Issue 03 / October 2013
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.
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.
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.
Outright war is rare but social-economic factors are giving rise to political unrest+
Outright war is rare but social-economic factors are giving rise to political unrest
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 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.
Agriculture and mining show high growth and offer investor opportunities+
Agriculture and mining show high growth and offer investor opportunities
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.”
Sub-Saharan Africa’s insurance industry has been singled out for its growth potential+
Sub-Saharan Africa’s insurance industry has been singled out for its growth potential
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.”
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.
If there is military intervention, the risk of Syrian government sponsored proxy or terrorist attacks against Western interests in the region is considerably higher, warns Tim Holt, head of Intelligence at SCR.
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