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Charles (Chip) Krakoff is publisher and principal author of Emerging Markets Outlook, as well as founder and Managing Partner of Koios Associates LLC, a firm specialized in investment, trade, and financial strategy in emerging markets. He has over 20 years of corporate, financial, and consulting... More
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  • Landing An Airliner In The Jungle: A Renaissance Of African Air Travel

    I recently joined a new frequent flyer program, which is not something I expected to do. I am already a member of several, covering each of the three major airline alliances, and I thought I was pretty well set. But as I sat in the departure lounge in Lomé, the capital of the West African nation of Togo, waiting to board a flight to Abidjan, Ivory Coast, a pretty young lady in company livery invited me to join the ASky Club. ASky is a new, mostly private, airline that serves a substantial West and Central African route network, operating Boeing 737 and Bombardier Dash-8 aircraft. It is affiliated with Ethiopian Airlines, which offers connections to North and South America, Europe, and Asia.

    A friend of mine, originally from Benin, told me an American cab driver once asked an uncle of hers, then a pilot with Air Afrique, "So how do you land those big planes in the jungle?" I can recall when taking a flight in Africa would almost always give you a funny or hair-raising story to tell, even though paved runways were already standard issue in airports throughout the continent, but traveling around Africa is now pretty boring, which is a good thing.

    Air travel in West Africa has always been a challenge. Until it went bankrupt in 2002, Air Afrique offered the only regional network, but as an airline owned by the governments of the 11 French-speaking countries in West and Central Africa, it is surprising it lasted as long as it did, with its creaking planes and surly service. Other national airlines in the region fared no better. In 2005 Cameroon Airlines was banned from French airspace for safety reasons, and finally gave up the ghost in 2008. Ghana Airways stopped flying in 2004, after one of its jets had been seized in London for unpaid debts and the U.S. Department of Transportation had grounded its aircraft. Nigeria Airways, after operating at a loss since the mid-1980s and seeing its fleet dwindle from 30 planes to three, two of them leased, stopped flying in 2003. Air Ivoire went out of business in 2011, while Air Mali, which had stopped flying in 1985 and was then resurrected in 2005, fired all its employees and grounded its three remaining planes in 2012.

    Frank Zappa once said that a country is not a real country unless it has its own beer and its own airline. But almost all of the flag carriers in Africa have gone under, even though the breweries in most countries still turn out an excellent product.

    Nevertheless, air travel in Africa is now better than it has ever been. South African Airways and Ethiopian Airlines, both of which operate large international route networks, remain state-owned, but operate profitably. Even in the worst days of Ethiopia's Communist revolution the government kept its hands off the airline, which is now one of the few companies flying the Boeing 787 Dreamliner. The Kenyan government now owns less than 30% of Kenya Airways, which, with its codeshare partners KLM and Air France, offers direct flights from its Nairobi hub to more than 40 destinations throughout Africa, as well as to Europe, Asia, Australia, and the Middle East.

    Start-ups like ASky are proliferating, while some of the old national carriers have been privatized. Both Air Burkina and Air Uganda are owned by Celestair Group, which in turn is owned by a private equity fund operated by the Aga Khan Foundation. Fly540, a subsidiary of the British, Africa-focused conglomerate Lonrho Plc, operates three separate networks: one, based in Nairobi, flies throughout East Africa, while others serve destinations in Angola and Ghana. Senegal Airlines, born out of the ashes of the defunct government-owned Air Senegal International, is 64% privately owned and flies to 13 countries in West Africa.

    Several years ago Nigeria experienced a spate of fatal crashes by private airlines operating with inadequate supervision, but now it has several private domestic airlines, as well as Arik Air, which in addition to flying all over Nigeria, offers direct flights to New York, London, and Johannesburg, as well as to several international destinations in West and Central Africa.

    South African discount airlines Kulula and Mango fly mainly within South Africa, though Kulula has a tie-up with British Air for flights to several other countries in Southern Africa. InterAir, a South African company, specializes in flights between Johannesburg and French-speaking countries in West and Central Africa and the Indian Ocean.

    To be sure, there have been some bumpy flights along the way. In 2004 Virgin Group set up Virgin Nigeria, a joint venture with private Nigerian investors, which quickly became the leading domestic airline as well as providing international flights to Europe, South Africa, and several West African countries. But the company ran into trouble with the Nigerian Ministry of Transport, which insisted on relocating it from the international to the much shabbier domestic terminal at Murtala Mohamed Airport in Lagos. In 2008 Virgin Nigeria suspended its London and Johannesburg flights in 2008 and in 2009 rebranded itself as Nigerian Eagle Airlines. Virgin sold its remaining stake to its Nigerian partners in 2010, and the airline, re-christened as Air Nigeria, ceased operations in 2012. Arik Air has encountered financial problems and major tussles with the Nigerian Internal Revenue Service over allegations of tens of millions of dollars in unpaid taxes and counter-accusations by the airline of government corruption. Aero Contractors, another Nigerian carrier, in April reinstated more than 650 employees it had dismissed in the course of a strike that grounded all its flights for two weeks. Most of these problems would be familiar to any American frequent flyer.

    The point, though, is that travel in Africa is becoming more like travel in other parts of the world. Economic reform and a burgeoning middle class are creating new demand for air travel, new opportunities to satisfy that demand, and plenty of new companies - or retooled older companies - that have geared up, in a newly liberalized environment, to meet that demand.

    It is not easy for investors to participate in this growth. Fly540 is owned by Lonrho Plc, which is listed on the London Stock Exchange and is available to U.S. investors on the pink sheets (OTC:LNAFF). Lonrho is a pure Africa play, but its share price performance has not been stupendous of late, down 65% from its October 2012 high. Comair (COM), which operates as a British Airways franchisee in Southern Africa and also runs, is listed on the Johannesburg Securities Exchange, and recently closed at its highest point since February 2010. Comair has recently mounted a legal challenge against the South African Government's proposed ZAR 5 bn ($550 million) guarantee to South African Airways as well as the cumulative ZAR 11 bn SAA has received in government bailouts since 1991, saying it violates numerous laws and the national constitution. Kenya Airways (KQ) trades on the Nairobi Stock Exchange , but has shed 12% of its price in the past six months in the midst of a wider market rally, and Citigroup has forecast a 2013 net loss of KSH 7.9 billion ($93 million), largely due to slackening demand in the European market. The longer-term outlook is more positive, with a new code sharing agreement with the Abu Dhabi airline Etihad and the likelihood that Etihad will take an equity stake if the alliance proves successful.

    None of the airlines mentioned in this article are included in the holdings of Africa- or emerging market-focused exchange traded funds available to U.S. investors. This is not too surprising, since airlines in general are fairly unpopular with institutional investors. In March, Guggenheim closed its global airline ETF (NYSEARCA:FAA), but even this fund held no shares in African airlines.

    As an investment opportunity, African airlines are probably not that attractive, even if you can find a way to invest (The operation of African airports, many of which have been ceded under concession to private operators, may be a more accessible opportunity, and will be the topic of a subsequent article). But the growth and improvement in African airline services - which includes a large and growing number of airlines from outside the region, including Turkey and the Arabian Gulf, which now have direct links to numerous African cities - is a clear indication of the continent's overall attractiveness as an investment destination and a market for consumer goods and services.

    Disclosure: I am long OTC:LNAFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: LNAFF, long-ideas
    May 30 9:52 AM | Link | Comment!
  • Who Would Adam Smith Vote For?

    With the debates over, the presidential candidates on their last, gasping try to grasp those elusive Electoral College votes in Iowa, Colorado, Nevada, Virginia, Wisconsin, New Hampshire, or Ohio needed to put them over the top, and the polls to open in less than 48 hours, it is a bit late to be offering strategic advice to Barack Obama - advice that by all indications he would have ignored - but he could have done much worse than to cloak himself in Adam Smith's mantle. Yes, the same Adam Smith whose profile adorns the neckties of more than a few Wall Street bankers and right wing think-tankers.

    The thing is, the Adam Smith Mitt Romney and Paul Ryan and their followers claim to revere bears scant resemblance to the real Adam Smith, friend of Enlightenment philosopher David Hume and author not only of An Inquiry Into the Nature and Causes of the Wealth of Nations but also of The Theory of Moral Sentiments, which predatedThe Wealth of Nations by more than 15 years. "I think Adam Smith was right," said Romney in a January debate, "and I'm going to stand and defend capitalism across this country, throughout the campaign." In a subsequent speech at the University of Chicago, Romney proclaimed, "When the dead hand of government replaces the invisible hand of the market, economic freedom is the inevitable victim."

    Paul Ryan, better known for his enthusiasm for Ayn Rand, has also paid homage to Smith. In the introduction to his Roadmap for America's Future: A Plan to Solve America's Long Term Fiscal and Economic Crisis, he writes: "The Founders…understood the importance and value of free enterprise. In addition to the Declaration of Independence, the year 1776 saw the publication of Adam Smith's treatise The Wealth of Nations, which argued in part that the 'system of natural liberty,' or free markets in commerce, would vastly increase national wealth." This, at least, is empirically true, and no less than Karl Marx recognized it as such. But just as the Devil can quote scripture, so has the extreme right wing of the Republican Party (one can legitimately ask whether, today, any other wing even exists) appropriated Adam Smith as its own, by quoting his works selectively and out of context.

    Adam Smith, it must be remembered, was not merely an economist but a moral philosopher, concerned not simply with economic efficiency but with social justice. As such, he wrote at length and with great eloquence about the obligations that bind us together as a society, and also about the need for free markets to be regulated. He was also a radical, mistrustful of inherited wealth and position and scathing as to the inflated self-regard of the wealthy.

    Hedge-fund manager Leon Cooperman, in an open letter he sent to President Obama in late 2011, wrote of himself and his fellow billionaires, "As a group we employ many millions of taxpaying people, pay their salaries, provide them with healthcare coverage, start new companies, found new industries, create new products, fill store shelves at Christmas, and keep the wheels of commerce and progress (and indeed of government, by generating the income whose taxation funds it) moving. To frame the debate as one of rich-and-entitled versus poor-and-dispossessed is to both miss the point and further inflame an already incendiary environment." One suspects Mr. Cooperman would have received scant sympathy from Adam Smith, who writes, in The Theory of Moral Sentiments, "This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and meand condition…is…the great and most universal cause of the corruption of our moral sentiments…. It is scarce agreeable to good morals, and even to good language, perhaps, to say, that mere wealth and greatness, abstracted from merit and virtue, deserve our respect."

    We can't know what Adam Smith would have thought of any specific social welfare programs such as Medicaid or unemployment benefits any more than we can know which baseball team God roots for (though I'm pretty sure it's the Red Sox). But Smith was no advocate of abandoning the less fortunate to their fate. As he wrote in Book 1 ofThe Wealth of Nations, "Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged."

    Mitt Romney, who by all accounts gives 15% of his income to the Mormon Church and devotes a substantial amount of his time to helping co-religionists who have fallen on hard times, may think private charity from church and community is an adequate social safety net, but Adam Smith would almost certainly disagree. As he wrote in The Theory of Moral Sentiments, "The wise and virtuous man is at all times willing that his own private interest should be sacrificed to the public interest of his own particular order or society. He is at all times willing, too, that the interest of this order or society should be sacrificed to the greater interest of the state or sovereignty, of which it is only a subordinate part. He should, therefore, be equally willing that all those inferior interests should be sacrificed to the greater interest of the universe, to the interest of that great society of all sensible and intelligent beings, of which God himself is the immediate administrator and director."

    Smith did not get into the specificities of tax policy, but he would probably take a dim view of subjecting the working class to higher tax rates than the 0.1 percent. Indeed, he supported progressive taxation: "The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state."

    Obama's midsummer "You didn't build that" comment gave Republicans the opportunity for endless riffs on the theme of self-reliant entrepreneurs building their companies and their fortunes from scratch, ignoring Obama's point, which was true, if inelegantly expressed. Adam Smith put it better: "That the erection and maintenance of the publick works which facilitate the commerce of any country, such as good roads, bridges, navigable canals, harbours &c. must require very different degrees of expence in the different periods of society, is evident without any proof. The expence of making and maintaining the publick roads of any country must evidently increase with the annual produce of the land and labour of that country, or with the quantity and weight of the goods which it becomes necessary to fetch and carry upon those roads." He also had no problem asking the wealthy to pay a little more: "When the toll upon carriages of luxury, upon coaches, post-chaises, &c. is made somewhat higher in proportion to their weight, than upon carriages of necessary use, such as carts, waggons, &c. the indolence and vanity of the rich is made to contribute in a very easy manner to the relief of the poor, by rendering cheaper the transportation of heavy goods to all the different parts of the country."

    Smith supported what today we would call public-private partnerships, harnessing private capital and initiative to provide a public good such as a toll road, but he was clear on the need for such partnerships to be closely regulated to make sure the operators maintained the facilities rather than simply pocketing the proceeds. And when user fees and tolls are not sufficient to build and maintain essential infrastructure, Smith advocated a more active role for government: "When the institutions or publick works which are beneficial to the whole society, either cannot be maintained altogether, or are not maintained altogether by the contribution of such particular members of the society as are most immediately benefited by them, the deficiency must in most cases be made up by the general contribution of the whole society. The general revenue of the society, over and above defraying the expence of defending the society, and of supporting the dignity of the chief magistrate, must make up for the deficiency of many particular branches of revenue."

    Adam Smith probably would not have approved of the Dodd-Frank law regulating financial institutions, not because it represents an intolerable intrusion on free markets but because it failed to fix the principal causes of the 2008 financial crisis, leaving banks that are too big to fail, thus doing nothing to prevent future government bail-outs for losses on risky and speculative investments and trades. Smith did, however, see financial regulation as no less important than building codes: "Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as or the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed."

    Adam Smith probably would not be an enthusiastic supporter of President Obama. Not because Obama is a socialist, but because his signature initiatives, including Obamacare and Dodd-Frank, are weighed down with opaque language and impenetrable regulations virtually guaranteed to create uncertainty in big swathes of our economy, fail to achieve much of what they were intended to achieve, and incur costs we can't even calculate. Smith probably would have disapproved of direct government investments in companies like Solyndra, the solar panel manufacturer that famously evaporated along with half a billion dollars in public funds, though he almost certainly would approve of public investments in basic science. He would be likely to disapprove of mandatory corporate average fuel economy standards for cars - and subsidies for electric vehicles - instead opting for a more market-based and neutral approach such as a carbon tax, which would eliminate the need for energy subsidies of all kinds, including tax breaks for oil companies and direct subsidies and mandates for corn-based ethanol, and which would also an effective way to reduce greenhouse gas emissions. He would probably favor a much more liberal immigration policy (he wrote at some length about the need for labor mobility) to replace the idiocy of our current policies that every year send home tens of thousands of recently graduated foreign students instead of inviting them to stay here and help grow our economy.

    Obama, it is true, seems to be more comfortable with some aspects of crony capitalism than with unbridled free markets, but then so does Romney. On almost every other dimension, however, Adam Smith would find Barack Obama at least slightly more supportive of his ideas than Mitt Romney and Paul Ryan, who apparently see in Adam Smith a proto-social Darwinist. I too find that Barack Obama more closely reflects Adam Smith's view of governance than does Mitt Romney. And as an enthusiastic adherent of Adam Smith, on Tuesday I will vote to re-elect Barack Obama.

    Nov 04 2:24 PM | Link | 1 Comment
  • America's China-Africa Conundrum

    It must come as some reassurance to Mitt Romney that he is not the only would-be President who says remarkably silly things he knows to be untrue. Last week Hillary Clinton, on a tour of sub-Saharan Africa, delivered a speech in Senegal in which she said that the United States would stand up for democracy and universal human rights "even when it might be easier or more profitable to look the other way, to keep the resources flowing." In a barely veiled dig at China, she added, "Not every partner makes that choice, but we do and we will."

    China is widely seen as engaging in an aggressive grab for Africa's energy and mineral wealth in ways many African leaders find irresistible. Unlike the United States and multilateral institutions such as the World Bank, in which the U.S. has a dominant position, the Chinese offer money and technical assistance without attaching bothersome conditions on human rights, democracy, and free markets.

    It is hard nowadays to visit an African capital city that does not boast a brand new soccer stadium built entirely at China's expense and with Chinese labor. Chinese companies have paid top dollar for loss-making state enterprises, such as Mali's state textile concern, and have invested in major agricultural projects such as the massive Magbass sugar complex in Sierra Leone. The Chinese Government is spending $1.5 billion for a Chinese state company to rebuild the Benguela Railway, which hasn't operated in 35 years, but which used to, and will again, link Zambia's copper belt to the port of Lobito on Angola's Atlantic coast.

    This isn't an entirely new phenomenon. In the 1970s China built the Tazara Railway linking Zambia to the Indian Ocean port of Dar es Salaam, in Tanzania. I remember watching a film in a high school geography class, which featured Tanzanian President Julius Nyerere vigorously rebutting allegations of Chinese influence: "The Chinese do not own a single biscuit shop on the Island of Zanzibar!"

    There is a crucial distinction between American and Chinese involvement in Africa. U.S. oil and mining companies are active all over the continent, including several countries not known for their democratic values and respect for human rights. Angola, ruled for the past three decades by the family clique of President Jose dos Santos; Equatorial Guinea, which according to the World Bank has a higher per capita GDP by purchasing power than either Britain or France and which, under the 30-year rule of Teodoro Obiang Nguema Mbasogo, has achieved a ranking of 136th out of 187 countries on the United Nations human development index.

    But the companies in question are private, answerable to their shareholders. As long as they steer clear of countries under official U.S. sanctions (Sudan, Iran) and do not run afoul of the U.S. Foreign Corrupt Practices Act by bribing government officials, they can pretty much do as they please as long as the local authorities allow it.

    Official U.S. assistance to Africa and other underdeveloped regions, on the other hand, often does come with stringent conditions attached. The U.S. Agency for International Development (USAID), which dispenses most of America's non-military foreign assistance, operates programs to promote economic liberalization and regulatory reform, and democratic governance. The Millennium Challenge Corporation, created under the first George W. Bush administration, undertakes hugely ambitious infrastructure projects, most costing hundreds of millions of dollars. In order to qualify for such assistance a country must undergo a rigorous assessment of its commitment to and progress in achieving democratic governance, respect for human rights, and free markets.

    By contrast, most of the Chinese companies active in Africa, especially in the resource sector, are state-owned, and they act as quasi-official arms of Chinese foreign policy. I remember once visiting the offices of the Magbass sugar company in Freetown, Sierra Leone, which were located in the Chinese Embassy compound. It is much harder for the Chinese government than the U.S. government to maintain a plausible distinction between its own strategic objectives and the activities of Chinese companies, so they don't even try. China, which last month pledged $20 billion in loans to Africa over the next three years and which three years ago overtook the United States as Africa's largest trading partner, last year recording $166 billion in bilateral trade, is certainly pursuing both commercial and geo-strategic interests on the continent.

    It is hard to see anything sinister in this. Countries have always mixed commerce and politics in their foreign relations, none more blatantly than Britain, which twice in the 19th century went to war to force China to open its market to imports of opium from India. In many ways, China's approach is more honest than that of the United States. Our promotion of democracy and human rights is highly selective, and much of that selection is based on the business interests of American companies, which in the case of energy and mineral resources are closely linked to geo-strategic concerns.

    It is a happy coincidence when a democratic African country discovers commercially important oil resources, as is the case in Ghana, but it makes little difference to the conduct of our foreign policy. We tend not to give much financial aid to countries swimming on an ocean of petroleum, but we do give them military assistance when conditions warrant, though in Marxist-ruled Angola in the 1970s we were treated to the surreal spectacle of Cuban troops guarding American oil installations against attack by U.S.-backed guerrillas. You couldn't make this up.

    For all our vocal support for the Arab Spring, we remained almost entirely silent when Bahrain's government, with Saudi assistance, brutally put down the Shiite community's pro-democracy protests. It is no coincidence that Bahrain is the home base of the U.S. Navy's Sixth Fleet, whose main purpose it is to keep the Persian Gulf open to oil shipments. For similar reasons we maintain a significant military presence in Saudi Arabia, a close U.S. ally that has never shown tremendous concern for democracy or human rights.

    Back to Africa, we maintain very close ties to Uganda, whose President Yoweri Museveni, originally a reformer who has recently completed his 25-year anniversary in office, has altered the Constitution to extend his term, and has jailed political opponents. There may be multiple reasons for this support, but it cannot have escaped the attention of the U.S. State Department that Uganda is about to embark on a new era as an oil-exporter, its Lake Albert Rift oilfields expected to produce 200,000 barrels of oil per day. Secretary Clinton may reconsider this support in light of the sale of a 2/3 interest in the development by Tullow, the U.K. firm that discovered and developed the fields, to China's state-owned CNOOC (China National Overseas Oil Company) and Total, the state-owned French oil company.

    Evangelizing for democracy and human rights is part of America's exceptionalist self-image as a country founded on the highest of ideals. But it is often hard to determine when to adhere to and promote those ideals and when to soft-pedal them, especially when the commercial stakes are high. sometimes we get it right, as for example, when the U.S. placed an embargo on columbium-tantalite ores mined in appalling conditions of near slavery in Eastern Congo, and has been pretty effective in getting other countries to help enforce it. But it is a decision we often get wrong, whether it is in support of the hopelessly corrupt and inept Karzai government in Afghanistan, the thirty-plus years of military dictatorship in Egypt, or the autocratic Ethiopian government of Meles Zenawi, each of which advances some combination of commercial and strategic interests. There is no question that Sudanese President Omar al-Bashir is a nasty character, but it is hard to escape the conclusion that stringent U.S. sanctions against his government have at least something to do with the dominant position of Chinese companies in the oil industry in both North and South Sudan.

    Having visited nearly 100 countries, in most of which I have had conversations of a political nature with local citizens, I have to conclude that much of the hatred people feel for the United States - hatred which, by the way, is nowhere near as strong or as widespread as many Americans think - is rooted in the disconnect between what we do and what we preach. Sometimes this cuts in our favor: even as we arm and subsidize Israel, we much more quietly and modestly provide grants and technical assistance to the Palestinian Authority and Palestinian businesses. Much of the time, however, it cuts the other way. We preach democracy and human rights even as we assist and support governments that respect neither. We support some democratic movements (such as the Libyan revolution) while maintaining a hands-off policy toward others (e.g., Rwanda, Syria, Bahrain). Americans and non-Americans alike look for and fail to find coherency, and many conclude that talk of democracy and human rights is merely a fig leaf to hide our true, self-interested, motives.

    I don't believe this. I think more American foreign policy failures (the Vietnam War, the Second Gulf War, the Afghan War, and others) result from idealism and hubris than from calculation. We think we can improve a situation through military intervention and dollops of money and then, at huge cost, find we can't. It would be wrong, and untrue to American nature, to practice a strict form of realpolitik in which geopolitics and commerce trump all other concerns. But we have to be more realistic about what we can and cannot accomplish, and more open with respect to our real motives. If the Chinese can do it, we should be able to as well.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: economy
    Aug 06 4:57 PM | Link | Comment!
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