Q: Africa’s overall growth rate has declined from a 2014 high of 5.1% to the current estimate by the IMF of 1.4%. How do new business investors view this?
A: From an African perspective, the large but inexperienced funds are obviously somewhat nervous but there has been and continues to be a number of noteworthy and interesting deals in the past few months. This indicates that investors are still willing to invest in countries that reflect stability, and companies where there is potential for long-term growth. Opportunistic investors understand that with growth comes volatility, and that if they are cautious, act prudently, are patient and recalibrate their strategy if necessary, they will benefit.

Q: Regulatory frameworks are relaxing across the continent to encourage business investment. What nations are revising their policies to enable business?
A: Regulation has long been seen as the main stumbling block to investment in Africa. Countries such as Rwanda, Kenya, Madagascar and Ghana have all implemented reforms to regulations that have resulted in an upgrade of their ranking in the World Bank’s Doing Business report. African governments have to see the need to adopt policies that energise markets. One example is Angola, where we are currently assisting on such a project.

However, reforms to regulatory frameworks – although well-intentioned – are not always successful. Mauritius is a case in point. The Mauritian government has liberalised and reformed its economy to facilitate incoming business but, at least, in relation to the power sector, it has got this totally wrong by not understanding what financiers of power projects expect and, therefore, Mauritian power purchase agreements are not bankable.

Q: There is huge potential in numerous industries – oil and gas, manufacturing alternate energy solutions, and so on. In general, how easy or difficult is it currently to establish a business on the continent?
A: Again, it would depend on the country. Some ambitious countries go out of their way to make it really easy, but there are so many factors to consider – the political system; access to currency and the ability to export hard currency; the manner in which foreign investors are treated from a tax perspective; infrastructure or lack thereof; and the regulatory environment are just a few.

Moreover, having real industry knowledge is essential, such as is seen in the building of the petro-refineries industry. A savvy investor knows that these are pretty much not feasible or bankable given the amount of fuel floating around on tankers waiting for buyers. Therefore what a government seeks may not always be doable. It is also a good strategy to explore whether the country is part of the African Growth and Opportunity Act (AGOA), a US trade act that significantly enhances market access to the US for qualifying sub-Saharan African countries. Qualification for AGOA preferences is based on a set of conditions requiring each country to be working towards improvement in its rule of law and human rights, and to respect core labour standards.

Therefore, at least from a manu-facturing perspective, certain countries are more attractive if they have access to AGOA. Ethiopia, for example, is underpinning its new economy based on power and manufacturing, so it has made it relatively easy for investors to participate in industrial park developments and is streamlining regulations accordingly. Lesotho provides another such example, where a number of Chinese clothing manufacturers have set up operations so that they can access AGOA.

Q: How do African countries rate in terms of transparency when in comes to business governance?
A: Some countries, such as Botswana, Morocco, Rwanda and Ghana, are very transparent. Many other countries, including the likes of Burundi, Central African Republic and so on, are the total opposite. Something to bear in mind is that the rise of the young, increasingly prosperous and technologically savvy African consumer means that business can no longer ignore the importance of transparency. 

Q: What must new investors be wary of?
A: An investor needs to understand the market, including access to capital and the ability to export it, and the quality of the local country’s governance, whether they follow the rule of law and how much interference there is in the judicial system. Also consider the system of the treaties in place, par–tic-u-larly those related to double taxation and the resulting effect on judicial and arbitral awards. Most important is the way in which corruption is handled.

The savvy investor must stay away from potential partners or ‘rent seekers’ and, therefore, needs to undertake a great amount of investigation into who those partners and advisers should be. The new investor also needs to understand that in many of the countries the pool of resources that they would normally expect at home may not exist and, therefore, without necessarily exporting their own people into new territory, which is generally hated and in some cases prohibited, they will in the fullness of time need to develop local talent.

There are very few jurisdictions in Africa where the quality of legal, tax and corporate finance advice is what they receive at their home base, so rather than discovering this late and after much cost, it is worthwhile going in with a lead adviser who has experience in the territories and who can manage local advisers.

Q: Diversification from traditional economic activities centred on resources, and the growing influence of technology are having an effect on industries. Are these new economic drivers changing African business law?
A: Technology (in particular, fintech) and infrastructure will continue to attract investors, and law follows technology, as it does everywhere. Technology extends across national boundaries and financial inclusion is understood as a prime area for potential, as most Africans do not use formal banking as a store of wealth. This is rapidly changing, however, and the push for investment in start-ups in this area is recognition of the vast potential in this sector. We are seeing some of the most exciting fintech projects coming out of South Africa, Nigeria, Uganda, Kenya and Tanzania. It is also interesting to see a company such as Andela, which is co-owned by Mark Zuckerberg, running a massive technology development hub out of, inter alia, Lagos. It is apparently more difficult to get an internship at Andela than a position at MIT.

Q: How should one encourage investment thinking with businesses that view Africa as too big a continent on which to expand activities?
A: The way I always deal with this is to look at whether the country in question is part of a trade bloc such as ECOWAS, COMESA, SADC and so on. In this regard, the concerns are doubled or tripled for each new territory add-on but if a country is part of such a bloc, then often one can dispense with many of the concerns about free movement of goods and services, currency and access to the law. Notwithstanding this, the concern about having appropriate partners and advisers in the new countries still stands, as an in-country corporate adviser may not be well accepted in the neighbouring country.

Q: How valuable are partnerships in conducting business in Africa instead of independent business ventures, and what should be kept in mind when seeking such partners?
A: In my opinion, the single-most important issue in doing business outside of one’s country is to find a credible, honest, well-connected and hard-working partner or adviser who understands the political and cultural climate, can open doors, keep them open and provide in-country advice.

I have been involved in projects that, although they show huge potential, end in tears given that our incoming foreign client thinks it knows better and wants to go it alone or, alternatively, with a friend of a friend, or a distant relative. The fun part for us is going in on round two and salvaging this to the extent that it can be salvaged.

Q: It’s said that while doing business in Africa is a risk, it is a bigger risk not to. Would you agree?
A: If a client is happy in its home territory or in an old economy then all’s good. However, if a client is looking to creating future growth, then it is a huge risk not to be in Africa. If one looks at food security, the only place left to explore is Africa. If looking at project finance for infrastructure projects in less risky jurisdictions, then Africa is substantially less risky than doing business in the US.

Statistics reflect that approximately 1% of project finance transactions will fail in Africa compared to 12% in the US.

Q: What should the legal responsibilities of investors include?
A: Investment in African countries that are adapting to more modern economic and legal frameworks is definitely desirable.

Investors also carry a responsibility to the country they invest in. It is imperative that they promote responsible business practices including compliance with domestic legislation and fair business practice, respect for human rights, application of fair labour practice, environmental responsibility, compliance with tax laws and regulations, and promotion of good corporate governance. If a business does not follow these simple rules, the company and its employees are at huge risk.

For example, there are a number of employees of a large multinational company currently ‘residing’ in jail in Addis Ababa, Ethiopia. Their ‘crime’ was in their employer not following the rules in relation to work permits and promises made to government where incentives were granted. 

By Kerry Dimmer
Image: Athiyah Cader