Hidden Gems: When risks are mitigated,
This article originally appeared in the 2005/2006 Euromoney Yearbook.
Despite a recent surge in foreign direct investment in Africa, which reached US$18bn in 2004, the FDI gap between
The Africa of today is about more than just commodities and oil, just as the continent is about more than the AIDs epidemic, famine, civil war and poverty. In fact, recent World Bank studies suggest that potential return on investment in
In a year many are calling “the Year of Africa,” progress is being seen in many areas. Africa’s political leadership is taking ownership of conflict resolution, good governance, and poverty reduction at a regional level, with the New Partnership for
“Now is a wonderful time to get in,” notes David Bridgman, Africa Manager for MIGA. “Many countries in sub-Saharan
He advises potential investors to consider countries on an individual basis, rather than ruling out an entire continent based on potential difficulties in some places. So, investors should do their homework and look at a country on its own merits.
“Africa is no more homogeneous from
Trade agreements set the stage
While all eyes were on European Union expansion and the introduction of the common currency, in the past few years EU officials were busy negotiating other agreements as well, with African countries. These new treaties give rise to investment opportunities allowing foreign investors preferential access to the markets of industrialized countries for a range of products and goods exported from sub-Saharan
The African Caribbean and Pacific (ACP)-EU Partnership Agreement, called the “Cotonou Agreement,” for example, is an aid and trade agreement concluded between 76 of the 78 ACP countries and the EU in June 2000 in
A similar agreement, the African Growth and Opportunity Act, gives 35 sub-Saharan nations duty free and quota-free US-market access for all products through the Generalized System of Preferences (GSP) program.
And in February 2001, the EU General Affairs Council adopted the Everything But Arms (EBA) amendment to the EU’s own GSP program. The amendment gives duty and quota free access to all products originating in what the World Bank terms “Least Developed Countries,” except arms and ammunitions. For now, the agreement excludes controversial imports such as bananas, rice and sugar, which are slated for phase-in by 2009.
“These agreements have laid the groundwork and contributed to rising interest in Africa from an FDI perspective,” says economist Stephen Thomsen, an associate fellow with the Royal Institute of International Affairs and author of a new Chatham House white paper on FDI in
Efforts to reduce corruption and improve business environment enhance appeal
Until recently, corruption has been a fact of life in many African nations. But for some, such as
“The revival of foreign investment in
For example, private interest in constructing an aluminum smelter inaugurated in
In other countries, like resource-rich
The examples of countries such as
And while real risks do exist for foreign investors, an additional problem is, to put it simply, the image thing.
“The perception of risk in
Risks—real and perceived—obstacles to investment
Most African countries are not even on the radar screen of European companies in expansion mode because of this perception of risk. According to a recent study by AT Kearney, a global consultancy, corporate concern about country financial risk and government interference or regulation may prevent them from investing in certain countries. The survey also finds that executives are concerned about terrorist activity, as well as war and political upheaval.
And investors willing to look beyond the headlines still have to contend with the “glass half empty” crowd. “Such risks—whether they are real or perceived—can increase project costs, since there may be a risk premium imposed on bank loans,” explains Nick Halkas, MIGA’s Extractive Industries sector head.
Additional non-commercial, or so-called political risks, include the inability to transfer currency outside the country if the nation imposes a moratorium. And certain projects, such as those in the infrastructure sector that require massive upfront costs, typically take longer to complete and are reliant on future cash flows to meet financial obligations and provide reasonable returns. Political resistance to private provision of service can be an issue as well. Plus, the emergence of public-private partnerships in infrastructure projects adds another layer of complexity, involving multiple layers of public authority, and numerous opportunities for contract disputes. As governments decentralize control of services, states and municipalities with little experience dealing with the private sector become the lead public partner in such deals.
Can non-commercial risks be mitigated?
No deal is risk-free. And certainly, a decision to invest in a nation that might be emerging from war or civil conflict—like
Investors might not be able to make their risks go away completely as they consider sub-Saharan investments. But they can take steps to balance the potential risks, thus making deals viable, explains MIGA’s Bridgman. Sound deal structure and good project fundamentals are the place to start. And companies should also investigate the added protection that political risk insurance—or PRI—provides.
“Political risk insurance makes it possible to get debt funding for projects in countries where banks otherwise might not be willing to lend. It can also make these funds cheaper, and protect the investment for a longer tenure,” he says. “PRI allows investors to act on a hunch.” And this ability to act on a hunch, being in the right place at the right time, is the hallmark of successful investments around the world.
For example, Afriproduce, a UK-based company took advantage of a strong business opportunity with the support of PRI in
And when South African oil, gas and chemical firm Sasol identified business potential in a natural gas deposit in resource-rich
The resulting debt financing structure is “an innovative combination of corporate and traditional project finance lending, interwoven with a supporting web of political risk insurance,” according to industry experts at Cadwalader Wickersham and Taft.
Sasol, which is developing the Temane and Pande gas fields, assumed the commercial risks for the project on its own balance sheet. The company constructed a central processing facility to clean up and compress the gas, and built an 865 km cross-border gas pipeline that is now sending gas from Temane in
One area of growing interest—endorsed by
The West African Gas Pipeline project, launched in December 2004, is a good illustration of an investment in markets reliant on regional economies. The project involves the construction of a 678 km pipeline to transport natural gas from
Capitalizing on African opportunities
It would be foolish to suggest that investors ignore the problems that continue to haunt parts of
But so do the opportunities. Economic viability tends to grow on itself. And as more companies make African investment decisions in countries that have committed to encouraging foreign investment through legal and regulatory reforms and anti-corruption measures, the market itself will expand. In turn this creates additional opportunity, and more investors will decide to move forward with their plans. With the stage set through new trade agreements, European investors are well positioned to capitalize on the vast prospects in many African nations by incorporating careful deal structure with appropriate measures to mitigate risks.