In late April, I had the opportunity to travel to Nigeria for a week to meet with PE and VC funds as well as local banks and indigenous companies. Needless to say, I was somewhat apprehensive as to what I would find as we were road showing a local downstream Oil and Gas project. I honestly have to say that I was very pleasantly surprised to find not only a high level of professionals but also a secure and profitable environment as well as countless investment opportunities.
Foreign companies intending to commit long-term resources and investment to Africa must learn to distinguish real from perceived risks, says Paul Okaru, an Executive with Bauhaus Capital Partners, based in the UK with a focus on development of Western Africa. To follow up with Paul directly, you can e-mail him at email@example.com.
African Investments Challenging Perceptions
Africa is a large and diverse continent of 53 countries. Yet when most foreign companies or executives first decide to consider doing business in Africa, they usually tend to view it as a single country – this is far from the reality.
Even within most African countries themselves there are large differences in language and culture.
The situation in many African countries has changed as democracy is becoming more
commonplace. Some long-running civil wars, such as those in Angola and the Democratic Republic of Congo, have come to an end and given way to democratically elected governments. Similarly, countries with a history of military-type dictatorships, such as Nigeria, are now led by civilian presidents, following multi-party elections. The reality is that most multinationals have tended to rely on very generic sources of information for assessing a country’s situation, rather than conducting a proper, detailed risk assessment, which may reveal that even though a particular kind of risk exists it does not actually affect the industry in which the multinational intends to operate in the country in question.
Traditionally, multinational corporations that have considered doing business in Africa have been very concerned about political and other related risks. This concern is, in part, due to reporting of politically related conflicts by the Western media. For example, coverage of the events that followed recent presidential elections in Kenya could give viewers the impression that this was an ‘African’ event, when in fact it was happening only in Kenya, one of many African countries.
The lesson for any foreign business intending to commit long-term resources and investment to Africa is to distinguish real risk from perceived risk. Even if risk does exist in a particular African country, ask whether that particular risk affects the company’s particular industry. It may be that these activities are not likely to be affected by that risk. In any event, there are facilities, which include political risk insurance. It would be advisable to speak to experts about ways to mitigate a particular risk that has been identified following a detailed analysis of proposed activities in a given country. Such analysis should take place in the African country chosen as an investment destination, because one will get a much better picture of the situation there.
Opportunities in sub-Saharan Africa are huge for European, Asian, American and other foreign
multinationals. Fruits such as pineapples go to waste in large quantities on a fairly regular basis in some African countries when they could be processed into fruit juice. This is an example of agro-industry, and Africa needs companies with technical know-how and capital to develop such industries to a standard acceptable not just by developed world standards but also to take advantage of local and regional markets within Africa.
Malawi, in southeastern Africa, has been importing fertilizers for many years at a high cost, in a county where foreign exchange is precious. But Malawi has phosphate deposits and of course phosphate is a raw material used to produce fertilizers. This is just another example of what can be done to turn a hopeless situation into an excellent business in this vast continent of unlimited opportunities. In this context, it is important to mention that any technology or machinery supplied to Africa as part of the process of industrialisation should be adaptable to the conditions of the country in question, and adequate provision made for maintenance of the equipment.
Before a foreign business decides to venture into Africa for the first time, it needs to be aware of the culture of the country it is interested in. Culture here refers to the business culture. And what is considered corruption in Europe may not be considered so in Africa. ‘Dash’, a practice of giving someone money without expecting anything in return, in a Nigerian context, may be seen as corrupt in Europe, especially where the dash is given to a key official. But similarly in Europe, what is seen as mere corporate entertainment, such as taking a potential client to expensive restaurants to create a good impression, if critically analyzed may be seen as corruption.
Hence it is important to understand how the business culture of an African country may affect one’s chosen strategy. It is felt that forming joint ventures with local African companies in some African countries is a good idea, because local partners provide valuable local inputs, such as access to key contacts, business culture and the general business environment.
Although it sounds rather simplistic, any multinational or foreign business person seriously
considering venturing into Africa for the first time needs to ask themselves if they are sincerely prepared to work in an environment that is not the same as that which exists in the developed world of Europe, America or parts of Asia.
There are some African countries that offer political or economic stability with a relatively good infrastructure. Examples are Botswana, South Africa, Namibia and Mauritius. Others are making steady progress, such as Ghana and Mozambique. But in many other countries, one needs to be prepared for poorer infrastructure leading to electric power failures, as well as bad roads. This has implications for foreign investors in Africa as they need to consider that there may be an extra cost associated with doing business there, obviously depending on the country chosen.
The positive news is that infrastructure is improving in most countries. Recent success of the
wireless mobile networks has helped to ease communication problems, which previously existed
for business people in most African countries. The telecommunications companies that recognized these problems as opportunities were among the first to venture into the wireless
telecommunications industry in Africa and have consequently reaped huge rewards.
The key is for firms to see infrastructure limitations not so much as problems but as opportunities to be a first mover or early entrant into a particular industry. For example, there is a demand for power generation in many African countries due to inadequate electricity supply, and so infrastructure limitation equals opportunity for the early entrant or first mover in the energy industry of that particular African country. It is also a chance for a foreign investor to make a positive change in a given country and to reap the rewards that go with being an early entrant into a market or industry.
Don’t let TV reports of unrest in one African country put you off investing in another
country on the other side of the continent.
- Carry out a proper, detailed risk assessment.
- Distinguish ‘real’ risk from ‘perceived’ risk.
- If there is risk in a country of interest, carry out checks to establish whether this risk will
impact upon the specific industry in which the company is active.
- Speak to experts to mitigate a particular risk, preferably from the country in which
investment is being considered.
- Take into account infrastructure limitations within Africa.