A new chapter – Tokyo eyes African potential

From the archive: this was originally published in the Auguest/September issue of African Business.

Japan’s involvement in Africa has become increasingly overshadowed by Chinese economic and diplomatic activity over the past decade. Yet Japanese firms are playing an important role in developing much-needed infrastructure, and Tokyo is keen to maximise its energy imports from the continent in order to reduce its dependence on Australian coal, East Asian gas and Middle Eastern oil. Africa’s growing importance in terms of consumption adds another element to an already attractive mix.

The value of Japanese imports from Africa over the past five years has roughly balanced its exports to the continent, with both averaging $12.8bn a year. The main Japanese exports to African consumers are cars, machinery, ships, electronic goods, iron and steel, with South Africa accounting for about a third of all Japanese exports to Africa. Africa also imports more second-hand Japanese cars than any other continent. While Japanese foreign direct investment in Africa has averaged just $4.2bn a year over the past five years, the country is leading the way in project finance. A report by UK law firm Linklaters in March concluded: “Japan now ranks as the most active Asian project finance sponsor in Africa, investing almost three times as much as China, which is often regarded as the most active Asian investor on the continent.”

The head of Linklaters’ Africa unit, Andrew Jones, said: “Japan has a much quieter and below-the-radar approach, less headline grabbing than Chinese investment. We had a phase 10 to 15 years ago where there were some big Japanese investments into Africa and now there’s a new wave of investment coming.” Japan accounted for $3.5bn of $4.2bn Asian project finance in Africa in 2014. For instance, most of the funding for a 1.38GW coal-fired power plant in Morocco is being provided by Japanese investors.

Port investment

The Japanese government is now helping to directly fund infrastructural projects in Africa. It has switched the focus of its development arm, the Japanese International Cooperation Agency (JICA), away from small-scale, local projects towards big infrastructural schemes in Eastern Africa. Its two biggest commitments are new container terminals, at Mombasa in Kenya and Nacala in Mozambique. Mombasa’s existing container terminal is already working beyond its design capacity and has been severely affected by congestion in recent years. JICA has therefore funded the construction of the second terminal at a cost of $300m. A tender is currently underway to select a private sector operator for the terminal, which will eventually have annual handling capacity of 1.2m TEU (or ‘twenty foot equivalent units’, the standard size of container).

JICA is also funding the massive expansion of Nacala, which is the deepest natural harbour on the east coast of Africa. It has provided $93m over the past three years to redevelop the North Quay and other harbour infrastructure. In June, it signed a deal to provide a $250m low-interest loan to fund the construction of a new container terminal. Nacala is primarily being developed to handle coal exports from Tete Province in the northwest of Mozambique but it is hoped that the provision of a modern container terminal with new cargo handling equipment will encourage wider economic development in the northern half of the country. It should also benefit landlocked Malawi and Zambia, which make use of Nacala, while the port is being developed to handle large vessels and so should secure significant transhipment business. JICA is also helping to finance other projects in the region.

Other investment in African ports by state development agencies is often tied to the acquisition of port operating concessions by companies based in the donor state. This is not the case at Mombasa and Nacala because Japan does not possess a potential operator. Tokyo’s decision to invest in the two ports is partly strategic. They are both located on the east coast of Africa and will help promote trade between the continent and Japan. In addition, Japanese mining companies, such as Nippon Steel & Sumitomo Metal, are active in Tete and so they will benefit from improved facilities at Nacala.

Energy security

Energy security has long been a key plank of Japan’s foreign relations. The country produces almost no oil, gas or coal itself and is therefore hugely reliant on energy imports. This dependency was exacerbated by the closure of all of the country’s nuclear reactors following the Great East Japan Earthquake and Fukushima nuclear disaster in 2011. Although the government has decided that most reactors will be brought back on stream, coal and gas will make a bigger contribution to the generation mix than previously expected.

Mozambique will be particularly important in this regard, as it will supply both coal and liquefied natural gas (LNG). Mitsui has a 20% stake in the Mozambique LNG project, which plans to develop an LNG plant in Cabo Delgado Province that will eventually produce 50m tonnes of LNG a year. Much of this production is expected to be exported to Japan. In October 2012, Maputo and Tokyo signed a wide-ranging memorandum of understanding on the production and export of coal and gas. The Japanese government is also keen to secure the import of LNG from neighbouring Tanzania, if and when an LNG plant is constructed in that country. A meeting between the Japanese government and officials from 16 African countries was held in Japan at the end of May. Tokyo pledged to invest $2bn over five years to support mining projects undertaken by Japanese private sector firms in Africa. Apart from coal, much of the money will be targeted at the copper sector.

The Minister of Economy, Trade and Industry, Yoichi Miyazawa, said: “We will take our relationships with African countries to a new stage.” The government has organised the Tokyo International Conference on African Development (TICAD) every five years since 1993 but the focus of this event is now starting to change away from aid and towards trade as Tokyo begins to view most African countries as attractive trading partners rather than just destinations for donor aid.