You cannot be serious!

Today (or possibly yesterday) is the 30th anniversary of John McEnroe’s classic “You cannot be serious!!!” outburst at Wimbledon. Some things cannot go uncommemorated even on a blog mainly about business in the Ivory Coast.

That ball was on the line! Everyone saw it in the whole stadium!

There is actually a link to the Ivory Coast as there have been tons of these you-cannot-be-serious-moments during the post-electoral crisis. Thinking about it, there were a quite a few in practically all interviews with Gbagbo or Toussaint Alain.

Here are my favourites:

  • Somebody managing to steal 5 large sized city buses in Abidjan. And I think it was the first time in many months that the top news story of any Ivorian newspaper was not about the post-electoral crisis.

 

  • This is from before the crisis, and it’s more the relaxed McEnroe of 2011 than the impassioned one of 1981. I’m on a regular Air France flight to Abidjan, the flight lands, and while taxiing someone puts on coupé décalé music and a great part of the passengers start dancing along – basically expressing joy of being back home. 
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Secure Title

Titre Foncier
I got the question below from a friend about “Titre Foncier” which is the final title deed for land ownership in the Ivory Coast.
How do you know that the Titre Foncier is genuine, when there has been so much corruption and fraud up to the highest level, and you have a judiciairy which is just as corrupt and corruptible?
Investor Stephen Jennings from the A Bull on Africa post said that “In urban real estate we are looking for very large conurbations in fast growing countries with reliable property title and reasonably sound rule of law.”   So this question is about the two latter issues which are very fundamental to real estate investing in Africa. Here’s my reply:
Well, the short answer is that  that’s why there is a risk premium for investing in Africa.  Returns on paper are much better than in the developed world.
As for Titre Foncier, I have yet to hear of a case where someone holding a titre foncier has lost a property outright,  but heard many cases of problems with “lettre d’attribution” and “terrain villageois”. Corruption is not uniform, the risk reward from the point of a corrupt official looks much better when rules and paperwork are less clear.  And with a Titre Foncier that’s as clear as it gets.
One has to put much more effort into due diligence when doing real estate deals in the Ivory Coast compared to the developed world. The more due diligence is done the more expensive it gets for somebody to bribe officials. For a small plot of land it could be worth it for an official at a local municipality, but less so at the Ministry of Construction.
I think for most of the cases the main risk is a dishonest counterparty (possibly cooperating with a dishonest/fake notary and agent) trying to sell something he doesnt own, or selling the same plot multiple times or something like that, without having any links to the adminstration.  A bit of natural skepticism and checks at the local municipality or at the Ministry of Construction should avoid these types of frauds.
Close call
Another thing to watch out for is if the land is disputed. It can look fine at the Ministry of Construction, the seller’s identity matches the owner’s and everything, but then there is someone else claiming ownership through a legal process that can last several years. And such a legal process is definetly not something one wants to be involved in. Heritage Foundation writes:
The judiciary [in the Ivory Coast] is constitutionally independent but slow, inefficient, and subject to executive branch, military, and other influences. Judges serve at the discretion of the executive, and some are open to bribery.
This is exactly what happened with the first Cocody plot I looked at. A  friend who is a lawyer fortunately checked at the “Cour de Cassation”  [the Ivorian High Court] and found that there was a legal claim from somebody other than the seller –  so I backed out of that one and bought another pretty equivalent plot nearby instead. That was a close call, and these due diligence checks can really be the difference between success and failure.

A crisis is an opportunity

Argentina and the Ivory Coast

I found a story about doing business in Argentina in Inc. Magazine during and after the 2001 crisis.  There are a lot of parallels with the Ivory Coast, but one big difference in that Ivory Coast has a stable currency (except for the 1994 devaluation) whereas Argentina does not.

On the day his country exploded, Santiago Bilinkis stayed at home and watched the riots on television with his wife and infant son. It was painful. In Buenos Aires, one of the world’s great cities, looters were attacking grocery stores. Bilinkis’s bank account—along with every other account in the country—had been frozen by executive decree three weeks earlier. Argentina was out of money.

This was December 20, 2001, a Thursday. That afternoon, several people were killed by police in front of the executive office building, known as the Pink House, and President Fernando de la Rúa resigned and fled the capital in a helicopter. In the days that followed, Argentina would cycle through four more presidents and default on debts totaling $155 billion.

[…]

But although Argentina talks and walks like a European country, its style of doing business is distinctly Third World. The country ranks 115th on the World Bank’s Doing Business index and 138th on the Heritage Foundation’s Index of Economic Freedom, thanks to a tangle of taxes, tax credits, subsidies, prohibitions, exemptions, and delays. These rules change constantly, aren’t enforced uniformly, and are forever subject to bending or breaking if a bribe is paid. And almost everybody pays: Transparency International ranks Argentina 105th in terms of corruption, worse than famously corrupt countries such as Mexico, Egypt, and Liberia.

Sounds very familiar. Ivory Coast under Gbagbo (who unlike de la Rua didn’t have a helicopter to flee with) ranked 169th (out of 183) on the World Bank’s Doing Business index and 122nd (out of 183) on the Heritage Foundation’s Index of Economic Freedom.

A few excerpts from the Heritage Foundation’s piece on the Ivory Coast:

Bureaucracy, ad hoc tax policy, corruption, and burdensome contract enforcement inhibit investment. […] Despite land reform, freehold tenure outside of urban areas is difficult, and most businesses opt for long-term leases. Expropriation of property by the government has not been a problem, but there have been instances of poor protection against expropriation by private parties.

The judiciary is constitutionally independent but slow, inefficient, and subject to executive branch, military, and other influences. Judges serve at the discretion of the executive, and some are open to bribery. Outside of urban areas, traditional property rights of villages and ethnic groups prevent the sale of land.

Corruption is perceived as pervasive. Côte d’Ivoire ranks 154th out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009. Domestic laws and regulations to combat corruption are neither generally nor effectively enforced. Government corruption and lack of transparency affect judicial proceedings, contract awards, customs and tax issues, and the accountability of security forces. Racketeering by security and defense forces is often denounced in the media and receives wide attention from the authorities and the population.

Also the part about access to finance in Argentina from the Inc. Magazine story sounds like it could have been written about the Ivory Coast:

The single biggest one—and the most obvious way that Argentina is much, much worse off than America—has to do with money. Argentina does not have a modern financial system. Business credit is nonexistent. Only businesses with many years of operating history can qualify for things such as lines of credit or overdraft privileges. Small-business loans are extremely unusual, and it would be crazy to tap credit cards for operating capital: They have low limits and interest rates of up to 45 percent. “It’s hard to explain it to Americans, but there is no financing in Argentina,” says Patricio Fuks (pronounced fooks), a co-founder of Fën Hoteles. “There are no seed investors. The stock market is so small that if you invested a million dollars, you’d move the market.”

Starting a hotel business during a crisis

Still despite all of the above this Fuks guy managed to start a hotel business during the Argentinian crisis with a very small starting capital. His story is quite inspirational:

I met with Fuks in his palatial office in Buenos Aires. Dressed like a nightclub promoter—a black suit and a black T-shirt—Fuks told me his entrepreneurial story with a mix of pride and genuine wonder that it had even happened. In a span of eight years, he has built a group of 34 four-star and five-star hotels in six Latin American countries, under the brands Dazzler and Esplendor. Together, the hotels, which charge roughly $100 a night per room and take design cues from Starwood’s W hotel chain, account for $40 million in annual revenue and employ 700 people. […]

But by 2001, the advertising work started drying up, and in November of that year, Fuks closed his agency. On December 20, the day the rioting started, Fuks and his wife boarded a ferry to Uruguay. They spent New Year’s Eve there, then traveled to Costa Rica and then to Miami. Fuks considered getting a job in Miami, but he couldn’t stomach the idea. “I didn’t know what to do,” he says. “But I was just thinking: A crisis is an opportunity. What’s my opportunity?

Fuks had $25,000 in cash, which he then used to pay off the $200,000 mortgage he had taken on his apartment in 2001. (The devaluation of the peso brought the value of his mortgage down to $50,000, which he was able to pay off by buying bank bonds at a 50 percent discount.) He then scraped together $40,000 from three friends—an enormous amount of money in Argentina in 2002. “Raising $40,000 would have been like raising a million today,” says Alejandro Frenkel, Fuks’s co-founder and Fën’s current CEO. After making a few calls to hotels that had closed over the past year, Fuks found a hotel owner willing to rent him a four-star establishment, the Bisonte, for just $5,000 per month. Labor costs were low, too: The going rate for a hotel manager was just $400 a month. (Today, it’s $2,500 a month.) “I figured that if we could rent rooms for $25 at 75 percent occupancy, we’d make $30,000 a month in profit,” Fuks says.

Fuks renamed his hotel the Dazzler—he thought the name would appeal to foreign tourists—and ended up renting rooms for just $14 a night. Even so, the hotel was immediately profitable, and Fuks used the earnings to rent another hotel and then a third. By the time the crisis was over, in 2003, Fën was managing five hotels. “It was an amazing time,” he says. “I was getting all these hotels. I knew I was never going to see this in my lifetime again.” Armed robberies were a monthly occurrence, but Fuks would simply take the loss and keep expanding.

This happened all over Argentina, on scales large and small. The crisis gave entrepreneurs with money the chance to buy assets and hire staff at a fraction of the precrisis cost. “For the top 1 percent of us, the crisis was great,” a serial entrepreneur told me. “We had money, our savings were not in the banks, and we were paying one-quarter the salary. Of course, for people with salaries, it was horrible. It was very sad.”

[…]

A few days after I return to the United States, I meet up with Patricio Fuks, who has come to New York City to pitch American investors on a $25 million real estate fund he is starting so he can build more hotels in Latin America. As we drink beer in a glitzy rooftop bar, he complains that American investors seem more interested in putting their money in exotic financial instruments than in tangible assets like hotels. “Every guy I meet is a hedge fund guy,” he says. “A hedge fund guy is like an astronaut to me. I don’t understand how they make money.”

He tells me that if he were a reader of Inc., he would be trying to sell products to the developing world—Argentina or Brazil or Peru—where there is still demand for the basic things a society needs to function. You don’t need to be a hedge fund guy to make money in Argentina; you just need to look around and see what’s missing. Hotels, for instance. “Americans don’t look abroad,” he complains.

Hotel Dazzler Libertad in Buenos Aires

Now, I doubt it’s possible to make money out of renting hotels in the Ivory Coast, but the Ivorian crisis and the ending of it, has – I believe – opened up opportunities just like in Argentina.

For instance, the Ivory Coast has plenty of hotels and other facilities to cater for tourists along the coast, and they have been mostly empty for almost a decade now.  I’m pretty optimistic that this really is the ending of the crisis, and that tourism will return, but I can see someone who have had practically no clients since 2002 having a different perspective.  Thus it’s probably still possible to buy tourist-related facilities on the cheap.

A safe store of value?

Land in Abidjan

I’m thinking that in 5-10 years time I’m probably going to regret that I didn’t buy more land in Abidjan.  A strong case can be made for it as an investment (but that’s for a future post), but it’s not bad as a store of value as well.   It actually feels safer to have money placed in land in Abidjan (given that the title is secured)  than in a lot of other places. That’s linked to me having pretty pessimistic macroeconomic views.

Very briefly, I think:

  • China is going to have a real estate crash – impossible to say when, but I think it will happen. This will reduce the demand (and prices) for various natural resources and cause stock markets to go down world wide.
  • Most of the countries in western world (plus Japan) have structural budget deficits, that seem difficult to close for political reasons.  Instead they are borrowing and/or printing money to cover budget shortfalls which isn’t sustainable and will end in disaster if it goes on for too long.
  • The banking sector (especially in Europe) is still over-leveraged and a second financial crisis might well happen.

With all this, it’s hard to find a safe store of value.  Even having US Dollars or Euros on a bank account doesn’t feel entirely safe – not because the bank will default, but because both the EUR and the USD could lose value dramatically.

Where am I gonna put my money?

Here’s Jim Rogers on BBC Hardtalk voicing the problem of where to put one’s money:  [He is more positive on China than I am though]

There’s going to be huge downsides, there’s serious problems. Where am I gonna put my money? US? the UK? They’re bankrupt. Why would I take my money out of a place that is having a dip [China] and put it into a bankrupt country?

With land in Abidjan the price is to a great degree determined by local conditions and local demands. With asset values in the developed world and the most developed emerging markets becoming more and more correlated, Africa is still an exception where things can go up while the rest of the world goes down.  Nile Capital has just released a report entitled “Africa investing: The benefits of a diverse continent” that elaborates on this point.

Also land prices in Abidjan are clearly not in a bubble – rather still in a political crisis dip, which provides a margin of safety. And land is a pretty good inflation hedge (except in the most dramatic stages of hyperinflation). 
The problems are that it’s not very liquid and that you don’t have a very strong rule of law to back up your ownership rights.

Safer places to put your money, compared to land in Abidjan, that I can think of include:

  • Currencies backed by countries that have low debt, a strong fiscal position and strong rule of law:  Norwegian crown, Swiss franc, and maybe Singapore dollar, Chilean Peso and Canadian dollar.
  • Gold mining stocks of companies with strong balance sheets and maybe gold itself although it has gone up a lot.
  • Stocks of well managed companies with strong balance sheets producing stuff that are close to the base of the Maslow’s hierarchy (eg agriculture). These should be well positioned in a crisis scenario.

Freedom in West Africa

Scoring Freedom

I had a look at Freedom House annual Freedom in the World report where political rights and civil liberties are measured on a scale from 1 (most free) to 7 (least free) for all countries. It’s one of the measures I planned on using to keep track of Ouattara’s government’s performance. The latest report is for 2010, so it includes the Ivorian crisis, but not its resolution.

Freedom House writes:

Côte d’Ivoire’s political rights rating declined from 6 to 7 and its civil liberties rating declined from 5 to 6 due to incumbent president Laurent Gbagbo’s refusal to step down or recognize the November 2010 electoral victory of opposition presidential candidate Alassane Ouatarra, as well as political violence that stemmed from the postelection standoff, including state security forces’ targeting of ethnic minority groups that supported Ouatarra.

In the graph below I plotted the average of political rights and civil liberties scores from Freedom House, for some key West African countries from 1972 to 2010:

Click to enlarge

From this graph we can deduce that there never was a golden age under Houphouet-Boigny, at least not in terms civil rights and political liberties. The Ivory Coast has been pretty bad on these measures all along, but it will be interesting to see what the figures for 2011 show.

As for the other countries one can clearly see the effects of:

  • Amadou Toumani Touré’s “good” coup d’etat against military ruler Moussa Traoré in 1991 in Mali
  • Sani Abacha’s dictatorial rule 1993-1998 and subsequent return to (somewhat flawed) democracy in Nigeria
  • The electoral victory of Abdoulaye Wade and his PDS party in year 2000 ending a 40-year rule of the Socialist party in Senegal
  • A stable and repressive dictatorship in Guinea under Sekou Touré (independence – 1984) and Lansana Conté (1984 – 2008), and then the rise and fall of Moussa Dadis Camara
  • Jerry Rawling’s first coup in 1979 in Ghana where he handed over to a civilian government, and his second coup in 1981 after which he banned political parties and quelled dissent.

Is anybody noticing what’s happening in West Africa?

The most interesting part of the graph is how it’s going to look like for 2011.

The two least free countries, the Ivory Coast and Guinea are likely to make big improvements. Guinea had a fairly free democratic election this year electing Alpha Condé who seems to be significantly more democratically-minded than previous Guinean presidents, though not necessarily better than the runner up Cellou Dalein Diallo. Nigeria also had a democratic election after the Freedom House data was compiled and seems to be on the right path despite local violence (and other issues).

Senegal which has a strong civil society is likely to make improvements once Wade, who has shown some authoritarian tendencies, is voted out.

Then we have Niger where the military carried out its promise to return the country to civilian rule this year, and elections widely recognised as free and fair were held.  Sierra Leone and Liberia are in a positive trend since the end of the wars.

So altogether it’s quite remarkable. West Africa is becoming a region dominated by democracies where citizens enjoy unusually high levels of freedoms in relation to GDP per capita, but also high on absolute terms compared to world averages. And there are network effects with leaders who do respect civil liberties and political rights, taking a stance against the remaining oppressive leaders in the region.

UPDATE:  Here are graphs for the other West African countries: