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Issue 03 / October 2013

Managing Africa's political risks and cultural differences

At a glance
  • Agricultural production, growth in services and a rise in oil production and mining is fuelling GDP growth
  • Africa is a continent not a country and growth is uneven
  • Weak legal systems, corruption and security all hamper development
In contrast to the usual cycle of war, disease and famine, Sub-Saharan Africa shows the budding shoots of promise. While investors face significant and persistent risks, in US President Barack Obama’s words, “Africa is rising”.
1 billion people
2 billion people by 2020
54 nations
6 time zones
5th largest economy in the world
28 African countries tipped to see annual average growth of over 5% over the next five years
500% economic growth in the last 30 years

Africa’s governance has improved, democracy and economic policy have become more stable, and natural resources have provided an economic boost, according to the UN in their Economic Report on Africa 2013.

“The continent’s economic performance has improved hugely following two decades of near stagnation,” says William White, executive director of Willis International. “But the only certainty in Africa is change.”

Despite a slowing world economy, Africa’s GDP growth in 2012 was 5% and is expected to be 4.8% in 2013, before accelerating further to 5.3% in 2014, according to the UN’s report. The engines for growth are expected to be the expansion of agricultural production, robust growth in services and a rise in oil production and mining, says the UN.

Other sectors are also expanding, says Johnny Evans, deputy chairman at insurance broker Gras Savoye – East Africa. For example, aerospace has grown as more people travel and conduct business in Africa. The region’s underdeveloped infrastructure is also creating opportunities: new power projects are getting underway all over Sub-Saharan Africa, says Evans. When lauding Africa’s potential, Obama highlighted a private partnership to operate a power station in Tanzania, farmers harnessing new technologies in Senegal and entrepreneurs in South Africa.

Africa's growth in a stagnating world

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Stubborn risks

However, for all the Afro-optimism the region suffers some deep-seated problems. Poverty has been reduced, but remains widespread. Despite its 780 million-strong population, Sub-Saharan Africa’s share of global GDP is just 1.1%.

To take part in Africa’s growth story, foreign companies must assess and mitigate myriad risks, which are in many ways similar to those in other emerging markets, says Julia Graham, director of risk management and insurance at international law firm DLA Piper. But Africa is a continent rather than a country. “The different social, economic, political, security, cultural and risk profiles are constantly changing,” says Graham, former chair of the UK’s Association of Insurance and Risk Managers (Airmic) and a current board member of the Federation of European Risk Management Associations (FERMA).

The buzz about Africa can obscure such difficulties, says Justin Dargin, head of energy, Middle East and Africa at global analysis and advisory firm Oxford Analytica. For example, there are many broad structural issues, such as the effects of urbanisation (close to three quarters of Africans will be living in cities by 2050), infrastructure, access to reliable power, transport and skill shortages. “Such issues constrain growth and have a profound effect on the ability of foreign firms to invest,” explains Dargin, who is also an energy and environmental scholar at the University of Oxford.

Patterns of growth

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Regulatory challenges

Sub-Saharan Africa has some of the weakest legal institutions and most complex regulatory processes of any region, according to the World Bank’s Doing Business 2013 report. A large number of Sub-Saharan countries are ranked in the lower third – the worst five countries are all in Africa – and feature highly among the worst countries when it comes to protection for foreign investors, access to electricity and ease of starting a business.

Bureaucracy and inefficiency plague Africa, and can hike the cost of transactions. For example, it takes 90 days in Kenya and 161 in the Republic of Congo to open a business, according to the World Bank.

But progress is being made in many Sub-Saharan countries – it takes just three days to start a business in Rwanda. In fact, Rwanda ranked second of 50 countries for showing the most improvement in regulator reform since 2005, while Burundi was ranked fifth in the league of fastest-improving countries.

Political risks

Outright war is rare but social-economic factors are giving rise to political unrest

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Political risks

Outright war is rare but social-economic factors are giving rise to political unrest

Outright war between countries in Sub-Saharan Africa is comparatively rare, and nationalisation of private assets is not as common as parts of Latin America. However, as with other emerging markets, social–economic factors – including ethnic tensions, urbanisation, inequality and the transition to democracy – are giving rise to political unrest, expressed as civil war, terrorism and civil unrest.
For example, political tensions in fast-growing Mozambique threaten the nascent gas and coal sectors. Earlier this year, foreign-operated mines temporarily ceased operations after the Renamo – which lost a 15-year civil war against the government – threatened to sabotage a vital rail line. Discontent has also been brewing as communities fear they will not benefit from recently discovered reserves of offshore gas. 

“Pure economists have a rosy view of growth in Mozambique but this doesn’t take in to account the many real problems businesses face,” says Tim Holt, head of intelligence for Alert 24, a risk and crisis management consultancy from Willis Special Contingency Risks.

Similarly, a group affiliated to Al Qaida attacked a uranium mine in Niger run by French nuclear power operator Areva. The attack was part of the wider rise in Islamist unrest in the Sahel region, which includes Mali and Northern Nigeria.

With many of those in positions of power also holding a tight grip on economic wealth, political risk and economic risk should be viewed together in Africa, Holt says. “Economic stakeholders have tremendous political clout – whether as part of the traditional commercial elite, or because of family or ethnic links – so it pays to understand how they interact.”

The relationship between politics and economics requires a shift in management approach towards diplomacy, Holt advises. “You have to represent your position but maintain dialogue with all parts of the host nation to understand the root causes of fissures that might exist.”

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Hard graft

Perhaps the most obvious challenge for businesses investing in the region is corruption. Seven of the nine countries with the highest reported bribery rate are in Sub-Saharan Africa, according to Transparency International. Some 84% of people admit to having paid a bribe in Sierra Leone and 70% in Kenya.

Ethnic and tribal patronage is commonplace. “In many countries it is difficult to separate corrupt practices from cultural practices,” says Dargin. “Foreign companies have to balance cultural expectations with home country anti-bribery and anti-corruption legislation.”

And legal redress can also be an issue. Corrupt judiciary may be subject to the influence of local officials and business. “In South Africa the legal code is stable, although recent political developments there are creating a more tenuous investment climate, but for the rest of the region it is uncertain at best,” Dargin adds.

Climate change is often overlooked but impacts many other risks according to Dargin. “Climate change should be on the radar for businesses because it could have an unforeseen impact and exacerbate existing social, economic and political tensions. Food and water security are also complex issues that could have a cascading effect that crosses many regions and sectors.”

Political risk

Political risk remains a key in Africa (see box). As democracy has put down deeper roots, coups and civil war have become less frequent. But ethnic, religious and socio-economic rifts still give rise to terrorism and political violence.

Engines of growth

Agriculture and mining show high growth and offer investor opportunities

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Engines of growth

Agriculture and mining show high growth and offer investor opportunities

Agriculture

Sub-Saharan Africa’s agricultural sector is underperforming but food security, urbanisation and the prospect of exports are just a few reasons why it offers huge long-term potential. The region could grow into a trillion-dollar market by 2030, up from $313 billion in 2011, according to the World Bank. However, farmers need better access to capital, electricity, better technology and irrigated land to grow high-value foods.

The region has more than half of the world’s unused fertile land and access to untapped water. After years of neglect, foreign investors, wholesalers and retailers are being drawn to Africa, especially to supply out-of-season products in Europe.

Adverse weather – too much or too little rain, too hot or too cold, is the biggest risk for agri-business, says Julian Roberts, executive director of agri-business at Willis. Other risks for the food industry include pests, disease, infrastructure (including storage and transport) and political risks. 

The take-up of agricultural insurance in Africa is still very low, but both awareness and interest is increasing. “Insurance brings risk assessment discipline and knowledge. And by de-risking, insurance enables investments to be made that may not otherwise have been feasible,” Roberts says. This helps increase yields and production by facilitating access to funds for critical investment in higher yielding seeds, chemicals, fertilisers and mechanisation.
Africa boasts the world’s largest reserves of platinum, gold, diamonds, chromite, manganese, and vanadium, as well as possessing some 17% of the world’s uranium.

High commodity prices in recent years have driven economic growth in many African countries. Others stand to join them: Mozambique and Tanzania are set to become major exporters of natural gas; Guinea and Sierra Leone should become huge iron ore exporters.

Insurance requirements, like storage inspections and seed checks, also encourage good practice, acting as a catalyst for higher standards of risk management. “It’s a virtuous circle of raising standards and elevating production risk management,” Roberts claims. “Crop insurance has a great deal to offer and will have a much greater role to play in Africa in the future.”

Mining

Although interest has cooled in the past 12 months as commodity prices have reduced, long-term prospects are good, says Andrew Wheeler, Mining Practice Group leader at Willis. “Africa has world-class deposits in minerals that are increasingly becoming scarce elsewhere, or that only exist in the region.”

Resource extraction in Africa is, however, a high-risk investment. Political risk, demanding geography and underdeveloped infrastructure pose problems for mining companies. Mines are wary of achieving a return on their investment, Wheeler adds. 

Deposits are often in remote locations, and countries may lack the roads, rail and port infrastructure. Flood and water ingress damage is of particular concern for mines, while the prolonged rainy seasons can hamper logistics. Human resources are limited and skilled foreign workers costly.

Political risk remains the biggest risk for most mining operations, however, as recently highlighted by violent labour disputes in South Africa.
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The safety of employees is another consideration. Even South Africa presents a travel risk, especially in urban areas blighted by crime, but such risks can usually be mitigated. It’s a different story for high-profile foreign workers, such as oil workers in Nigeria, who are particularly at risk of kidnap – a British man was kidnapped as he left Lagos airport in April.

Attitudes to foreign companies differ widely, and can depend on the country of origin: Chinese workers may be treated differently to Americans. “With the rise of resource nationalism, some African intellectuals have interpreted the return of companies as a form of neocolonialism,” says Tim Holt, head of intelligence for Alert 24, a risk and crisis management consultancy from Willis Special Contingency Risks.

“Chinese companies and investment has flowed into parts of Africa, and while they were initially welcomed with open arms, we now see some resentment,” Holt adds. “Countries are happy for the investment but there are always suspicions that foreign companies will want to come in, take the resources out, and leave environmental damage behind.”

  

Insurance

Sub-Saharan Africa’s insurance industry has been singled out for its growth potential

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Insurance

Sub-Saharan Africa’s insurance industry has been singled out for its growth potential

Africa is well positioned to become an important part of the global insurance markets over the next 50 years, according to Swiss Re. This is a reflection of changing demographics – Africa’s share of the world’s population is set to increase from 15% currently to roughly 27%. However, its insurance sector currently accounts for a mere 0.2% of total premiums.

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Cultural diligence

Political risk and terrorism could be much better understood by investing businesses, argues Holt. “It’s about changing the business culture. The more connected you are, the more you will understand and the chances of spotting an opportunity will increase.”

Companies should therefore spend time getting to know the culture of the country they are going into, Evans advises. “Spend time in the place you want to develop. It is vital that you try to employ good local talent and develop local capacity and skills, and find a balance between international and local standards.”

Dargin agrees: “You really do have to get to know individuals on a personal level and have a profound and nuanced understanding of government officials and business relationships in Africa.”

Foreign companies have to balance cultural expectations with home country anti-bribery and anti-corruption legislation.”

Due diligence is key, according to Graham. “You are trusting your reputation and brand. While you don’t want to be a business beast that overwhelms a partner in Africa, nevertheless there must be minimum standards of business and governance set and followed.”

Yet, she urges against a patronising attitude that underestimates the sophistication of Africa. “This applies to risk management, which can be a two-way street. Risk management is emerging as a professional discipline across Africa. Kenya, among other countries, has recently been quoted as forming a risk management association.”

Whilst the UN, Western aid agencies and Chinese mining companies have all played their part in Sub-Saharan Africa’s growth, economists believe that the major attributer is internal. “The people of Africa are demanding a better quality of life, embracing technology and understanding the power of the vote, thus pushing their leaders to deliver more,” explains White. “As a consequence peace reigns in most countries, those attending school is at record highs, HIV has fallen by three quarters, life expectancy has risen by a tenth in the past decade and foreign direct investment has tripled.”

Find out more

Photo of William White
William White

wwhite@willis.com | +44 (0)20 7558 9247

William White is executive director at Willis International. He has over 25 years' insurance experience including setting up his own facultative insurance brokerage business in Mauritius, before moving to Bermuda to create the property practice for the leading independent Bermudan broker, Park Bermuda, eventually became CEO of Park London. In 2007 William joined Glencairn as a senior partner managing their reinsurance division, thus joining Willis as part of the HRH acquisition. Today he manages Willis Group’s relationship with Gras Savoye.

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wwhite@willis.com | +44 (0)20 7558 9247

William White is executive director at Willis International. He has over 25 years' insurance experience including setting up his own facultative insurance brokerage business in Mauritius, before moving to Bermuda to create the property practice for the leading independent Bermudan broker, Park Bermuda, eventually became CEO of Park London. In 2007 William joined Glencairn as a senior partner managing their reinsurance division, thus joining Willis as part of the HRH acquisition. Today he manages Willis Group’s relationship with Gras Savoye.

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