- POLITICAL INSTABILITY
- CONTRACT FRUSTRATION
- BRIBERY & CORRUPTION
- REGULATORY BURDEN
- INDUSTRIAL ACTION
- SOVEREIGN DEFAULT
- ECONOMIC RISK
Government or political instability drives all other risk perils. It determines whether a government is likely to remain in power, whether a change in policy direction is expected, or whether state institutions are about to collapse. In countries where a government frequently changes hands through democratic elections or a military coup, political risk is more likely to fluctuate.
Paradoxically, some of Africa’s most politically stable states right now are secured through strong-man rule or the dominance of one political party. Yet such stability is often unlikely to be sustainable over time. Therefore, investors that have trusted a country’s initial semblance of stability are often at risk of other serious perils further down the line.
The risk that the state will confiscate, expropriate, nationalize, or deprive the assets of private businesses, whether domestic or foreign, is rare in Africa, unlike other parts of the world. There are some prominent examples of state expropriation without compensation, such as the 2009 revocation of a Canadian firm’s mining license in DRC and the subsequent confiscation of its assets.
Yet in reality, such horror stories are rare in Africa and most investments are secured through international arbitration and guarantees. In Zimbabwe, the government has imposed an indigenization policy that it has struggled to enforce as the state lacks the funds required to compensate mining companies. Very often expropriation threats are mere political rhetoric to pressure foreign investors into making other concessions.
Contract risks are very prominent in Africa and take on several forms, including the risk of a contract being altered or canceled outright by the state. Frustration of contracts also includes potential non-payment or any other form of delay without due process. Furthermore, there is a risk that weak, corrupt, or biased state institutions, primarily the judiciary, will not uphold or enforce a contract agreed with private parties.
It is still easier for African governments to tax companies extracting minerals out of the ground, rather than taxing its own citizens, for now at least. Therefore, large extractive sector investments often face risk of sudden and arbitrary increases in taxes or royalty rates. Particularly in Africa, the tax burden can be contradictory, as both national and local authorities may impose similar dues, leading to risk of double taxation.
There is also a risk that taxes are levied in an opaque manner, where taxes seem manipulated to suit political ends.
Bribery & Corruption
Corruption trends in Africa are fast changing following the implementation of foreign anti-corruption legislation with far international reach, such as the FCPA and UK Bribery Act. Payment of simple bribes by foreign companies has become too complicated and new methods of corruption are being developed allowing the perpetuation of age-old African patronage structures.
In particular, local content policies and requirements for local participation are often opportunities for local political elites to assert control over business revenues, especially in extractive industries but also in consumer demand sectors such as telecoms and banking.
Rising electricity tariffs or power black-outs, strict new local content requirements, bureaucratic inefficiency, cumbersome compliance procedures, and opaque regulatory environments all add to the cost of doing business in Africa. Penalties for non-compliance are often politicized or disproportionate. Licensing application processes are lengthy and unnecessarily complicated, adding delays to project timelines.
Moreover, overlapping local, provincial, and national jurisdictions add uncertainty to regulatory authority and oversight.
Labour action is becoming an increasingly prominent threat to businesses in Africa. Traditional alliances between labour unions and former liberation movements turned into long-time governing parties are gradually eroding. More radical politicians are seeking support from frustrated labour unions. And violence is becoming increasingly associated with industrial action. Whether labour action takes the form of legally protected strikes, go-slows, illegal ‘wildcat’ action, or kidnapping of managers, companies operating in Africa will increasingly face a tougher front from organized labour.
The primary security threat to African business is derived from civil unrest, rather than wars or terrorism. Africa is more peaceful today than at any point in recent history, although some localised war zones still affect commercial operations such as oil drilling, cargo, and other foreign investments. Terrorism and insurgency are growing threats in various parts of the continent and the potential target set is growing. Yet, civil unrest through strikes, riots, and civil commotion still poses the largest threat of frequent property damage and drives substantial death and injury risks.
As African countries pile on debt in recent years through international bond issuance, the risk of default by the sovereign is becoming a growing concern and raises questions over the sustainability of the continent’s record growth. The threat of default endangers a country’s long term financial obligations and delays the payment of contracts. As African countries move away from foreign aid and budgetary support towards debt issuance and foreign direct investment, government’s difficulties to meet external obligations are likely to grow.
Africa’s record economic growth is outpacing many other emerging markets across the world. This leaves African economies exposed to sudden volatility and cycles in economic change. Many African countries are too vulnerable to commodity price cycles, which may suddenly trigger an acute recession after years of growth or destabilize inflation rates. The political reactions to such economic volatility will affect taxation policy, currency controls, and capital transfers by businesses.