Investment in Africa — Will the “Africa Rising” Story continue?

LAGOS, Nigeria, Capital Markets in Africa — Low commodity prices, the worst drought in Southern Africa since 1982, on-going social unrest, the terrorism threat in East and West Africa – the list of doom and gloom scenarios for many African countries in 2016 is a long one.

 But what about positive stories around major urban development projects; M&A deal-making in Africa reaching new heights*; improved anti-corruption legislation and enforcement; or Ethiopia’s emergence as a major FDI target country? What is negative perception only and how optimistic can investors really be?

Political Risks and how to manage
Grassroots mobilisation in October 2014 in Burkina Faso overthrew President Blaise Compaoré and thwarted a subsequent coup. In March 2015, people power in Nigeria authored a landmark opposition victory. It has also prompted protests from Kinshasa to Kampala against the strivings of long-serving presidents to maintain their grasp on power.
Popular pressure has laid low some establishment parties including the African National Congress (ANC) in South Africa and the People’s Democratic Party (PDP) in Nigeria. Each has fallen victim to power struggles or suffered factional breakaways as prominent party figures have sought to exploit social dissatisfaction to bring about radical change or further their own political ambitions.

False dawn
 A total of 22 African countries will see elections in 2016 – 17 presidential and 11 legislative polls. Still, we expect incumbent leaders and their parties to dominate electoral dynamics.
The outbreaks of popular energy will see their limits. Entrenched élites continue to hold sway in many frontier markets in Africa, even in Burkina Faso and Nigeria, where the excitement generated by Compaoré’s overthrow and Muhammadu Buhari’s election victory will fade in 2016. Moreover, few other countries in Africa nurture the pre-conditions for change driven by the masses, either through the ballot or mass mobilisation.

Across the rest of the continent, social and historic factors are less likely to facilitate political change driven by the will of the masses. Central African countries including Gabon, Chad, and Equatorial Guinea will hold presidential elections in 2016 in which long-standing incumbents will almost certainly secure victories. The recent election in Uganda followed this pattern with the re-election (albeit contested) of President Yoweri Museveni. Some of these elections will be more competitive than in previous years, but they will not overturn the status quo.

 Angola’s political system is under strain from worsening socio-economic conditions and rising tension over President Eduardo José dos Santos’s eventual succession. This will undoubtedly influence the tug-of-war within the ruling People’s Movement for the Liberation of Angola (MPLA) over the presidential succession. But there seems to be limited appetite and capability among the masses to challenge the MPLA’s supremacy, not least because of the repressive treatment of dissent and the absence of a credible political alternative.

Muted outlook
In southern Africa, the impact of people power will vary in scale and impact. The ANC’s political dominance will be severely tested in South Africa’s municipal elections, with a very real possibility that it loses its majority in a number of key urban centres. The party’s centre of influence has already been pulled towards its more populist extremes as it attempts to counter the rise in militant movements such as the Economic Freedom Fighters (EFF). A strong municipal election performance by such groups will have concerning implications for how the ANC responds to economic challenges, particularly regarding fiscal and labour policies.

 In neighbouring Zimbabwe, the perceived weakness of the ruling Zimbabwe African National Union – Patriotic Front (ZANU-PF) is likely to prompt increasingly vocal opposition to the government. Infighting as factions manoeuvre to succeed the 92-year-old President Robert Mugabe, as well as the resulting neglect of a stagnating economy, has emboldened protests and enabled the possible emergence of Zimbabwe People First, a new party led by former vice president Joice Mujuru. These political battles have worrying consequences for business.

Managing the uncertainty is possible
People power, even if contained, sometimes might pose a challenge to business in the form of volatility around key dates such as elections and constitutional reviews. It can also threaten to alter élite power structures and influence policy. For companies operating in politicised sectors, an understanding of the stakeholder environment will be increasingly important to avoid potential interference or contractual instability – particularly when assessing the longer-term outlook. Rising accountability pressures will have a positive impact on long-term governance standards, but also create a more volatile political environment. Businesses will need to navigate this volatility with care to avoid being on the wrong side of a shifting political balance. One option is for companies to develop scenarios for those key markets within their global network that pose a high or extreme risk to their operations from a political perspective. This exercise tends to be most effective when using three scenarios – examples would be a “most likely” scenario, a “credible alternative” and an “outlier” scenario (very low likelihood but high impact). Using these scenarios as a platform, businesses can then identify political developments or “triggers” which increase or decrease the likelihood of a particular scenario taking place, and build in risk mitigation plans based on this model.

 Corruption Risk
A change in government administration is one of the most potent sources of volatility in African markets. It usually represents a critical test of business resilience to sudden shifts in government policy. This is amplified at a time when anti-bribery and -corruption (ABC) enforcement continues to spread around the world and many African governments find themselves under pressure to join this trend.

 No longer business as usual
In theory, a renewed political will to tackle corruption can reduce companies’ exposure to corruption. In practice, however, it also heightens the risk of becoming ensnared in anti-corruption investigations of agreements signed by new and former government officials. Businesses that routinely flout local ABC laws will face higher risks of fines, reputational damage and potential jail terms for staff. Most African countries will remain high-risk jurisdictions through 2016, as vested interests often prevail, impunity persists, and governments fail to make the necessary investment.

 Therefore, companies need to take critical steps to review their business operations. Companies should revisit their business strategy, goals and objectives to ensure they would be compatible with a more “compliant” environment and, therefore, have a sustainable business in the new evolving context. This exercise may well raise various questions about the business. For instance, are staff incentives that promote business development sufficiently balanced with incentives that promote compliant behaviour? Are ABC policies on paper actually practised in the field? Is there sufficient leader involvement and anti-corruption accountability?

 A company’s reputation is a strategic issue that needs to be managed by its leadership. The tone from the top will naturally affect behaviour in the rest of the organisation. Such a review can be enhanced with an anti-corruption assessment of the business environment. It is important that companies understand the real risks they are likely to face and place these within the specific context of their operations. This should form the basis for developing or enhancing ABC policies and procedures.

 Above all, there should be an emphasis on obtaining quality intelligence about activities within and outside the business. It is not uncommon for organisations with sound ABC programmes to find themselves caught out by the unethical actions of negligent staff or partners. This emphasises the need for effective communication lines within the business, as well as quality integrity due diligence programmes covering third parties.

 The emergence of genuine local efforts to combat corruption is ultimately a positive story, especially when combined with the existing international enforcement actions of countries like the US and the UK. Removing the “corruption barrier” to business could go a long way towards further unlocking the continent’s vast economic potential. Africa’s leaders still have a lot to prove in this area but it is clear that their followers are running out of patience with “business as usual” practices. Companies should, therefore, take note of this impending change of direction and ensure they are properly aligned to capture the opportunities while managing the associated integrity risks.

Terrorism and militancy
Terrorism and militancy remain primarily a threat in West and East Africa and tend to be overwhelmingly Islamist. In West Africa, al-Qaida’s shift towards high-impact attacks targeting foreign interests increases the threat facing coastal capitals and economic hubs located outside the Sahel region. Global competition among Islamist militant groups and the continuation of France’s Operation Barkhane in the Sahel will encourage al-Qaida-linked groups to attempt attacks further from their northern Malian stronghold to demonstrate resilience and expanding reach.

 Authorities across the region have realised the seriousness of the threat and are now implementing a series of security measures designed to protect the most exposed public places. However, questions remain about how the top-level commitment demonstrated by the government and security force hierarchy will translate into rigorous and effective protection at the operational level.

The Nigerian militant Islamist group, Boko Haram, is increasingly likely to splinter in the face of military pressure. The group is likely to evolve into a regional threat, taking advantage of porous border areas and weak state authority around the Lake Chad basin. Although no longer in command of territory to the same extent as in early 2015, Boko Haram will continue to fuel insecurity in the region by combining terrorist and banditry tactics primarily targeting local civilians. It will present more limited threats to foreign businesses, which have few operations in these border areas.

 The apparent terrorist attack on a passenger aircraft in Somalia in February could reflect militant fragmentation in Somalia. No group has yet claimed to have staged the attack. Al-Qaida affiliate al-Shabab has repeatedly attacked the heavily protected airport in Mogadishu, which hosts and is secured by African Union (AMISOM) forces, most recently in December 2015. Alternately, splinter factions aligned with rival group Islamic State (IS) and under attack from al-Shabab would have high intent to carry out a high-profile attack, in order to demonstrate resilience and gain supporters. 

The threat to aviation assets across sub-Saharan Africa is prominent – the proliferation of anti-aircraft weapons from the Libyan conflict, many of which are believed to be in the hands of Islamist militants, raises the risk to civil aviation in Libya and the Sahel region.

 For businesses operating in regions with a significant terrorist or militant threat, having the appropriate crisis and business continuity management structures in place can do much to mitigate these threats. It is not possible to stop a terrorist incident from happening, but it is possible to build in sufficient organisational resilience to protect your employees and operations from the worst outcomes. Through diligent monitoring of the security environment, horizon scanning and use of incident mapping intelligence to plan movements and locate facilities, businesses can maximise awareness and ensure that crisis management and business continuity plans have the best conditions for successful implementation. A robust crisis management system has a business continuity focus, envisages possible scenarios and targets scenario planning to the ultimate goal of ensuring the survival of the business, its people and operations. This applies at all stages of a crisis, from the immediate security response to matters of operational continuity, insurance and external communications. If teams on the ground and management are aligned in their understanding of the threat and have a rehearsed, coordinated response strategy, businesses can be resilient enough to profit from the risk-reward relationship of complex operating environments.

[*]: Deal Drivers Africa 2016, published by Mergermarket in collaboration with Control Risks, February 2016.

Featured in the INTO AFRICA April 2016 edition by Claudine Fry and Gbenga Abosede, Control Risks Group