Managing Political Risk When Investing in Africa

LAGOS (Capital Markets in Africa) – Africa is rarely shy of reminders of the critical role that political risk can play in impacting on investments. From the headline-grabbing Arab Spring uprisings that rocked North Africa in 2011 to the sweeping changes in government witnessed in Nigeria and Tanzania following elections in 2015, politics can play a big role in determining business fortunes. And against a global backdrop of rising political uncertainty and nationalism, and a regional context of increased social accountability pressure on governments in power, Africa will likely continue to see a trend of political volatility in all its various shades in the years ahead.

With this context in mind, it is critical that businesses adopt a rigorous approach to evaluating and managing political risk from initial investment through to exit. This presents a number of challenges, even to the most hardened African investors. The Arab Spring is a stark reminder of this. Few could have predicted such a dramatic and impactful ‘black swan’ event that was to shake the foundations of the region. Yet all experienced the impact. More generally, the qualitative analysis and understanding that often encompasses political risk evaluation do not always fit smoothly into investment models. But when investing in frontier markets, a failure to get to terms with how political conditions are likely to impact on an investment – or to adapt effectively to change when it comes about – can prove disastrous.

Market-entry: eyes wide open 
Such are the stakes and uncertainties that surround the initial investment process that political risk tends to receive greater attention at this stage. However, a basic understanding of the political status quo is not an adequate substitute for a rigorous political risk evaluation which considers three critical areas in particular:

• Political outlook: this should not only focus on political stability but also on broader trends in government management, policy and personnel likely to impact on the investment. Using a scenarios format for assessing political outlook is also generally a suitable approach to evaluate and stress-test different likely trajectories and their impact on the investment. This can help shape investment decisions, price bids and form mitigation strategies against key eventualities.

• Sector-specific risks: often some of the most challenging political risks stem from conditions within a sector regarding a legacy of regulatory challenges or commercial disputes, the interference of vested interests, or misalignment of political objectives behind the sector’s management. Taking a deeper dive to consider these conditions and how they might evolve can avert a number of challenges that could weigh down the investment or subsequent operations.

• Business specifics: whether it be a politically-connected local partner or a legacy of issues around a particular project, conducing robust due diligence should not be seen as a simple compliance box tick, but rather an opportunity to identify, isolate and manage potential reputational, political or commercial risks that stem from the specifics of the deal.

For the most extreme forms of political risk such as expropriation, nationalisation, terrorism, conflict or instability, political risk insurance mechanisms have been developed to help investors manage their exposure. However, most political risks tend to be more nuanced and ambiguous requiring internal mechanisms to treat. By being eyes-open to these risks at the outset, investors can properly evaluate, price and mitigate against critical challenges, providing a more stable base for growth.

Post-investment: adapting to change
After isolating and assessing risks during the investment stage, political risk management remains an iterative process in a political situation often characterised by flux and further uncertainty. Because of some risks – like the Arab Spring – are difficult to predict and even prepare for, the emphasis should be placed on policies, plans, and responsibilities. For example, ensuring a crisis management plan exists not only on paper but has also been stress-tested by relevant staff can help ensure smoother management when that crisis does eventually occur. Equally, ensuring that proper accountability for monitoring and managing political risk exists within the organisation.

Even with accountability vested in a particular individual or department, there is also a need for effective internal coordination in managing political risk exposure. For example, we were recently brought in to advise the external affairs department of a mining firm in West Africa that was facing a number of challenges in managing critical stakeholder relations. A key failing we encountered was a lack of coordination between relevant departments so that mixed messaging was being delivered to stakeholders by operations staff, external affairs staff, and others, necessitating stronger internal communications and processes to avert this state of affairs.

When political change does occur – be it in a volatile fashion such as the overthrow of Burkina Faso’s president in 2014 or in a smooth electoral context such as John Magufuli’s election in Tanzania in 2015 – businesses often tend to get caught out having grown comfortable with the status quo. Political risk exposure can change dramatically in response to changes in government or the operating context, and businesses need to respond with alacrity, planning engagement and risk mitigation strategies that are both premised on a strong understanding of what’s going on in the market and sector, and geared towards adapting to this new reality to secure tangible and realistic outcomes. Tracking progress and perception can form an important part of measuring success and managing risk in this respect.

Exiting a market: don’t shut the door
In instances where businesses are looking to exit an investment – or even a market – managing risk and reputation goes far beyond the immediate conditions around the business exit. The successful management of this exit process can influence a company’s ability to win further work not just within the relevant market but also in others, given the potential knock-on effect on perceptions of a business if it has been blighted by soured government relations or a controversial exit.

Managing political risk during an exit process requires a strong understanding of all the critical stakeholders around the process and their interest and influence over it. Developing an engagement and communications plan that then addresses the needs and concerns of these actors and seeks a path of ‘shared advantage’ from the exit process will be critical to managing an orderly exit and ensuring in particular that relations with government and the regulators do not needlessly sour.

Africa in 2017: key risks to watch
The coming year sees a number of countries face uncertainties around successions or elections. In Kenya, all the floor-crossing and mud-slinging that has preceded the elections build-up points to a heated contest. While we do anticipate heightened uncertainty and some volatility around the polls, as things stand the incumbent administration likely has its nose in front to secure re-election. Unfortunately, prospects for elections occurring in the DRC before the year’s end look increasingly poor and the prolonged uncertainty around this important vote will heighten the risk of instability, especially given precedent.

Elsewhere we anticipate smoother transitions – albeit still carrying notable political risks for investors. In Angola, long-standing President José Eduardo Dos Santos will stand down to make way for his appointed successor, Joao Lourenco. But the end of the Dos Santos reign could also see subtle shifts in the influence and prominence of key family members and regime stalwarts. Equally, Zimbabwean President Robert Mugabe’s succession appears increasingly close as the President’s health deteriorates. Although the opposition will use his eventual departure from the political scene to call for radical political change, while opportunists surrounding Mugabe’s wife will call for a dynastical succession, we believe a more likely scenario will see Vice President Emmerson Mnangagwa take control of the reins in a ZANU-PF managed succession, after an initial period of contestation and volatility.

In another market that will attract much attention in the year ahead as it seeks to turn the corner on a prolonged recession, Nigeria’s President Muhammadu Buhari has spent the last two months in the UK on extended medical leave. This has raised serious questions about his future tenure with Vice President Yemi Osinbajo (who governed during his absence). However, if any lessons can be learned from Nigeria’s constitutional crisis in 2010 when president Umaru Musa Yar’Adua died in office, it is that the country’s democracy is maturing and its institutions are far more robust than they were in the days of repeated military intervention through the 1970s-1990s. As such, a relatively orderly – if tense – constitutional succession seems likely, albeit leading to complications around party unity in the lead-up to the 2019 elections.

In all these scenarios, businesses will be needing to monitor developments carefully and proactively consider how different outcomes might impact on critical aspects of their business. Such steps form the foundations for managing political risk amidst the flux and uncertainty that tends to characterise the African investment context. A failure to do so can leave corporates chasing their tails and pointing fingers instead of adapting and responding to risk to limit the impact on their business.

This article is featured in the April 2017 edition of INTO AFRICA Magazine, Powering Africa’s Energy Projects.

Contributor’s Profile 
Roddy Barclay heads up the Intelligence and Analysis team at africapractice, a strategy and communications consultancy that specialises in managing external relations. In this role, he oversees a team of political risk analysts and business intelligence consultants spread across Africa, helping clients to mitigate stakeholder and policy risks and manage their reputation. Roddy has worked in the political risk advisory industry for over eight years and formerly specialised on West Africa when he worked as a Senior Consultant at the multinational risk advisory firm, Control Risks. He has travelled extensively across the continent, building strong networks and knowledge in over 20 African countries.