fiscal income originating from this sector.⁽¹³⁾ The oil industry provides revenues which can be used for economic growth and nation building; however, there are obvious dangers in relying on such a narrow base, including being at the mercy of oil price movements, investors and infrastructure. In addition, instability may lead to reduced output, as is currently the case. This concern has been expressed in the government’s Gross Growth Strategy 2010–2012 (GGS), a framework which outlines key principles to guide the government and development partners in promoting broad-based economic growth.⁽¹⁴⁾ In the GGS, the South Sudanese Government states that it will prioritise growth in the agricultural and livestock sectors, which are already large sectors in which most people are engaged, albeit at a substance farming level.⁽¹⁵⁾ The International Monetary Fund (IMF) has also identified the agricultural industry as having the potential to reduce the country’s over-dependence on oil.⁽¹⁶⁾

South Sudan has a comparative advantage in the agricultural sector as its large fertile landmass and climate are suitable for the production of several products such as beans, cassava, cowpea, finger millet, groundnuts, maize, rice, sesame, sorghum and sweet potato.⁽¹⁷⁾ Despite these advantages, the country remains a net food importer and only 4% of arable land in the country is actually cultivated.⁽¹⁸⁾ Undeveloped farming practices and technology, poor infrastructure and the lack of access to farming and financial inputs are the main hindrances to the full utilisation of agricultural land in South Sudan. The agricultural sector is a major source of livelihood for close to 85% of the South Sudanese population, yet this amounts to a small level of production, and subsistence farmers still cannot meet the county’s food security needs.⁽¹⁹⁾ According to the Food and Agriculture Policy Framework of the Ministry of Agriculture and Forestry, South Sudan should have been food self-sufficient and self-reliant by 2011.⁽²⁰⁾ Notwithstanding this ambitious plan, the county’s agricultural yield per hectare for cereals (maize, sorghum, millet and rice) averages only about 0.5 metric tons, in comparison to the average yield in Africa of over 1 ton per hectare.⁽²¹⁾ According to the African Development Bank (AfDB), South Sudan’s food imports are sourced mainly from Kenya and Uganda.⁽²²⁾

In addition to agriculture, the government has turned its focus to improving the financial and infrastructural sectors. After independence, the South Sudanese hospitality, banking and construction sectors attracted companies from neighbouring countries. For example, Kenyan companies such as Kenya Commercial Bank (KCB), Equity Bank, Co-operative Bank and the financial services group, UAP Holding, have reportedly made large investments into the country. South Africa-based Standard Bank Group has also opened offices in South Sudan.⁽²³⁾ Other international players that have set up in South Sudan include professional services firms such as UK-based Ernst & Young (EY) and United States (US)-based Deloitte Touche Tohmatsu (Deloitte).⁽²⁴⁾ Intra-regional trade with South Sudan has also increased as Kenyan exports to South Sudan have climbed, and the Mombasa port experienced an 83.8% increase in South Sudan-bound transit traffic between 2011 and 2012.⁽²⁵⁾ Regrettably, these increased trade flows between South Sudan and its neighbours in East Africa is being threatened by instability.⁽²⁶⁾

Creating an investor friendly business environment

South Sudan faces various constraints that are typical to both a new state emerging from decades of civil war and a least developed country (LDC). As a LDC, South Sudan is generally characterised by high levels of poverty and structural weaknesses at all levels, especially in its business environment. The magnitude of this challenge is evident in the country ranking 186th out of 189 countries in the World Bank Ease of Doing Business 2014 index.⁽²⁷⁾ The index assesses the performance of 189 countries in 10 key areas that are crucial to doing business: starting a business, dealing with construction permits, accessing electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.⁽²⁸⁾ South Sudan’s low ranking shows that local and foreign investors face many hurdles at every stage of developing their businesses.

The South Sudanese Government has responded to this challenge by stating that it will direct fiscal spending towards the provision of public goods, as well as the creation of a macroeconomic environment that is conducive to growth. In terms of its Development Plan Report 2011–2013, the South Sudanese Government aims to create an enabling environment by focusing on peace and security, rule of law, macroeconomic stability, basic infrastructure and effective tax administration. In this regard, legislative reform is a key focus, and includes the enactment of the Investment Promotion Act in 2009 that guarantees investors non-discrimination, protection from expropriation, access to information and dispute settlement, among other things. The World Bank’s Investment Climate Advisory Services (ICAS), which works in fragile and conflict-affected states, has also played a crucial role in helping to introduce legal reforms in South Sudan. ICAS assists conflict affected countries to 1) create environments that facilitate starting and operating new companies in the formal economy, 2) enact new or improved legislation related to business, 3) implement global standard practices in trade taxation, and 4) generate new investments through better government services to firms, amongst others.⁽²⁹⁾ Under this programme, ICAS has helped South Sudan to revamp the current legal framework by enacting new laws relating to contracts, limited partnerships and other critical issues.⁽³⁰⁾ Business entry has been made easier through the simplification of existing business registry procedures so that businesses can now be incorporated within a day.⁽³¹⁾ The South Sudan Investment Authority was established in terms of the Investment Promotion Act to help attract potential investors and provide clear and predictable rules.⁽³²⁾

The extent to which the current conflict has affected these economic and legal reforms is not yet clear as the present conflict is relatively new. However, what is clear is that the fresh crisis in South Sudan threatens to unravel the country’s progress in creating a new investment-friendly framework for business.⁽³³⁾ This is because the present crisis in the country has disrupted general peace and security and made it dangerous for foreign investors to function in some areas of the country. Investors such as the Greater Pioneer Operating Company (GPOC), comprising the state owned China National Petroleum Corporation, Petronas of Malaysia and India’s ONGC Videsh, have halted oil production amounting to approximately one fifth of South Sudan’s total oil production, as it has been forced to evacuate workers from the country.⁽³⁴⁾ Some investors have been forced to close or scale down their operations amid the fighting, while others, such as Kenyan businesses, especially those outside the capital city Juba, have been looted by the warring factions.⁽³⁵⁾

Nevertheless, the present instability has not deterred all investors, as some, such as Kenya’s KCB, have learned to work around the hurdles of the current environment and have taken advantage of profitable opportunities.⁽³⁶⁾ Most of the KCB’s 22 operations were still functioning in South Sudan, despite weeks of fighting.⁽³⁷⁾ For other investors, such as the US-based asset management firm Nile Capital Management, South Sudan’s investment case remains as strong as ever. According to Larry Seruma, the managing principal of Nile Capital Management, “South Sudan has enormous potential. If you have the patience, this is the right time to invest. The returns you can get now will be higher than after the dust settles.”⁽³⁸⁾ However, the current environment is simply too frustrating.

Conclusion

The challenges which South Sudan faces as a new state are not unique: such challenges are shared by other resource-rich African countries that are emerging from conflict. There is a business case for investing in South Sudan; however, there is a need to create an enabling business and investment environment by, first and foremost, promoting peace and security alongside enhancement of the general ease of doing business in the country. Creating such an environment is never a simple task, especially in a climate of conflict, as political will and resources are required. Nonetheless, economic reform can be a way to tackle some of the underlying issues that cause and contribute to the region’s recurring conflicts. For South Sudan, the present political and economic challenges are not insurmountable.

NOTES:

Written by Magalie Masamba (1)

(1) Magalie Masamba is a Research Associate with CAI. Her key areas of interest are trade and investment promotion, strategy and risk mitigation in emerging markets. Contact Magalie through Consultancy Africa Intelligence's Industry & Business unit ( industry.business@consultancyafrica.com). Edited by Nicky Berg.
(2) World Bank website, http://www.worldbank.org.
(3) Global Security website, http://www.globalsecurity.org.
(4) Ibid.
(5) Ziada, S.H., ‘Oil in Sudan: Facts and impact on Sudanese domestic and international relations’, Universidad Autonoma de Madrid, 27 January 2007, http://www.sudantribune.com.
(6) Ibid.
(7) Ibid.
(8) ‘South Sudan backs independence – Results’, BBC, 7 February 2011, http://www.bbc.co.uk.
(9) Boniface, B., ‘Conflict in South Sudan creating economic and security uncertainty in East Africa’, Sabah Online, 14 January 2014, http://sabahionline.com.
(10) Taddele Maru, M., ‘The real reasons behind South Sudan crisis’, Al Jazeera, 27 December 2013, http://www.aljazeera.com.
(11) Forti, J., ‘South Sudan conflict: As US moves to defend embassy and evacuate its citizens, long relationship with South Sudan is on the line’, International Business Times, 27 December 2013, http://www.ibtimes.com.
(12) Boniface, B., ‘Conflict in South Sudan creating economic and security uncertainty in East Africa’, Sabah Online, 14 January 2014, http://sabahionline.com.
(13) ‘South Sudan infrastructure action plan - A program for sustained strong economic growth’, African Development Bank (AfDB), 2013, http://www.afdb.org.
(14) ‘Gross growth strategy 2010- 2012’, Government of the Republic of South Sudan, January 2010, http://www.investsouthsudan.net.
(15) Ibid.
(16) ‘South Sudan faces hurdles as world's newest country’, International Monetary Fund (IMF), 18 July 2011, http://www.imf.org.
(17) Ibid.
(18) Ibid.
(19) Asante Business Consulting website, http://www.asante-consulting.com.
(20) Lupai, J.K., ‘South Sudan potentially the region’s breadbasket’, Sudan Tribune, 24 August 2011, http://www.sudantribune.com.
(21) ‘South Sudan’s greenbelt: Can tapping agriculture assets become the new nation's economic elixir?’, United States Aid (USAID), September - October 2011, http://www.usaid.gov.
(22) Ibid.
(23) Maritz, J., ‘Crisis in South Sudan shows major business risks remain in parts of Africa’, How We Made it in Africa, 6 January 2014, http://www.howwemadeitinafrica.com.
(24) Ibid.
(25) ‘Kenyan investment in South Sudan threatened’, The Economist, 24 January 2014, http://country.eiu.com.
(26) Ibid.
(27) ‘Ease of doing business in South Sudan 2014’, World Bank, 2014, http://www.doingbusiness.org.
(28) ‘Doing business 2014 economy profile: South Sudan’, World Bank, 2014, http://www.doingbusiness.org.
(29) ‘Conflict-affected countries’, International Finance Corporation, https://www.wbginvestmentclimate.org.
(30) International Finance Corporation website, https://www.wbginvestmentclimate.org.
(31) Ibid.
(32) Ibid.
(33) Kibirige, J. and Lukhele, S., ‘Uganda: In pursuit of stability in a volatile land’, Africa Conflict Monthly Monitor, March 2014.
(34) Smith, D., ‘China urges immediate end to conflict in South Sudan’, The Guardian, 7 January 2014, http://www.theguardian.com.
(35) Odhiambo, P. and Muluvi, A., ‘Impact of prolonged South Sudan crisis on Kenya’s economic and security interests’, 12 March 2014, http://www.brookings.edu.
(36) Dziadosz, A., ‘South Sudan: Land of opportunity, if you don't mind risk’, Reuters, 30 November 2011, http://www.reuters.com.
(37) ‘Kenya's leading bank, KCB, will continue its operations in South Sudan despite weeks of fighting’, CNBC Africa, 15 January 2014, http://www.cnbcafrica.com.
(38) Keeler, D., ‘Investors flee South Sudan’, Wall Street Journal, 24 December 2013, http://blogs.wsj.com.