Africa remains an attractive investment destination for investors looking to unlock maximum returns on their outlay. However, doing business in Africa requires a thorough understanding of the cultural, economic and political nuances that exist across the continent. Failure to take into account each country's individual circumstances is likely to lead to challenges for any potential investor.
The Africa investment opportunity has seen a rise in South African corporate law firms, such as Cliffe Dekker Hofmeyr, partnering with their clients in African countries or leveraging collaborative network partnerships with incountry law firms.
An important yardstick to determine the health of foreign investment interest in Africa is the amount of cross-border M&A activity. According to a McKinsey Global Institute report, between 2010 and 2015 over 5 000 individual foreign direct investment (FDI) deals took place in Africa. The continent is on an upward trajectory in terms of the volume of M&A deals, with cross-border transactions accounting for 36% of the total volume in 2016.
To capitalise on investment opportunities in the rest of Africa, we have seen South African Development Finance Institutions (DFIs) amend their mandates to be able to invest in the rest of Africa. In the past few years institutions such as the Development Bank of South Africa (The DBSA Act (13 of 1997), has been amended by the insertion of s2A. This amendment will enable the DBSA to participate in large scale infrastructure and other strategic projects on the African continent outside the SADC region) and the Public Investment Corporation (PIC) and the Industrial Development Corporation (IDC) have not limited their mandates for investment opportunities to the South African market only. These changes are indicative of the confidence in the opportunities for investors to do business in Africa, which in turn has the potential to enhance trade and economic growth on the continent.
Despite the investment opportunities, there are many challenges facing investors. While there has been progress in the political situation in various jurisdictions over the past couple of years, there remains a risk from a political stability point of view.
Apart from the political landscape, legal risk is also involved, which may impact on an investor's future ability to exit their investments or enforce their rights. The complexity of certain sectors creates an abundance of laws and regulatory roadblocks. These additional challenges for investors may require the assistance of a local partner which, in itself, entails further risk appraisal of that local partner. Sectors such as banking, telecommunications, insurance, oil and gas, mining and property may be over-regulated and have sector specific legislation in addition to applicable national legislation and, in some cases, regional regulations which are triggered when cross-border transactions are concluded.
For lenders in particular there are security challenges relating to local registrations that are not always accurate or reliable, guarantees may need to be carefully structured. The security element must be carefully structured so that should investors need to enforce their rights, they are able to get the desired results within a reasonable time period.
The supply of currency, or lack thereof, poses a further risk for investors. There are countries, such as Mozambique, that insist on US dollars as the main currency for transactions despite shortages of the greenback. This may result in a challenge for a borrower to be able to repay the loan amount in US dollars.
In light of these risks, whether political or legal, there has been an attempt to put mitigation strategies in place through the involvement of export credit agencies and DFIs in various transactions. Their participation has proved to be critical and, to a certain extent, has had an influence as they use their connections to take a transaction to a bankable stage.
The result of the DFIs involvement is the de-risking of projects which enables private sector investors and commercial banks to fund the equity gap. However, investors must be mindful that where there are co-investments between the DFIs and commercial banks on projects, commercial tensions exist due to different investment objectives. These commercial tensions need to be well managed for transactions to go through.
It is essential for potential investors to have an experienced legal team to identify issues at an early stage of the proposed transaction. Over and above the normal due diligence, investors need legal counsel who have expertise in relevant areas and, in some instances, a technical team that can provide support, particularly when it comes to infrastructure projects. It is essential to have someone on the ground who understands the legal and political landscape and what it takes to work in a particular country. This way, investors will be aware of any potential stumbling blocks that could derail an investment.
Investors need an effective strategy to address corruption and bribery issues which have always been a concern for foreign investors in Africa. Having identified an opportunity, lenders and potential investors want to seize the moment but they also need to put measures in place to mitigate potential risks. For example, some lenders prefer English law to be the over-arching law that governs any potential transaction because it comes with automatic anti-bribery and corruption legislation, such as the UK Bribery Act, 2010, which has extra-territorial reach. Under the Bribery Act, the briber must intend to bring about or to reward improper performance of a function or activity. This is determined by an objective standard, as set out in s5(1) of the Bribery Act.
Mphafudi is a Director, Finance and Banking practice at Cliffe Dekker Hofmeyr.