Doing business in_post_conflict_and_fragile_states___challenges_and_risks____dr_malik_khalid_mehmood__ph_d

Development Planning Division Working Paper Series No. 23 By Dr Malik Khalid Mehmood, PhD

Doing business in post-conflict and Fragile states: Challenges and risks

Dr Malik Khalid Mehmood, PhD 2011

Development Planning Division Working Paper Series No. 23

Published by

Development Planning Division

Development Bank of Southern Africa PO Box 1234 Halfway House 1685 South Africa

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Doing business in post-conflict and fragile states: Challenges and risks

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Contents

Abbreviations 5

Executive summary 6

Entry strategies 7

Main sectors 8

Learning from experience 8

Main challenges of doing business in Africa 9

High-risk, high-reward opportunities in conflict and post-conflict countries 10

Strategies for risk mitigation: better risk analysis and partnerships 11

Role of the government 11

The way forward 12

Introduction 13

Methodology 15

Business in conflict and post-conflict states 15

Target markets for South African business 18

Main sectors for investment 20

Entry strategies 23

Challenges in the business environment 24

Specific challenges in conflict and post-conflict states 28

Infrastructure 29

High costs of doing business 29

Corruption 30

Skewed macroeconomic fundamentals 30

Regulation 31

Security of people and investment 31

Reputational risk 32

Doing business in post-conflict and fragile states: Challenges and risks Page 3


Risk in Africa 33

Market failures 36

Managing risk: The South African experience 37

Identifying risk 37

Managing political risk 38

Local partnerships 39

Sound entry strategy 40

Managing sector risk 41

Shareholding 42

Corporate governance 42

Learning the local systems 43

Procurement 43

Access to information 43

Service self-sufficiency 44

Corruption 44

Risk insurance 45

Case study 1: Democratic Republic of Congo 47

Case study 2: Mozambique 55

State-owned enterprises in Africa 63

Funding mechanisms 66

Conclusion 68

References 71

Annexure: South Africa in Africa: A Background 75


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Abbreviations

BRIC

CD

CGIC

COMES

A

CWN

DBSA

DRC

EAC

ECIC

EITI

ENE

EWN

FNI

GDP

HIPC

HIV/Aids

ICT

IDC

IT

MIGA

NEPAD

Okimo

PetroSA

SAA

Sacoil

SACU

SADC

SAPP

SNEL

SOE

Westcor

Brazil, Russia, India and China

compact disc

Credit Guarantee Insurance Corporation of Africa Ltd

Common Market for Eastern and Southern Africa

Congolese Wireless Network

Development Bank of Southern Africa

Democratic Republic of Congo

East African Community

Export Credit Insurance Corporation of South Africa Ltd

Extractive Industries Transparency Initiative

Empresa Nacional de Electricidade

Econet Wireless Nigeria

Front des Nationalistes et Intégrationnistes

gross domestic product

Heavily Indebted Poor Country

human immunodeficiency virus/acquired immune deficiency syndrome

information and communications technology

Industrial Development Corporation

information technology

Multilateral Investment Guarantee Agency New

Partnership for Africa's Development

Offices des Mines d'Or de Kilo-Moto

Petroleum, Oil and Gas Corporation of South Africa (Pty) Limited

South African Airways

South Africa Congo Oil Company

Southern African Customs Union

Southern African Development Community

Southern African Power Pool Société

nationale d'électricité

state-owned enterprise

Western Power Corridor Company



Executive summary

Africa's development has been constrained by many factors but none more than conflict. More than

2 8 A f r i c a n c o u n t r i e s h a v e b e e n i n v o l v e d i n s o m e k i n d o f w a r s i n c e 1 9 8 0 . M o st s t a t e s i n A f r i c a a r e

still in a conflict, sporadic conflict or post-conflict situation, depending on the definition used.

The legacy of conflict in Africa includes serious poverty, the breakdown of systems and

institutions, political control of the economy, endemic corruption and an unpredictable operating

environment. These challenges notwithstanding, South African companies have ventured into these

countries in ever-greater numbers. After 1994, companies moved primarily into member states of

the Southern African Development Community (SADC) that were not in conflict, because of their

geographical proximity, political stability, historical trading and political ties, and existing

opportunities. Member states of the Southern African Customs Union (SACU) were the easiest to

penetrate. In sectors such as banking and retail, this resulted in stiff competition in these small

m a r k e t s . A n o t h e r t o p t r a d e a n d i n ve s t m e n t d e s t i n a t i o n f o r S o u t h A f r i c a n s i s M o z a m b i q u e , w h e r e

proximity and opportunity, and the massive Mozal aluminium smelter project, have drawn

companies despite the language and cultural differences. Companies were slower to move into the

o t h e r b i g l u s o p h o n e m a r ke t , A n go l a , b e c a u s e o f t h e d i f f i c u l t y a n d c o s t o f e n t r y , gi ve n t h e u n i q u e

s t r u c t u r e o f t h e p o s t - w a r e c o n o m y , l o g i s t i c a l c o n c e r n s , a n d d i f f e r e n c e s i n l a n gu a ge a n d c u l t u r e .

The cost and difficulty of testing the market in Angola was simply far greater than in Mozambique.

South African companies have also expanded their activities beyond the SADC region, based on

increasing economic liberalisation, political stability and better governance. Although mining lured

early investors into Ghana, for example, retailers, banks and others soon followed after the country

entered a period of successful reform. More recently, Nigeria, Africa's biggest market, has been the

b i g d r a w c a r d . O n c e a vo i d e d b y S o u t h A f r i c a n s b e c a u s e o f i t s m i l i t a r y r u l e a n d r e p u t a t i o n a s a

tough place for business, the 1999 democratisation allowed the economy to open up and re-engage

w i t h gl ob a l bu s i ne s s .

In East Africa, a welcoming business environment drew investors to Uganda, supported by the

signing of bilateral agreements. In 2002, South Africa was one of the top ten investors in the country.

Tanzania, now part of the SADC, was also an investment target, as was Kenya. There, however,

local business was hostile to South African advancement because of threats to its own well-

developed private sector and stiff competition in sectors such as brewing, retail and tourism.

By 2009, Angola, Nigeria, Ghana, Zambia and the Democratic Republic of Congo (DRC) were top

investment destinations, with Zimbabwe back on the investment radar following the relative

normalisation of the economy. The government is looking for new business


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destinations for South African companies, sometimes in unlikely places. For example, it is courting

the pariah government of Equatorial Guinea to open up opportunities for business, particularly for

the Petroleum, Oil and Gas Corporation of South Africa (PetroSA) in the large oil sector.

In the early part of the century, trade with Morocco was brisk, despite cool diplomatic relations

owing to the dispute in the Western Sahara. It was boosted by the sophisticated economy, good

i n ve s t m e n t i n c e n t i v e s a n d t h e g o ve r n m e n t ' s a c t i v e e n g a g e m e n t w i t h t h e p r i va t e s e c t o r . E n ga ge m e n t

with Algeria has been slow, despite strong political ties. Egypt courted South African companies

with some success, although it has many cultural and legislative barriers to entry.

In Francophone Africa, business was engaged in the Côte d'Ivoire until conflict eroded interest in the

market, while Madagascar, Gabon and Cameroon are among current investment destinations across

a variety of sectors.

South African companies appear not to make decisions based on notions of conflict and post-

c o n f l i c t s t a t e s b u t r a t h e r o n a n a s s e s s me n t o f o p p o r t u n i t y v e r s u s r i s k a n d t h e

requirements for mitigating such risk.

Entry strategies

Entry strategies, which are critical to success in a new market, are starting to conform to the realities

of African markets. Many companies are now choosing to invest via equity partnerships, where

before they might have preferred a greenfield investment because of concerns about compromising

the brand or corporate ethics, or because they did not see value of a local partner. As companies

understand African markets better, they develop strategies that are more in line with local business

conditions. Equity investment in local firms is on the rise as companies see the benefit of local

knowledge, reaching critical mass sooner through existing networks, addressing empowerment issues

and being close to the market, particularly in challenging countries. However, they generally prefer

to maintain a majority stake in such enterprises, even if they do not keep their South African brand

name.

But partnerships can be risky when business practice and ethics do not meld. There may be funding

disputes, problems with local management skills or (unfounded) claims of high-level access to

government officials. These problems can - and have - set companies back. But such problems have

usually not been enough to deter them from continuing in the market concerned. South Africans

ge n e r a l l y d o n ot h a ve di f f i c ul t y i n f i n di n g n e w b us i ne s s pa r t ne r s l oc a l l y i f ol d p a r t ne r s hi ps f a i l .

Where there is a lack of potential targets for acquisition, companies prefer greenfield operations.

Some enter a market via a large contract, others through privatisation. Another



factor in investment is the drag effect of multinational companies, which import goods, services

and skills because of the weakness of the private sector in many African countries. This type of

entry is typically on a contract basis but larger suppliers often establish themselves

in important markets to broaden their customer base.

South African expertise, finance and experience are highly sought after and many African

g o v e r n m e n t s a n d c o m p a n i e s v i s i t t h e c o u n t r y t o f i n d e q u i t y p a r t n e r s o r o t h e r t y p e s o f p a r t n er s h i p s

and investment. They often offer good incentives to draw companies into new markets.

Main sectors

T h e m a i n s e c t o r s f o r i n ve s t m e n t a r e f i n a n c i a l s e r v i c e s ; m i n i n g a n d r e l a t e d s e r v i c e s ;

construction and property development; retail; supplier services to the oil, gas and mobile telephony

industries; ICT; security and guarding; logistics; and tourism and hospitality. Agriculture is a

growing area of investment although much of this is related to skills transfer.

A large part of South African business with the rest of Africa is trade, the export of goods

and services using local agencies, franchising, and other non-investment business.

Learning from experience

South Africans started to invest in other African countries just when those economies

entered an era of reform, economic liberalisation and privatisation. They were generally on an

upward trajectory in terms of their operating environments, investment incentives, openness to

foreign investment and policies. This eased, but did not remove, significant challenges.

Operating on the continent has been a major learning curve for companies, based on trial

and error. Early South African investors did not understand the markets well and there was a

ge n e r a l b e l i e f t ha t t h e i r s ki l l s a n d kn o w l e d ge , a n d b e i n g A f r i c a n , w o ul d b e e no ugh f o r t h e m t o

succeed. Instead, they found a difficult and complex terrain and had to learn from their mistakes.

Many struggled because of poor business models and entry strategies, insufficient market

information, an impatience for results and untested assumptions about new markets.

Most South African companies once viewed high risk and cost as major deterrents to doing

business on the continent. However, the experience of their countrymen, more information on the

markets, a better business environment and the ability to manage risk more effectively have spurred

many to take advantage of cross-border opportunities. Greater experience of and exposure to

African markets have led companies to assess countries and risk on a case-by-case basis rather than

seeing the rest of the continent as homogeneous.


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Main challenges of doing business in Africa

T h e h i g h c o s t o f d o i n g b u s i n e s s i n t h e r e s t o f A f r i c a i s a n i m p o r t a n t b a r r i e r t o e n t r y , pa r t i c u l a r l y

for small and medium-sized enterprises. Other significant challenges include: poor or non-existent

infrastructure; regulatory and tax uncertainty, which creates planning problems and unexpected

costs; difficult and costly logistics (linked extensively, but not exclusively, to infrastructure

deficiencies); a surfeit of bureaucracy, which creates bottlenecks and inefficiencies; the absence of

effective legal frameworks; corruption; skills shortages; and currency fluctuations.

P o l i t i c a l r i s k i s a n o t h e r c h a l l e n g e , a n d i n c l u d e s c o r r u p t i o n , p o l i t i c a l c h a n g e o r t h e s u d de n e r u pt i o n

of conflict. Political corruption includes the solicitation of bribes; officials maintaining personal

business interests, which can skew the playing field for competitors or result in unfair regulatory

changes; and political battles that can affect investor agreements. The power vested in individuals,

particularly ministers, is a particular problem as a new appointee can scupper deals made with a

p r ed ec es s o r .

A n o t h e r c o n c e r n f o r i n ve s t o r s , p a r t i c u l a r l y t h o s e i n r e s o u r c e s o r a gr i c u l t u r e , i s t h e l e ve l o f p o w e r

d e vo l ve d t o t h e p r o vi n c e s o r s t a t e s . S t r o n g d e c e n t r a l i s a t i o n c a n b e p o s i t i ve i n c o u n t r i e s s u c h a s

Mozambique or the DRC, where dealing with a geographically remote central government can be

slow and problematic. However, it also leaves companies in outlying areas susceptible to ad hoc

local policies, often designed to fleece foreign investors, in addition to any national requirements that

they may have to satisfy.

South Africans also face secondary risks on the continent. These include the following:

• D i f f e r e nt l a n gu a ge a n d b u s i ne s s c u l t ur e s

• T h e c h oi c e of l o c a l pa r t n e r s • A w e a k

l oc a l pr i va t e s e c t or

• A lack of market information

• Weak government institutions

• Problems with work permits

• N o n -p a y me n t o f c o n t r a c t s

• Dealing with issues of local content and empowerment

• Onerous requirements for operating licences

• T h e c o s t of t e n d e r i n g f or c o nt r a c t s

• T h e s e c u r i t y o f p e op l e a n d a s s e t s .

F i na n c e c a n be a c on s t r a i nt t o e nt r y b e c a us e b a n ks ha ve a pe r c e p t i on of hi gh r i s k i n A f r i c a . B u t

b a n ke r s s a y a p o o r b u s i n e s s c a s e o r s e e ki n g f u n d i n g f o r p a r t i c u l a r l y r i s k y s e c t o r s s u c h a s a gr i c ul t u r e

is the problem, not lending into other countries per se. Companies are



a l s o i g n o r a n t o f t h e ma n y f u n d s a v a i l a b l e t o f i n a n c e g o o d p r o j e c t s o n t h e c o n t i n e n t . T h e y t e n d n o t

t o s e e k f u n d i n g f r o m d e v e l o p m e n t f i n a n c e i n s t i t u t i o n s b e c a u s e t h e y d o n o t kn o w h o w t o a c c e s s

such funding or are concerned that the development criteria of these institutions may not fit their

b u s i ne s s pl a n s . M o s t l a r ge p r oj e c t s i n vol ve s yn di c a t e d a n d e x t e r n a l i s e d f u n d i n g , w h i c h m i t i ga t e s

r i s k . T h e f a c t t h a t S o u t h A f r i c a n b a n k s a r e e i t h e r op e r a t i n g i n or pr o vi d i n g t r a de a n d ot h e r t yp e s of

finance to many African countries has made it easier for business to access financial services outside

their home market.

High-risk, high-reward opportunities in conflict and post-conflict countries

South African companies are prepared to invest in conflict and post-conflict countries if the returns

a r e w o r t h w h i l e . R e s o u r c e s c o mp a n i e s g e n e r a l l y t a k e mo r e r i s k , a s i t i s a n i n h e re n t p a r t o f t h e i r

b u s i n e s s . M a n y c o m p a n i e s e n t e r a s s u p p l i e r s t o t h e m i n e s , w h i c h l e s s e n s t h e i r o w n r i s k. P o l i t i c a l

stability and economic progress in these markets usually draw companies from other sectors to

i n ve s t l a t e r o n .

B u s i n e s s o p p o r t u n i t y a n d f a i l e d o r f a i l i n g s t a t e s a r e n o t m u t u a l l y e x c l u s i v e c o n c e p t s , p a r t i c ul a r l y

in resource-rich countries. In fact, high returns are common in dysfunctional states but the process

of entering these markets can be difficult and expensive.

Investing in post-conflict states can bring an early-to-market advantage. This includes being able to

negotiate highly preferential investment agreements with young governments and to establish early

brand presence and market dominance. Donor-related opportunities and increased economic activity

in the wake of donor revenues provide another opening but there is a downside - overzealous donor

a c t i vi t y c a n c r o w d out t h e p r i va t e s e c t or .

Most post-conflict governments in Africa are eager for foreign direct investment to assist their

reconstruction efforts; companies can benefit from this goodwill in negotiating entry strategies.

Usually, there are also sharp increases in the demand for goods and services, an incremental

i m p r o v e m e n t i n t h e b u s i n e s s e n v i r o n m e n t , b e t t e r p r o s p e c t s o f f u n d i n g a n d l o w e r r i s k. S u c h

markets typically have strong donor inflows underpinning national budgets and reconstruction

projects. The potential downsides are dealing with inexperienced government officials, the

possibility that conflict may erupt again, and the likelihood of conflict-linked challenges in the

business environment.

Operating in conflict and post-conflict states carries other challenges, such as the following:

• Reputational risk from interaction with illegal regimes or rebel groups, or

from perceived links to human rights violations, as with resource extraction in rebel-held areas

• The high cost of finance based on the perception of risk among financial institutions

• A s i gn i f i c a nt l a c k of i nf r a s t r uc t u r e a n d s e r vi c e s


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• P e r va s i ve c o r r up t i on

• Skewed economic structures

• Shifting and often dubious relationships with politicians and local elites

• Contract violation compounded by unreliable legal systems.

Strategies for risk mitigation: better risk analysis and partnerships

The numbers of South Africans operating in the rest of Africa suggest that they have built these risks

and challenges into their business plans and found ways to manage them. Risk experts have fine-

tuned their knowledge and some companies have fulltime in-house risk officers. There is more

emphasis on pre-entry risk management, which mitigates some of the post-entry challenges. Risk is

also decreasing in most African markets as they mature and learn from their exposure to the global

market and best practice in other regions.

Relatively few South African companies of size have failed in their African expansion efforts. Most

e x a m p l e s o f f a i l u r e h a d s p e c i f i c r e a s o n s , s u c h a s l o c a l c o m p e t i t i o n a n d h o s t i l i t y, p o o r b u s i n e s s

plans, high costs, failure to get traction in the market, and the like. Once a company has decided to

enter a market, it will not walk away easily. Some of the main reasons a company may pull back

are the need to pay bribes or threats of nationalisation or extreme government interference. Should

such significant problems arise, companies may close down local operations or revert to

i n t e r n a t i o n a l a r b i t r a t i o n , a l on g a n d c os t l y pr oc e s s .

For all the improvements in the African operating environment, many challenges remain. Better risk

management mitigates but does not remove these risks. The difference between

success and failure in Africa can boil down to how these risks are identified and managed.

Role of the government

T h e S o u t h A f r i c a n g o v e r n me n t h a s i n d i r e c t l y s u p p o r t e d b u s i n e s s b y s i g n i n g b i l a t e r a l a g r e e me n t s

c o v e r i n g t r a d e , d o u b l e t a x a t i o n , i n v e s t me n t p r o t e c t i o n a n d o t h e r a r e a s o f i mp o r t a n c e . B u s i n e s s

t e n d s n o t t o s e e k d i r e c t s u p p o r t f r o m t h e g o v e r n m e n t , a l t h o u g h t h i s i s c h a n gi n g w i t h b l a c k

economic empowerment as senior executives have a closer relationship with top officials. They may

leverage these ties in their dealings in Africa, particularly when entering a market or when problems

a r i se .

The growth of South African missions on the continent is a resource for business that is not well

used. The Department of Trade and Industry has deployed trade and investment staff in countries

such as Nigeria, Angola and the DRC. However, their usefulness depends on the skills of each

individual.

The government has assisted foreign governments seeking South African investors by hosting

i n ve s t m e n t f o r u m s a n d d e l e g a t i o n s . T h e s t a t e a l s o p l a y e d a n i m p o r t a n t r o l e



by relaxing exchange control regulations for companies to invest in other African countries. Many

large companies have also circumvented exchange controls by raising operational finance offshore.

The way forward

South Africans have benefited from the fact that companies from the West and developing countries

such as China and India use their countries as a springboard into Africa. This has provided feeder

b u s i ne s s op p or t u ni t i e s f or s u p pl i e r s a n d s e r vi c e pr o vi d e r s , p a r t n e r s hi p s i n bi g p r oj e c t s a nd e ve n

e q ui t y p a r t n e r s h i p s .

The rapid growth of China, Brazil, India and other new players on the continent is both an

opportunity for and a threat to South African business. The opportunity lies in increased economic

activity, new projects, higher demand for goods and services, the building of infrastructure and the

p o s s i b i l i t y o f e n ga ge m e n t a s p a r t n e r s o r s t a ke h o l d e r s . T h e t h r e a t s , b r o a d l y, i n c l u d e i n c r e a s e d

competition in sectors such as construction, ICT and retail, and issues around corruption and

governance in resource-rich countries.

Surprisingly, given the many success stories on the continent, there is still a fair degree of

scepticism in South African boardrooms about the merits of African operations. This is based on

(often-outdated) perceptions rather than experience of risk. It is exacerbated by Afro-pessimism

linked to poor coverage of African business in the media, which tends to focus on negative political

stories. However, the interest in African business opportunities shown by investors from emerging

markets and the success of South African companies in the rest of Africa have started to erode some

o f t he s e do u bt s .

Increased funding by development finance institutions may draw more South African companies

into projects, particularly as providers to large infrastructure and development projects that may be

more marginal in commercial terms but for which they have valuable expertise. These institutions

have a particular role in facilitating and underwriting deals that involve state-owned enterprises in

other African countries. But development finance institutions need to market their services to

business, as the private sector seems concerned about long project timeframes and a surfeit of

bureaucracy, while generally being unaware of the services they offer.


Page 12


Introduction

The economic performance of the African continent has improved over the past decade,

albeit off a low base. Economic growth rates averaged about 2,6% in the 1990s but improved after

2000. From 2003 to 2008, the average growth rate was above 5%, reaching 5,7% in 2008 (ADB,

2009) .

W i t h a g r o s s d o me s t i c p r o d u c t ( G D P ) o f $ 2 8 3 , 1 b i l l i o n , S o u t h A f r i c a h a s t h e b i g g e s t

economy in Africa, followed by Algeria, Egypt and Nigeria (World Economic Forum, 2009). It

comprises about a third of the economy of sub-Saharan Africa and a quarter of the total African

economy (Grobbelaar & Besada, 2008). The size of the country's economy and the expansionary

ambitions of its companies have been significant factors in the improved fortunes of the continent.

A l t h o u gh f i gu r e s a r e pa t c hy a n d of t e n di f f e r a c c or di ng t o s o ur c e s , i t i s b e l i e v e d t h a t , f r o m 2 0 0 0 ,

S o u t h A f r i c a h a s b e e n t h e b i g g e s t n e w i n v e s t o r o n t h e c o n t i n e n t o u t s i d e t h e o i l a n d ga s s e c t o r .

Trade and investment continues to increase with returns on investment being 20% to 30% higher

than in South Africa.

South Africa remains a major player in Africa despite the recent emergence of new players

from the BRIC countries (Brazil, Russia, India and China), and the continued presence of companies

from traditional investors such as the United Kingdom, the United States and France. Investment

from South Africa is broad-based and cuts across sectors, including those unexplored by other foreign

investors. Such investment has brought higher employment for local people, from blue collar to

management level; training; more consumer choice; access to more and better quality services; and

s o on .

Most South African investment is still in the countries of the Southern African Development

Community (SADC),1 although there are growing investments further afield, such as in Nigeria,

Ghana, Uganda, Kenya and Rwanda. There has been a rash of new investment funds focusing on the

rest of Africa, funded by both local institutions and foreign equity. Commercial and state funding

agencies have developed new financial products to support trade, investment and infrastructure

projects on the continent. The South African government has also relaxed foreign exchange controls

on investments in the rest of Africa.

The South African expansion has been driven by several factors, such as pent-up capital at

home after years of international sanctions, a search for new markets owing to expanding industrial

capacity, the saturation of the domestic market and increasing competition. The post-apartheid

political openness was also an important driver, although the fact that

1 The SADC comprises South Africa, Botswana, Mauritius, Lesotho, Swaziland, Mozambique, Zambia, Zimbabwe, Namibia, Malawi, Madagascar, Angola, the DRC and Tanzania.



most companies expanding northwards are largely white-owned has brought some negative

perceptions about South African business. South Africans have the benefit of proximity to

underdeveloped markets, a familiarity with these countries, and skills and products that are well

s ui t e d t o A f r i c a n c o u nt r i e s . T h e y a l s o ha ve a n a p pe t i t e f or r i s k t h a t ha s c ou nt e r e d n e ga t i ve

p e r c e p t i on s a bo ut t h e s t a t e o f t he c o nt i n e n t .

B e t w e e n 1 9 9 4 a n d 2 0 0 6 , S o u t h Af r i c a n e x p o r t s t o A f r i c a n c o u n t r i e s g r e w b y 6 5 9 % ,

from $1,3 billion to $7,6 billion, while imports increased from a low base of $0,4 billion to $4,2

billion (Grobbelaar & Besada, 2008).

T h e ex p e r i e n c e i n t he r es t o f A f r i c a h a s be e n a st e ep l e a r ni n g c u r ve f o r b u si ne s s .

Two decades ago, many South Africans believed doing business on the continent would be similar

to operating in South Africa. Many also believed that they were superior because of their

sophisticated economy; that other Africans were unskilled and uneducated; and that governments

would be grateful to have them.

But dealing with the realities has changed attitudes and entry strategies have been redrawn.

Where South African companies once preferred to go it alone, many now seek local equity and

technical partners. The benefits include easier market entry, rapid critical mass, local knowledge and

market acceptance. Standard Bank, for example, made strategic acquisitions

in Nigeria and Kenya, which enabled it to become a significant presence in these markets.

South African companies are increasingly bidding for participation in big donor projects

and viewing the new investors from Asia and South America as potential business partners rather

than just as competitors. Traditionally, South Africans have been disadvantaged by the fact that

South Africa is not a donor, a former colonial power or a country with significant government

backing for investment. These factors have all assisted foreign investors from other regions in

obtaining contracts and earning the favour of African governments. South African companies are

trying to be part of the "slipstream" of new emerging market investors, although early signs are that

countries such as the BRIC nations prefer opportunities for their own nationals. For example, Brazil

mining giant Vale brought in two Brazilian conglomerates - Camargo Correa and construction firm

Odebrecht - to work on its $1,3 billion Moatize coal project in Mozambique. Still, the experience and

established networks of South African companies have opened a window of opportunity for

pa r t ne r s hi ps .

T hi s s t ud y l oo ks br oa dl y a t t he t r e n ds i n S o ut h A f r i c a n b us i n e s s e xp a ns i o n o n t he c o nt i n e nt ,

with case studies of Mozambique, as a post-conflict country, and the Democratic Republic of Congo

(DRC), which contains two distinct profiles - conflict in the eastern Congo and post-conflict

economies in Kinshasa and Lubumbashi. The study examines the challenges and risks of this

expansion and the mechanisms for dealing with them.


Page 14


Methodology

The methodology was multi-faceted, based primarily on interviews and discussions with South

African companies doing business on the continent. Some have been on the continent for many years

and, while not having particular entry strategies, survived through learning from experience. Others

are large companies such as Group Five and Anglogold Ashanti, which have risk officers to assess

potential problems and advise on managing risk.

Questionnaires were used but found not to be sufficient, as companies are reluctant to talk in detail

about their engagement in Africa for fear of compromising their competitiveness. More effective

were face-to-face and telephone interviews. The information-gathering process also included events

related to business in African markets and risk management. The paper also draws on extensive

research on business in Africa over the past decade by Africa @ Work.

Business in conflict and post-conflict states

M o r e t h a n 2 8 A f r i c a n c o u n t r i e s h a v e b e e n i n v o l ve d i n s o m e k i n d o f w a r s i n c e 1 9 8 0 . T he s e

conflicts increasingly have a regional aspect. For example, the war in the DRC drew

i n s e ve n c o u n t r i e s ( L u c kh a m , 2 0 0 1 ) . M o s t s t a t e s i n A f r i c a a r e s t i l l i n a s t a t e o f c o n f l i c t ,

sporadic conflict or post-conflict, depending on the definition used. Peace deals frequently

fail as conflicts reignite, and many conflicts are taken to more remote theatres of war, such as those

in the eastern DRC, Darfur in the Sudan, Casamance in Senegal and the Lord's Resistance Army in

northern Uganda.

Almost all countries in Africa experienced conflict during the struggle for independence, during the

Cold War, in localised disputes or even civil wars. The remaining conflicts are mostly internal,

where rebel groups fight against the central government, although these may spill over into cross-

b o r d e r d i s p u t e s . L o n g - r u n n i n g c o n f l i c t s b e t w e e n r e g i o n s o r i n l oc a l i s e d bo r d e r a r e a s a r e of t e n

i ns i d i o u s , c a us e d b y e t h ni c c o nf l i c t s , r i va l r i e s , b a t t l e s f or r e s o ur c e s , c or r u pt i o n, r e ve n ge a t t a c ks a nd

s o on .

There are many examples of "traditional" conflict: armed warfare between domestic parties, whether

in urban or rural areas (e.g. Angola, the Côte d'Ivoire, Rwanda, Mozambique, the Sudan, Somalia,

Senegal, Guinea-Bissau, Morocco and Algeria) and cross-border wars (e.g. Ethiopia-Eritrea, Chad-

Sudan, the DRC-Uganda-Rwanda and Liberia-Sierra Leone). Another form of conflict is the erosion

of the state through dictatorships, poor governance and economic failure, essentially a scenario of the

government versus the rest (e.g. Zimbabwe, Chad, Equatorial Guinea, Nigeria and Guinea).

Africa also has what many classify as "failed" and "failing" states". The narrow definition of a failed

s t a t e i s o n e t h a t i s u n a b l e ei t h e r t o c o n t r o l i t s o w n t e r r i t o r y a n d s e c u r i t y o r t o



deliver basic services to its people. It has the corollary of creating a vacuum in a region, which may

create problems for its neighbours. External intervention is usually necessary in these countries.

Failing states are generally those that fit some of the criteria for failed states but are still able to turn

themselves around. In most, but not all, cases, such states are characterised by tiny, rich elites and

widespread and extreme poverty.

B u s i n e s s o p p o r t u n i t y a n d f a i l e d o r f a i l i n g s t a t e s a r e n o t m u t u a l l y e x c l u s i v e c o n c e p t s , p a r t i c ul a r l y

in the case of resource-rich countries. Business can thrive in situations of poor governance.

Companies seeking high-risk, high-reward scenarios often find these in dysfunctional states but the

process can be difficult and expensive. Compromise of principle, large amounts of money and large

doses of ingenuity are important criteria for operating in such states. Many business opportunities

arise from donor spending and large projects, usually resource-based, and others from providing

goods and services that are generally not available in conflict and post-conflict situations.

According to the International Finance Corporation, which recently established a programme on

Conflict Affected States in Africa,2 economies can often recover quickly from conflict once basic

economic activity resumes but they generally struggle to sustain long-term growth. According to

the programme, economies recovering from conflict typically face the

following problems:

• Lack of institutional capacity in government

• Weak and "balkanised" business associations

• High levels of corruption and a climate of mistrust

• High levels of informality

• Marginalisation of small domestic firms

• L a c k o f b a s i c i nf r a s t r uc t u r e t h r o u gh ne gl e c t or a c t i ve d e s t r u c t i on

• Deterioration of financial services and diversion of savings into survival activities

• S pr e a d o f d i s e a s e , e r o di n g a l r e a d y d e p l e t e d h e a l t h b u d ge t s a n d a f f e c t i n g

economic recovery

The slow pace of economic development means many states that have not experienced

conflict for years are still regarded as post-conflict countries. One example is Mozambique, which

held its first post-war election in 1994; arguably, the patchy development and extreme poverty in

most of the country keep it confined to the post-conflict category. As Nkurunziza (2008:5) writes:

"If the name of post-conflict is justified on the grounds that countries emerging from civil war have

s p e c i f i c c ha r a c t e r i s t i c s t ha t d i f f e r e nt i a t e t h e m f r o m p e a c e f ul c o u n t r i e s , a p o s t - c o n f l i c t p e r i o d s h o u l d

end, in theory, when the specific attributes inherited from the conflict cease to have influence. In

reality, however, it is impossible to

2 The programme started with four states in Africa: the Central African Republic, the DRC, Liberia and Sierra Leone. See www.ifc.org/ifcext/africa.nsf/Content/CASA_Home


Page 16


say exactly when a country returns to normalcy from its post-conflict state. Hence, the

post-conflict period is arbitrarily defined as the 10-year period following the end of a conflict."

South African companies tend to think of countries in terms of levels of risk rather than

whether they are conflict or post-conflict states (although it may well amount to the same thing).

Business seems prepared to go into conflict countries if the returns are worthwhile. However, it is an

e n vi r o n m e n t f o r l a r g e c o m p a n i e s . A l t h o u g h m a n y e x p o r t t o t h e s e c o u n t r i e s , t h e s m a l l a n d m e d i u m -

s i z e d b u s i n e s s e s t h a t a r e f a i r l y c o m m o n i n t h e m a i n S A D C t r a d i n g p a r t n e r s a r e n o t f o u n d i n h i gh -

risk markets, except as suppliers to the big companies. Companies almost seem to be deterred more

by issues of language and cultural barriers, as in Francophone countries and the Arabic markets of

North Africa, than by overt

political risk.3

The premium for investing in a conflict country can be high in many ways, not just in

terms of raising investment and operational finance. Other aspects are skills recruitment, the security

of staff, the reputational risk of operating in areas known for human rights abuses, the difficulty of

d o i n g t r a n s a c t i o n s , p o o r ( a n d o f t e n d a n ge r o u s ) t r a n s p o r t l i n ks , e s t a b l i s h i n g b a s i c s e r vi c e s , d e a l i n g

with the demands of communities and governments (often illegally constituted), high levels of

militarism and crime, and rampant corruption. Geographical proximity and supply chain issues,

particularly with regard to transport links, are also important factors for companies considering

h i gh - r i s k m a r ke t s . I n e a s t e r n C o n go , go o d s c a n b e t r a n s p o r t e d o n l y b y ( e x p e n s i ve ) c h a r t e r e d f l i gh t s

or by road from the Mombasa port in Kenya through Uganda and Rwanda, another costly option.

In post-conflict countries, the risk and difficulty of operating are often ameliorated by the fact that,

despite some remaining dysfunction, new governments tend to seek investors. They may offer

generous incentives and be open to improving the operating environment, usually with the help of

ze a l o u s d o n o r s . C o r p o r a t e r e p u t a t i o n a l r i s k i s a l s o m u c h l o w e r , a n d l a r g e d o n o r i n f l o w s f o r

r e c o n s t r u c t i o n b o o s t e c o n o m i c a c t i vi t y a n d c r e a t e l i n k e d o p p o r t u n i t i e s . T h e n e e d f o r go o d s a n d

services increases, although the premium on them decreases as the economy improves.

But many institutions in developed countries continue to see Africa as a risky destination;

there is little effort to recognise the diversity of countries and their development. South Africans

ma i n t a i n t h a t i n t e r n a t i o n a l b a n k s , f o r e x a mp l e , c h a r g e h i g h p r e mi u ms f o r l e t t e r s o f c r e d i t w h e n a

d e a l e ma n a t e s f r o m o r i s t a k i n g p l a c e i n A f r i c a , r e g a r d l e s s o f t h e c o u n t r y c o n c e r n e d . S o u t h A f r i c a

benefits from the fact that it is the base for many foreign multinationals and is viewed as a country

a p ar t .

3 Roger Ballard-Tremeer, Hon Chief Executive of the South Africa-Angola Chamber of Commerce, says language can be a risk when poor interpreters misunderstand or interpret badly, scuttling a deal or resulting in parties not signing the deal they thought they had.



Target markets for South African business

SADC remains the main investment destination for South African companies because of its

proximity, its established transport routes, the similarity of language and business culture, historical

ties and an understanding of the markets. The first markets for South African investors, which are

still relatively significant, were those in the Southern African Customs Union (SACU): Swaziland,

Lesotho, Namibia and Botswana. These countries have seen a proliferation of South African banks,

retailers, food chains and other businesses fighting for market share in their small and overtraded

economies.

Beyond SACU, Zimbabwe and Zambia were, and remain, the top investment destinations. Although

new investment into Zimbabwe has almost come to a standstill over the past decade, South African

companies (which make up about 70% of all listed stocks) remained, waiting for change rather than

disinvesting. As Zambia blossomed in the wake of Zimbabwe's decline, investment in Zambia

increased not just in mining but also in tourism, retail, construction, property, agriculture, ICT and

ot he r s e c t or s .

Mozambique was very different from other countries in the SADC, given its foreign business culture,

its former Marxist economy, and its long record of conflict and underdevelopment. But proximity

and opportunity have made it a top trade and investment destination for South Africans, with many

companies drawn by the Mozal aluminium smelter project and its spinoffs. Until recently, nearly all

investment was in the Maputo area, signalling that South Africans were not ready for the more

d i s t a n t a n d d i f f i c u l t p a r t s o f t h e c o u n t r y . T h i s i s s t a r t i n g t o c ha n ge a s o p po r t un i t i e s i n a n d a r o u nd the capital become

saturated and infrastructure starts to improve. The government is also actively

courting South African investors in sectors such as tourism and agriculture, offering commensurate

i nc e nt i ve s .

Companies were slower to move into the other big lusophone market, Angola, given the cost and

difficulty of testing the market. This was due to the unique structure of the post- war economy,

i s s u e s o f l a n gu a ge a n d c ul t u r e , l o gi s t i c a l di f f i c u l t i e s a n d po or t r a n s p or t l i n ks .

In the past five to eight years, companies have started to invest further afield. Mining companies

and related suppliers were the pioneers in West Africa, concentrated in Ghana. As this market

matured and became politically stable in the late 1990s, banks, retailers, franchisers, ICT

companies and others followed. Investment reached a plateau as the focus turned to Nigeria,

Africa's biggest market, but Ghana remains a popular investment destination in view of its ongoing

political stability.

T h e r e i s l i m i t e d S o u t h A f r i c a n i n ve s t m e n t o u t s i d e t h e s e t w o a n gl o p h o n e m a r k e t s i n W e s t A f r i c a ,

despite attempts by the South African government to interest companies in markets such as

Senegal, the Côte d'Ivoire, Mali and Liberia as part of its foreign policy strategy. Many companies

regard such markets as a bridge too far because of differences


Page 18


in language and business culture, different legal systems, competition from France, political

instability, corruption, transport challenges and poor policy frameworks, among other issues. Some

p l a n n e d t o u s e G h a n a o r N i ge r i a a s a s p r i n gb o a r d i n t o t h e r e gi o n b u t t h a t h a s b e e n s l o w t o ha p pe n:

Nigeria, in particular, has proved to be an all-consuming market.

In East Africa, Uganda was an early destination for South Africans, the result of a welcoming

business environment supported by strong government-to-government links and the signing of trade

and investment agreements. In 2002, South Africa was one of the top ten investors in the country.

Tanzania, now part of the SADC, was also an investment target, as was Kenya. There, however,

local business was hostile to South African advancement because of threats to its own developed

private sector and stiff competition in sectors such as brewing, retail and tourism. This, together with

the difficulty of market entry, meant that the Kenya- South Africa relationship has never realised its

pot e nt i a l .

By 2009, Angola, Nigeria, Ghana, Zambia and the DRC were top investment destinations, with

Zimbabwe back on the investment radar following the relative normalisation of the economy. The

South African government continues to seek new destinations for business, include the pariah state

of Equatorial Guinea, where President Jacob Zuma undertook a

state visit in 2009 in part to position South Africa as a supplier to the booming oil sector.

North Africa is a mixed bag. A decade ago, South African trade with Morocco was brisk, despite

cool diplomatic relations owing to the dispute in the Western Sahara. It was boosted by the country's

relatively sophisticated economy, generous investment incentives and its government's active

engagement with the private sector. Business engagement with Algeria has been slow, despite strong

p o l i t i c a l t i e s . P o l i t i c a l c o n f l i c t , t h e s l o w p a c e o f r e f or m , s t r o n g E u r o p e a n c o m p e t i t i o n , t h e d i s t a n c e

f r o m S o u t h A f r i c a a n d a l a c k o f p e r c e i ve d

opportunity in an economy dominated by hydrocarbons have kept business at bay.4

Egypt has courted South Africa with some success, despite its significant cultural and legislative

barriers to entry.5 It is highly protectionist, as companies trying to take advantage of duty-free access

under the Common Market for Eastern and Southern Africa (COMESA) free trade area have

discovered (South Africa is not a member).

I n F r a n c o p h o n e A f r i c a , b u s i n e s s w a s e n ga ge d i n t h e C ô t e d ' I v o i r e u n t i l c o n f l i c t e r o d e d i n t e r e s t i n

the market, while Madagascar, Gabon and Cameroon are among current investment destinations

across a variety of sectors, including telecommunications, mining, infrastructure, downstream

petroleum, logging and tourism.

4 In 2004, SABMiller, with French partner Castel, made investments in two breweries and two soft drink plants in Algeria. In Morocco, it acquired an interest in a holding company that owned three breweries and a malt plant. In Algeria, BHP Billiton is the only other company of size linked to South Africa.

5 However, it has proved to be a difficult and highly competitive market. Shoprite, for example, invested in 2001, opening seven supermarkets. In 2006, it divested because of ongoing restrictions on retailing and a different trading culture, which also affected its India operation. It closed seven stores, resulting in a R19,9 million loss. See www.shopriteholdings.co.za/pages/1019812640/about-our-company/history.asp



Main sectors for investment

The main attractions for companies looking at African markets are proximity, reasonable logistics, similar business cultures and economic reforms that promote economic activity. South Africans

appear not to make decisions based on notions of conflict and post-conflict states but rather on the

assessment of opportunity versus risk and the requirements for mitigating such risk. Another reason

is the drag effect of large multinationals, which import goods, services and skills because of the

w e a k n e s s o f t h e l o c a l p r i v a t e s e c t o r . T h e s e a r e o f t e n p r o vi d e d o n a c o n t r a c t b a s i s a l t h o u gh l a r ge r

suppliers may establish themselves in important markets to provide such services. The pull effect

of economic reform, stable governments and good incentives may also encourage companies to

invest, as may the availability of acquisitions, a direct approach from a local company or a

government invitation to invest.

Although South African investment into the continent is broad-based across multiple sectors, the

large, high-profile investments are concentrated in a few sectors, as listed below.

Financial services have been a significant area of African expansion but the publicity given to this

sector belies the scale of the expansion. Outside SACU markets, it has mostly been one large player:

Standard Bank. The bank capitalised on the expansion of South African business, following its

clients into 17 African countries. The strategy paid off in an unexpected way - the purchase of a 20%

stake in the bank by China's largest bank, ICBC, premised on its large footprint and experience in

African markets. This has provided the group with a massive capital injection and significant new

opportunities. The other large banks have also made some forays. For example, ABSA made

acquisitions in Tanzania and Mozambique, and now has the benefit of Barclays' African footprint.

Nedbank has operations in SACU countries and in Malawi and Zimbabwe; its 2009 tie-up with West

Africa's Ecobank Group significantly extended its reach. Firstrand has been active in African

countries mostly through its trade and project finance operations but is looking at acquisitions,

especially in Nigeria. The market for financial services is growing, particularly for corporate

advisory services on the back of equity deals and mergers and acquisitions, as well as project and

e x p or t f i n a n c e .

South African companies have generally been loath to use the services of local African banks despite

major improvements in banking operations and capitalisation through reforms of the banking

sector. Despite its advances, the industry is still in a transition phase in most countries. Some

companies say the high cost of local finance in these countries is a deterrent, with interest rates

routinely around 25% and term funding hard to obtain. But where there are strong local banks, they

are a potential resource for local currency funding. For example, in 2007, MTN raised a $2 billion

loan facility from international and Nigerian banks to fund its Nigerian expansion

(Bizcommunity.com, 2007). The deal, which involved 12 Nigerian banks,

raised a naira-denominated N138,6 billion term facility and a N63 billion revolver facility.6

6 In 2009, the value of the naira against the United States dollar was fairly steady at around $1 = N160.


Page 20


Investment in mobile telephony has been dominated by two large operators and a slew of other

companies in their supply network. MTN and Vodacom spent millions of dollars in their Africa

o p e r a t i o n s , w h i l e l a r g e s u p p l i e r s s u c h a s A l t e c h N a m i t e c h e s t a b l i s h e d A f r i c a n s u bs i di a r i e s t o

produce charge cards, for example. Big international players based in South Africa also do business

in the rest of Africa, such as Siemens, Nokia and Samsung. Mobile telephony has been a massive

change in Africa's operating environment and has improved the ease of doing business immeasurably.

The success of mobile phone companies was a signal to South Africans of the size of the potential

o p p or t u ni t y, a nd hi gh l i gh t e d t h e f a c t t h a t p o ve r t y s t a t i s t i c s d o n o t n e c e s s a r i l y r e f l e c t t h e s p e n d i n g o f

disposable incomes. Their success also underscores the improving risk profile of African markets.

The related ICT sector is growing rapidly. South African ICT companies, such as Dimension Data,

Integr8 and Business Connexion, often work with foreign multinationals based in South Africa, such as IBM,

Intel, Unisys, SAP, Dell and Compaq. The multinationals typically employ South Africans to

r u n t h e i r A f r i c a o p e r a t i o n s a n d u s e S o u t h A f r i c a n s u p p l i e r s i n t h e i r e x p a n s i o n , a n e x a mp l e b e i n g

the tie-up between America's Cisco Systems and Dimension Data. The opportunity in this sector is

linked to the historical deficit of ICT across Africa; companies are closing this digital divide with

new leapfrogging technologies. Advances in ICT improve the operating environment, allowing

i n no va t i on i n bu s i ne s s a n d f i n a n c i a l m a n a g e m e n t s y s t e m s , l o w e r i n g t h e c o s t o f b u s i n e s s w i t h n e w

technologies, and generally improving efficiency. As local companies and governments become

more sophisticated, they are also looking to IT to improve efficiency.

All African countries have Internet connectivity; costs are falling as broadband improves,

infrastructure is built and entry and competition are facilitated. Seacom, the 13 700 kilometre

u n d e r s e a f i br e o pt i c c a bl e b r i n gi n g br oa d ba n d t o t he e a s t c oa s t , i s o ne of s e ve r a l i ni t i a t i ve s t h a t a r e

expected to make ICT the boom sector in Africa over the next five to ten years. However, South

African investors face growing competition from Indian ICT companies, who, like the Chinese

retailers, are competing on price. The South Africans believe it will take time for new consumers to

see professional backup as a competitive advantage instead of making decisions based on price alone.

South Africans are also active in television, primarily through MultiChoice and its suppliers.

Retail is the most visible sign of South African expansion. Retail companies rapidly expanded into

S A C U c o u n t r i e s i n t h e e a r l y 1 9 9 0 s b u t o n l y a f e w c o mp a n i e s e x p a n d e d s u c c e s s f u l l y b e y o n d t h e s e

markets, notably Game, in 11 countries, and Shoprite, with 71 stores in 16 countries.7 In the 2008

financial year, Shoprite's revenues from operations outside South Africa grew by 38% to R5,5 billion. Growth is

constrained not by opportunity but by a lack of suitable sites, according to Shoprite, which

h a s e s t a bl i s he d a pr op e r t y a r m t o s ou r c e s i t e s

and build its own centres in several countries.

7 www.shoprite.co.za



The retail opportunity grew along with the rise of an African middle class and new elites,

a s w e l l a s i n c r e a s i n g n u m b e r s o f e x p a t r i a t e s . S o u t h A f r i c a n s u p e r m a r ke t s a n d m a l l s h a ve c h a n ge d

the face of shopping for African elites long used to informal traders, stalls and outdoor markets.

A p a r t f r o m s t r o n g l o c a l c o mp e t i t o r s i n Z i mb a b w e a n d K e n y a , S o u t h A f r i c a n r e t a i l e r s h a v e n o t h a d

much formal competition, although the informal market is a significant competitor on price. Other

problems include widespread smuggling, which undercuts prices, and cheap imports from Asia.

Still, there is enough purchasing power at the high end to support formal retailers.

SABMiller is a significant investor in Africa's brewing sector, where it competes head-on

with big international brands such as Heineken and Guinness. It markets various brands in 31

African countries. Because returns are good, competition is stiff and the brewing game has had a

sordid past. In East Africa, the company was involved in a major spat with East African Breweries

in the fight for market share; SAB eventually left the Kenyan market. Kenyans use the case as an

example of South African arrogance in African markets, although both sides behaved badly. Local

competition also kept the company out of Nigeria until

2008, when it finally entered that market through a small acquisition in one of the states.

The mining sector drew many of the investment pioneers, including some of the world's

biggest miners, such as Anglogold Ashanti (following the merger with Ghana's Ashanti

Goldfields), Anglo American's various metals divisions, De Beers and Randgold Resources. Junior

miners are less visible on the continent; Canadians and Australians dominate this sector but many

South African companies are suppliers to Western mining companies. Mining is always a high-risk

sector. Exploration is costly, lengthy and risky and, once the mine has been dug, the costs escalate

significantly, as do the risks. Mining operations are long-term ventures, which rely on government

agreements and contracts that are often violated. It is difficult to avoid high-risk countries: outside

South Africa, the best mineral deposits are in countries such as the DRC, Angola, Guinea, the

Central African Republic, Algeria and others. Tanzania, Zambia, Ghana and Mali are exceptions.

Construction companies were among the pioneers in Africa but soon experienced difficulty.

S o me w i t h d r e w t o t h e d o me s t i c ma r k e t , p a r t i c u l a r l y a h e a d o f t h e 2 0 1 0 W o r l d C u p . M o s t p r o b l e ms

r e l a t e d t o p a y m e n t b y g o v e r n m e n t c l i e n t s . N o w , f e w a r e p r e p a r e d t o d o l a r ge , c o s t l y p r o j e c t s i n t h e

African public sector unless the project has significant involvement by Western donors and funders

with offshore financing. Nevertheless, the opportunity is huge, given major infrastructure deficits

and commodity demand from Asia. Companies that have spent millions on their African footprint

are not leaving. Rather, the large players, such as Aveng8 and Murray & Roberts, have spread the

r i s k b y d i ve r s i f yi n g

8 In September 2009, Aveng said it had R22 billion in its project pipeline for the rest of Africa, focused mostly on infrastructure (De Bruyn, 2009).


Page 22


their operations into specialised sectors such as engineering, water management, mining

a n d p o w er . 9

Hospitality is a growing area of investment because the demand for quality hotels rises as economies

improve. All of South Africa's big players - Sun International, Southern Sun, Protea Hotels and the

Legacy Group - have operations in African countries. These are mostly management contracts and

lease agreements rather than fixed investments.

T h e o i l a n d g a s s e c t o r i s d r a wi n g i n c r e a s e d S o u t h A f r i c a n b u s i n e s s a s s u p p l i e r s t o i n t e r n a t i o n a l

oil companies and in areas such as construction, engineering and other skilled jobs. The main

operators on the exploration side are Sasol and Petroleum, Oil and Gas Corporation of South Africa

(PetroSA). Cape Town has established itself as a repair and maintenance hub for ships and oil rigs in

West and Central Africa.

E n tr y s tr a te g i e s

The mode of entry into an African market is an important strategy for risk management. The choice

o f m o d e d e p e n d s o n t h e o b j e c t i ve , t h e s i z e a n d n a t u r e o f t h e c o m p e t i t i o n , w h e t h e r t h e r e a r e

s ui t a bl e a cq ui si t i o n t ar get s o r use f ul a sset s, a nd a n y o p por t uni t i es

arising from government activity, such as public-private partnerships or privatisation.

I n t h e e a r l y d a y s o f e x p a n s i o n i n t o A f r i c a , t h e r e w a s a vi e w t h a t gr e e n f i e l d e n t r y w a s ne c e s s a r y

because of the weak private sector in African markets. Companies were concerned about their brand,

corporate governance, profits, skills, company ethics and the like. In addition, there were limited

a c qu i s i t i on t a r ge t s be yo n d p r i va t i s a t i o n .

Companies are still concerned about these issues but, through experience, have discovered distinct

b e n e f i t s t o c a r e f u l l y c h o s e n , s t r a t e g i c l o c a l p a r t n e r s h i p s t h a t d o n o t r e q u i r e c o mp r o mi s i n g o n

p r i n c i p l e s . T h e s e i n c l u d e : l o c a l k n o w l e d g e a b o u t b u s i n e s s c u l t u r e , p e r s o n a l i t i e s , c o mp e t i t o r s a n d

opportunities; the rapid development of critical mass; getting local buy-in to avoid concerns about

empowerment and related issues; leveraging

complementary skills, assets and operations; and adding to their portfolio of services.

H o w e v e r , mo s t S o u t h A f r i c a n c o mp a n i e s p r e f e r t o ma i n t a i n a ma j o r i t y s t a k e i n a n e n t e r p r i s e , e v e n

if they do not use their brand name or merge it with a competitor's brand. Recent examples include

Standard Bank's purchase of a mid-sized Nigerian bank, IBTC Chartered, to become Stanbic IBTC,

a n d t h e a c q u i s i t i o n o f a l a r ge K e n ya n b a n k, C f C B a n k, t o b e c o m e C f C S t a n b i c B a n k. A B S A

acquired 80% of top Mozambican bank Banco Austral, keeping the Mozambican brand, although

this has now changed to Barclays Bank Mozambique.

9 In 2008, Group Five won a $62 million contract to design, supply and install a power station in Nigeria.



Dimension Data made two recent acquisitions - in Angola and Morocco - while insurance

companies Alexander Forbes, Clientèle Life and others have bought local enterprises. Nedbank and

FNB are looking for acquisitions in Nigeria, while Tiger Brands bought a majority stake of Haco

Industries in Kenya, that country's biggest industrial conglomerate. Even smaller companies have

gained rapid market share by finding a local partner with complementary operations. SABMiller

has mostly opted for acquisitions and, although Shoprite appears to prefer greenfield entry, in 2002

it acquired French chain Champion in Mauritius, a move which immediately gave it five stores and

a di s t r i b ut i o n c e n t r e .

But partnerships can be risky. When business practice and ethics do not meld, it can result

in funding disputes, problems with local management skills or (unfounded) claims of high-level

access to government officials. Companies believe the partner must make a substantial contribution

to justify the investment in them, whether a licence, important assets or other non-financial

benefits. Still, the uneven weighting of partners' financial standing can be a problem, as happened

with Vodacom and its Congolese partner in the DRC (see the case study below). While many

companies have had trouble, most continue in the market concerned and find new partners. South

A f r i c a n s a r e s o u gh t a f t e r a s b u s i n e s s

p a r t ne r s a n d i t i s e a s y f o r t h e m t o f i n d n e w p a r t n e r s s h o ul d t he pr e vi o us pa r t ne r s h i p f a i l .

The further afield the markets, the more smaller companies, and some large ones, are likely

to have an entry strategy linked to a big client. For example, many firms operating in Nigeria

entered on the back of their links to MTN. The banks have a reverse strategy in some markets, going

in with their corporate clients rather than as part of a pull effect, that is, establishing themselves in

a market for purposes of attracting new South African clients.

Some companies enter a market via a large contract, and there are two possible outcomes.

E i t h e r t h e b u s i n e s s s u c c e e d s i n p u t t i n g d o w n r o o t s , a s d i d N a mi T e c h i n W e s t A f r i c a , o r t h e y a r e

u n a b l e t o s u s t a i n t h e o p e r a t i o n o n c e t h e c o n t r a c t e n d s , s u c h a s P a c e P r o p e r t y i n N i ge r i a , or t h e i r

experiences preclude further engagement.

Challenges in the business environment

Although the return on investment is generally higher in other African countries than in South

A f r i c a , t hi s i s n e c e s s a r y t o j us t i f y t he c o s t s of d oi n g bu s i n e s s a nd t h e hi gh , a l t h ou gh d e c r e a s i n g,

risk. South African companies face significant challenges on the continent, mostly related to issues

that do not exist in the domestic market, thus adding to the learning curve. Huge inefficiencies in the

business environment, insufficient and badly functioning infrastructure, and the lack of local

products and services keep the cost of doing business high. Other significant problems are: poor

go ve r n a nc e , a l a c k of i nf r a s t r uc t u r e a n d p o w e r , p r o t e c t i o n i s t t a r i f f s a n d n o n - t a r i f f b a r r i e r s , a

p l e t h o r a o f t a x e s a n d d u t i e s , i n e f f i c i e n t bu r e a uc r a c i e s , c or r u pt o f f i c i a l s , o ve r z e a l o u s b ut po or l y

implemented regulation, weak legal


Page 24


systems, currency risk, exorbitant property rentals and insecurity of tenure.

Although many African producers are uncompetitive because of the onerous operating environment,

this serves the South Africans well: they have developed critical mass and economies of scale by

serving a large domestic market. But the flood of cheap Chinese imports, particularly white goods,

is eroding this edge. Price, rather than quality and backup, is still the driving force for the majority

of African consumers. This is evident in the clothing market where South African retailers compete

with second-hand clothing bought in bulk from Asia.

Some of the challenges in the business environment are detailed below.

Inefficient and insufficient infrastructure: The main concerns relate to transport routes

to and within markets, power supply, water reticulation and sewage, rail networks and other utilities. In most of Africa, companies are forced to supply services that the state provides in South Africa. This can be particularly expensive.

Currency volatility: The volatility of local currencies, particularly the rand, against the

United States dollar has a significant impact on company profits and dollar funding into new markets. Metorex, for example, which has mining operations in the DRC and Zambia, said in September 2009 that its operating costs had increased by 25% to R749 million for the year, mainly because the rand-dollar exchange rate weakened by 24% (Mining Weekly, 2009a). As most South African companies report in rand, negative currency movements can skew the true performance of African operations and affect perceptions about the value of business r e t ur ns .

Regulatory and tax uncertainty: Unpredictable regulation is a significant cost factor in

doing business in Africa, affecting funding models, profit projections and operational ma t t e r s . T h i s c a n me a n v i o l a t i n g i n c e n t i v e s a g r e e d u p o n w h e n e n t e r i n g a ma r k e t , c h a n g i n g a g r e e m e n t s a f t e r t h e i n v e s t m e n t h a s b e e n m a d e , a n d i n t r o d u c i n g n e w r e gu l a t i on s a n d t a x e s once profits rise. Examples include royalties in the mining sector and tariffs for booming mobile phone companies.

Supply chain: A long and inefficient supply chain is a major concern. Problems include

l o n g a n d c o s t l y d e l a ys a t b o r d e r c r o s s i n gs ; i n e f f i c i e n t a n d s e ve r e l y c o n ge s t e d p o r t s 1 0

in large markets such as Kenya, Nigeria and Angola; theft along the route; and the tendency of governments to impose ad hoc bans on certain goods and alter import tariffs or taxes without notice. In southern and eastern Africa, transport costs represent 15% to 20% of import prices, a c c o r d i n g t o t h e W o r l d B a n k ( 2 0 1 0 ) . 1 1 I n l a n d l o c ke d c o u nt r i e s , t h e c o s t i s h i ghe r . T h e c os t s r i s e on the return journey as trucks from SADC countries usually return empty because, with the exception of minerals, exports from these countries are limited.

10 The average turnaround time for goods from Cape Town to their market in Lagos is about 80 days; the time to Luanda is longer, according to companies that transport goods by sea.

11 The Regional Trade Facilitation Programme maintains that, while it takes goods between two and three weeks to move from the Zambian Copperbelt area to the Durban port, the same distance in Europe would take 48 hours.



C o r r u p t i o n : O ve r z e a l o u s b u r e a u c r a c y i s o f t e n a t t h e h e a r t o f c o r r u p t i o n i n b u s i n e s s . T he s t a t e

makes it extremely difficult to get things done and officials solicit bribes to

ease the process. The biggest problems are encountered in government contracts, where a

" s i gn a t ur e b o nu s " 1 2 i s of t e n r e q ui r e d t o s e c u r e a de a l . D e s p i t e o bs e r vi n g c o r p or a t e go ve r n a n c e

principles at home, South Africans are seemingly not averse to offering bribes to secure

business or remove bureaucratic problems.13 However, as companies gain more experience on

t he c o nt i n e nt , t h e y a r e l e s s i nc l i ne d t o p a y on c e t h e y r e a l i s e t h a t i t i s po s s i b l e t o d o go o d

business without paying bribes; it only takes longer.

Lack of institutional structures: Poor institutional structures in African countries put the emphasis on personalities. A change of government or minister can change the playing

field, and associated deals, overnight. Investment agreements made by one person or

government may have to be renegotiated with a new incumbent. This is particularly

problematic in long-term projects, such as in the mining industry, as demonstrated by the

r e n e go t i a t i o n o f l i c e n c e s i n t h e D R C ( s e e t h e c a s e s t u d y b e l o w ) . M a ki n g c o n t a c t d i r e c t l y w i t h

a president or minister to gain entry to a country is becoming less important as governments

develop better structures but such contacts can still be useful. Shoprite's Whitey Basson says

that, before the company enters a market, they make an appointment to see the president so he

knows who they are and what they want to do. Once a company is established, particularly a

high-profile company that interfaces with the public, a change of government may not disrupt

b u s i ne s s .

Small and inefficient local private sector: This affects foreign investors in various ways. For example, the difficulty of sourcing goods and services locally means costly relocation

of staff and imports of goods and services. It can also mean that foreign investors become

r e ve n u e t a r ge t s vi a a d h o c t a x e s , t h e c o r r u p t o r u n f a i r a p p l i c a t i o n o f r u l e s a n d r e gu l a t i o n s , a n d

t he l i ke .

High operational costs: The high costs of setting up and operating businesses in other countries is a barrier to entry, particularly for small companies. Operating costs are

t yp i c a l l y a t l e a s t d o u b l e w h a t t h e y a r e i n S o u t h A f r i c a , w h e t h e r f o r f l i gh t s , h o t e l s , 1 4 of f i c e

rentals,15 or basic services. The same holds for taxes, currency volatility, delays in start-up

procedures, unexpected regulatory costs and having to rely heavily on imports (depending on

the sector). Building costs, whether for offices or roads, are about three times those in South

Africa.

12 This is usually a payment required by a minister or top official to append his or her signature to a contract, typically a percentage of the contract value.

13 In the 2008 Bribe Payers Index released by Transparency International (2008), South Africa was at number 14 out of 22 countries, an improvement on previous years.

14 In Nigeria, three-star hotel rooms go for more than $400 a night, for example.

15 Also in Nigeria, rentals for offices and homes are payable in full at least two years in advance, in United States dollar. In Luanda, a major accommodation shortage has also pushed up prices.


Page 26


Increasing competition: South African companies face increased competition from rapidly

growing domestic companies, other South African companies and new investors

f r o m A s i a a n d o t h e r d e ve l o p i n g r e gi o n s . S t r o n g s t a t e b a c ki n g a n d t h e u s e o f c h e a p l a bo ur a n d

capital have enabled Asian companies to outbid competitors for government

tenders in Africa, for example.16

Visas and work permits: The ongoing requirement for visas to most African countries is an irritant in doing business, particularly as it can be difficult to get multi-entry visas.

W o r k p e r m i t s a r e b e c o m i n g m o r e p r o b l e m a t i c . G o v e r n m e n t s a r e p r o m o t i n g s k i l l s t r a ns f e r a nd

limit the number of expatriates allowed into a country. Quotas for foreigners are being reduced

and work permits take longer to obtain.

Protection of property rights: Property rights for both physical and intellectual property are often a movable feast. In terms of intellectual property, legislation may exist but is

seldom enforced. Land and property disputes are common, given the lack of formalised

databases for property and the political and emotional baggage of land ownership. Claims on

l e a s e d l a n d 1 7 a r e f r e q u e n t a n d c a n s t a l l p r oj e c t s f o r m o n t h s , i f n o t ye a r s . T he r e a r e of t e n

multiple claimants, particularly when a big investor or project is involved.

Legal systems: Legal redress for problems like contract fraud (a relatively common problem) a n d d i s p u t e s a b o u t p a y m e n t a r e h a m p e r e d b y i n e f f e c t i ve l e ga l s y s t e m s ,

which make for a slow, corrupt and often fruitless process. Cases can take years to be resolved

and the enforcement of court rulings can be problematic.

Foreign shareholder limits: Some governments have capped foreign shareholdings to p r o mo t e l o c a l e mp o w e r me n t . In A n g o l a , mi n i n g i n v e s t o r s a r e o n l y a l l o w e d a

minority interest, with the government and local investors taking the rest. In Zimbabwe,

legislation forces investors to cede 51% of new investments to black Zimbabweans, while in

Kenya, foreign ownership of companies is pegged at 40% of the enterprise (Duncan, 2009).

Other challenges in the business environment include the following:

• The time taken to get licences and permits can be a year or more. In some sectors, such

as retail, businesses need multiple permits for imports, which are renewable annually.

• L a n gu a ge b a r r i e r s a r e a c o n c e r n , p a r t i c u l a r l y i n F r a n c o p h o n e c o u n t r i e s . T h e q u a l i t y

of translation services is sometimes unreliable.

• F i n a n c i a l s e c t o r s i n h o s t c o u n t r i e s a r e o f t e n u n d e r d e v e l o p e d , w h i c h ma k e s i t h a r d

t o o bt a i n p r oj e c t a n d t e r m f i n a nc e i n l o c a l c u r r e n c y.

16 In 2008, South African construction company Murray & Roberts took the Namibian Tender Board to court over its award of a state tender to a Chinese company that had not complied with Namibia's labour and affirmative action laws (Donnelly, 2008).

17 In most African countries, freehold title on property does not exist, only leasehold.



• There may be problems with local partners if bad choices are made.

• There are concerns around the security of people and assets in high-risk countries; • Many

countries have skills shortages, coupled with pressure for local empowerment. • The playing

field for tenders and contracts may be uneven.

• There may be a lack of shareholder buy-in for expansion in difficult markets or support

for operations where results do not justify the perceived risk, such as the case of Johnnic/ Avusa (see below).

• M e d i a h o s t i l i t y : S o u t h A f r i c a n c o m p a n i e s c o m e u n d e r gr e a t e r s c r u t i n y i n A f r i c a n

markets than foreign investors from elsewhere, possibly because they are African too. Large companies such as MTN, SABMiller, Shoprite and others are frequently taken to task in local media for issues such as high prices, market domination or the perceived

e xpl oi t a t i on of l oc a l s .

Specific challenges in conflict and post-conflict states

In Africa, the distinction between conflict and post-conflict countries can be tenuous. For example,

it may be premature to call the DRC a post-conflict country. Violence simmers in many parts of the

country and long-standing flashpoints have not been resolved permanently. Many business people

describe the DRC as both a conflict and a post-conflict country: the east and north-east remain

c o n f l i c t f l a s h p oi n t s w h i l e K a t a n ga p r o vi n c e a n d K i n s h a s a a r e r e ga r d e d a s p o s t - c o n f l i c t a r e a s . S t i l l ,

t h e c o r e c h a l l e n ge s o f d o i n g b u s i n e s s i n t he D R C a r e p r e s e n t t h r o u gh o ut , s uc h a s e x c e s s i ve

bureaucracy, corruption and limited infrastructure.

Mozambique is not generally viewed as a post-conflict state as such but rather as a poor country

where underdevelopment means great opportunity. The concentrated attention by both donors and

foreign investors has put the government under pressure to perform. Despite some challenges

outlined in the case study, there is no doubt that the country is on a firm democratic trajectory

underpinned by a market economy.

Unfortunately, stability in an African country can sometimes be the flipside of instability, as

happened in Guinea recently. Mining companies, while conceding the West African state to be a

difficult country in which to operate, believed it was politically stable. But the stability was a façade

created by authoritarian rule. When the dictator died in 2008, the military leader who took his place

by force unleashed a rash of new problems and uncertainties for companies there.

Conflict and newly post-conflict countries face most of the challenges outlined above but some of

these are more pronounced; others are not experienced in more stable countries. The primary

challenges are outlined below.


Page 28


Infrastructure

Infrastructure deficits are extreme in conflict and post-conflict countries. The diversion of resources

and energy, neglect and sabotage for political or military gain mean that roads, railways and utilities

u s ua l l y n e e d t o be r e bu i l t or ha ve n ot b e e n b ui l t a t a l l .

Power is a particular issue affecting reconstruction. After the war in Mozambique, almost

all transmission lines had to be replaced or refurbished, which took about three years. The DRC has

gradually increased its power supply although available power falls short of installed capacity and

equipment is generally run-down. Zimbabwe is experiencing chronic shortages because of a lack of

investment in its power utility. Angola is just able to meet its peak demand, although the grid

reaches very few people. On considering a market, these costs are built into the model but they can

be high. For example, a 400KVA generator can cost more than half a million rand. In Nigeria, a

generator to run a large business 24 hours a day costs about R4 million installed. This does not

i nc l ude f ue l .

A i r l i n ks t o c on f l i c t z o ne s a r e ge n e r a l l y p oo r a nd of t e n r e q ui r e c i r c ui t o us r o ut i ng o r us i n g

n o - n a m e a i r l i n e s t o r e a c h p l a c e s s u c h a s L i b e r i a , C h a d , S i e r r a L e o n e , G u i n e a a n d t h e C en t r al

African Republic. Special charter flights and United Nations planes are often used for cargo in war

zones, such as eastern Congo and the Sudan.

Rail is defunct in most of the continent because of neglect. Low usage of existing networks

i s p a r t o f a vi c i o u s c yc l e , w i t h h i gh c o s t s c o n t r i b u t i n g t o m o r e l o w u s a ge . R o a d s t e n d t o s u f f e r f r o m

a lack of maintenance due to fighting, landmines, the emergence of no-go areas and little

commercial activity. There is the further risk of transporters being hijacked or bandits robbing cargo

a l o n g t r a n s po r t r ou t e s .

High costs of doing business

T he h i gh c o s t s of op e r a t i ng i n A f r i c a r i s e c on s i de r a bl y i n c o nf l i c t z on e s . T h e d e s t r uc t i on of

most normal economic activity means goods and food must be imported. In eastern DRC, for

example, imports are trucked from Mombasa through Uganda and Rwanda. This adds at least 40%

t o t h e c o s t o f go o d s b e c a u s e o f f u e l c o s t s , b o r d e r t a xe s , w e i gh b r i d ge f e e s a n d c o r r u pt i o n a l o n g t h e

way. The same happens in Burundi, Southern Sudan and Chad.

Companies must often provide all basic services, especially when government officials are

unable to enter conflict areas. Anglogold Ashanti, for example, built its own power stations in Mali

and the DRC. In outlying areas, mining companies may have to build their own roads, without state

assistance, and install generators at great cost to power mines, computers and lights. Mobile phone

operators also have very high infrastructure costs as they have to transport base stations to remote

areas, which may include building runways and roads.



Other costs are danger pay for staff, paying a premium for project funding, paying high

security costs, building accommodation and offices, leasing land, and paying bribes or

"fees" to local communities to be allowed to operate and to ensure the safety of staff.

Corruption

Pervasive corruption, often at the highest levels, is a particular problem for companies that are

e x p e c t e d t o s a t i s f y S o u t h A f r i c a n s t a n d a r d s o f c o r p o r a t e e t h i c s . C o r r u p t i o n i s a l w a ys w o r s e i n

conflict countries where the fabric of society has broken down and where survival requires quick

thinking. It is easy to get on the wrong side of the law simply to survive, particularly in remote

a r e a s w h e r e d i f f e r e n t o p e r a t i n g n o r m s a p p l y a n d w h e r e p a y i n g b r i be s c a n r e l a t e t o pe r s on a l a n d

b u s i ne s s s e c u r i t y.

New operating systems, which are broadly viewed as corruption outside conflict areas, can become

the norm. They include facilitation fees (usually small amounts of money to get basic services

delivered) and outright bribes to get officials to attend meetings, deliver services and issue contracts.

Managers in the field say paying some sort of fee is sometimes the only way to avoid political

interference in business operations. Decisions have to be made on the spot, as rapid referral to head

office is usually difficult. Companies need to decide upfront how far they are prepared to go under

exceptionally difficult conditions (see the example of Anglogold in the DRC case study) as

i nf l e xi bi l i t y c a n pu t a n i n t ol e r a b l e s t r a i n o n gr o u nd s t a f f .

This conflict zone culture of corruption remains entrenched in post-conflict societies and can take

years to eradicate. Many post-conflict governments, recognising the corrosive effect of graft and the

o b j e c t i o n s t o i t b y d e ve l o p m e n t p a r t n e r s , e s t a b l i s h a n t i - c o r r u p t i o n i ns t i t ut i o ns . U n f or t u na t e l y, t he s e

generally fail to address high-level graft, which reduces their overall impact.

Skewed macroeconomic fundamentals

Economic policy in conflict states is usually expedient, out of kilter with normal practice and

t a i l o r e d t o t h e n e e d s o f t h e r u l i n g e l i t e . T h i s o f t e n r e s u l t s i n s p i r a l l i n g i n f l a t i o n , 1 8 f o r e i gn e xc ha n ge

controls, wide spreads between official and black market exchange rates, price controls and high

trade taxes. Mostly, this macroeconomic environment does not serve companies well, although

black market currency trading can work in their favour. In post-conflict states, the correction can

also be problematic as liberalisation brings price increases for goods and services, rising rentals

because of increased demand, and the outlawing of currency trading on the lucrative black market,

among other measures.

18 In 2000, when Joseph Kabila assumed the presidency of the DRC, the inflation rate was over 500%, falling to less than 20% a year later.


Page 30


Regulation

In conflict countries, corrupt bureaucracy usually supplants regulation: officials make the

rules and take bribes to circumvent them. In post-conflict states, regulation is usually part of a

package of reforms introduced by foreign consultants but a lack of skills and experience among the

l o c a l s i m p l e m e n t i n g t h e m c a n m a k e r e g u l a t i o n a n o b s t a c l e t o b us i n e s s r a t h e r t ha n a f a c i l i t a t o r of i t .

A challenge in post-conflict countries is changing the ideological mindset of government

employees to embrace a new market-driven order. This has been an issue in Mozambique, for

example, where officials have clung to their socialist mindset, hampering the speed of reform and

maintaining the heavy hand of the state in business.

On the upside, post-conflict governments can be more open to new ways of doing business

t ha n t h os e i n c o u nt r i e s w i t h o ut c o nf l i c t a s a s pu r t o c h a n ge o r i n c ou nt r i e s s t i l l i n c on f l i c t .

Security of people and investment

Conflict and post-conflict areas are breeding grounds for crime. Even after the fighting ends, well-

armed and trained - and usually jobless - former soldiers remain at large, often resorting to crime.

Vigilante groups can be a threat to mining companies in remote areas, while banditry is common

along transport routes. This situation makes demobilisation and reintegration of the armed forces

crucial components of post-conflict reconstruction.

Staff security is a concern for resource-based companies, as a remote location increases the

likelihood of crime and extortion. Staff may require lucrative salaries to work in such areas.

Security of investment is usually covered by bilateral agreements on investment protection but if the

government does not honour these, the only recourse is the long and costly process of international

arbitration. A change of government can precipitate threats of seizure of assets, expropriation and other

measures. But South Africa does not have such bilateral agreements with every country. For

example, it only signed an agreement with its important trading partner, Zimbabwe, in late 2009. In

the meantime, the state had already seized

the assets of more than a dozen South African farmers.19

Urban crime is a lesser issue. Most companies say staff is safer in other African countries than in

South Africa. But because foreign workers can be targets in ways they are not at home, companies

still take precautions. Many workers live in secure compounds or have 24-hour security at home and

work. In Nigeria, large companies such as Protea and MTN have armed escorts for their staff and

s e c u r i t y c o n vo ys f r o m t h e a i r p o r t i n L a go s . S o u t h

19 Although an investment protection agreement was finally signed between South Africa and Zimbabwe in 2009 after years of delays, by 2010 it had still not been ratified by both governments.



African security companies are active on the continent, contracted not only to companies from home

but also to embassies, foreign multinationals and local companies.

Reputational risk

Reputational risk is a significant potential problem for companies in conflict and even

post-conflict areas, given the shadowy forces at large. Anglogold Ashanti in the DRC is a good

e x a m p l e . D e B e e r s i n b o t h A n g o l a a n d t h e D R C a l s o e x p e r i e n c e d r e p u t a t i o n a l c h a l l e n ge s l i n ke d t o

protests about "blood diamonds".20 Anglo American and De Beers were both named in a 2002

United Nations report as being among 29 firms accused of wrongdoing in the DRC. Anglo

American said at the time that it had not done business in the DRC because of its concerns

regarding the governance issues of mining in that country (UN Wire, 2002).

In 2009, British tin smelter Thaisarco suspended tin ore purchases from the DRC, sourced

mainly in eastern Congo, because negative publicity undermined industry efforts to combat illicit

trading through a certification process. In 2008, the United Nations pointed fingers at Belgian

minerals merchant Traxys for buying minerals from four Congolese companies that, in turn, bought

from rebel-controlled mines (Mining Weekly, 2009b). The company denied any wrongdoing but

s t o p p e d s o u r c i n g mi n e r a l s f r o m t h e D R C o n r e p u t a t i o n a l g r o u n d s . A l t h o u g h n e i t h e r i s a S o u t h

A f r i c a n c o mp a n y , t h e i r p r o b l e ms h i g h l i g h t t h e p o te n t i a l r i s k o f a s s o c i a t i o n w i th c o n f l i c t a r e a s a n d

areas where human rights violations are known to take place, particularly as well-resourced non-

governmental organisations affect sentiment in Western markets far removed from the theatres of

wa r .

In Zimbabwe, not a traditional conflict country, foreign companies, including South African

firms, were criticised for their continued presence, which was viewed as tacit support for a

government widely accused of repression and human rights abuses. In Nigeria and Angola,

companies appear to have shied away from any hint of corruption because of concerns for their

r e pu t a t i o n .

Other challenges in these high-risk operating environments include:

Skills shortages: This Africa-wide problem is exacerbated by conflict, which sharply

increases the brain drain. Even in a post-conflict environment, countries have found

it difficult to draw back diaspora skills, requiring more investment in training.

Weak private sector: In post-conflict states, the options for entry are more limited.

U s u a l l y, t h e r e a r e f e w go o d p r o s p e c t s f o r a c q u i s i t i o ns u n l e s s i t i s t o s e c u r e a l i c e n c e

or contract already awarded to a local company (see, for example, the case of Vodacom in the

DRC).

20 Diamonds mined in areas of conflict, the proceeds from which are believed to fund and prolong wars.


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Donors, advisers and consultants and economic policy: In post-conflict countries, new

a n d i n e x p e r i e n c e d g o v e r n me n t s w o r k w i t h d o n o r s , c o n s u l t a n t s a n d p o l i c y

advisers who draw up policies and give advice that may not promote the growth of the private

s e c t or .

Financial systems: In politically charged countries, the availability of foreign exchange

is a problem, as it is usually traded at a premium on the black market. Moving it out

of the country through formal channels can be all but impossible, as banking systems flounder

and cash transactions are paramount.

A shifting population of powerful and influential people makes it hard to know whom

to court to help business run smoothly.

Risk in Africa

Emerging markets are challenging for businesses: a company must deal with the usual risks

associated with entering a new market, as well as new challenges such as an unknown political

environment, different security and leadership dynamics, a lack of transparency and, importantly, a

lack of available information. But, despite the drawbacks, the continent offers high-reward

investment opportunities, provided that the risks are rigorously assessed upfront and proactively

managed afterwards.

Companies believe that just operating in sub-Saharan Africa carries a premium based on

perceptions of risk that are not always justified. Such perceptions affect credit ratings and the cost of

finance from institutions outside the continent. Africa is often viewed as a single high-risk region

rather than different countries with vastly differing risks, opportunities and challenges, and investors

pay a price for this. South Africans are more in tune with the diversity on the continent and are able

to identify the risks differently.

D e p e n d i n g o n t h e s e c t o r , c o m p a n i e s t e n d t o vi e w r i s k o n a c o u n t r y - b y - c o u n t r y b a s i s . F o r

c o mp a n i e s s u c h a s S A B M i l l e r a n d S h o p r i t e , f o r e x a mp l e , ma r k e t c h o i c e s a r e n o t d i c t a t e d b y t h e

location of resources. Resources companies often operate in high-risk environments. Anglogold

Ashanti, for example, has a dedicated risk department, as do Murray & Roberts, Group Five and other

companies of size in relatively high-risk business. Much of the risk analysis is premised on

experience, although new risks may emerge unexpectedly. A good example is the punitive tax on

b e e r i n t r o d u c e d i n B o t s w a n a r e c e n t l y t o c u r b d r i n k i n g a n d t h e a s s o c i a t e d s p r e a d o f H IV / A i d s , a

move that significantly affected SABMiller in a seemingly low-risk market.

South Africans tend to believe that other African markets are similar to each other and to their home

base, and thus do not require tailored business strategies. Many do insufficient homework and

underestimate the costs and timeframes for entry and start-up. There is a tendency to believe that

p o l i t i c a l c o n t a ct s ( o n e i t h er s i d e ) w i l l p r o t e c t t h e m i n d i f f i c u l t



markets and that African markets are inferior and will welcome any South African engagement.

Some of these rather basic miscalculations can lead to failure in the long run.

Most of the SADC is viewed as low-risk, although Angola, the DRC and Zimbabwe are exceptions.

Mozambique is not viewed so much as a post-conflict as a low-income developing country.

Zimbabwe is not a post-conflict country in the traditional sense but investors currently regard it as a

high-risk market given its unpredictable government and business- unfriendly legislation.

East African countries are regarded as low risk because of their similar business culture and

language, transport links to southern Africa and political stability. The violence in the 2007-08

election in Kenya came as a shock to South Africans because the nation was regarded as politically

stable. Kenyan hostility to South African companies operating locally had been seen as a greater risk

than the political environment.

M a n y c o m p a n i e s h a ve i n v e s t e d i n U ga n d a : a s f a r b a c k a s 2 0 0 5 , t h e r e w e r e a l r e a d y m o r e t h a n 5 0

South African companies, making South Africa one of the top three sources of its foreign direct

investment (GCIS, 2005). Rwanda and Tanzania are also favoured, although South African business

faces competition in East Africa from strong Kenyan companies, particularly in retail, hotels and

financial services.

R i s k h a s n o t b e e n a s i gn i f i c a n t d e t e r r e n t t o S o u t h A f r i c a n i n ve s t o r s e n t e r i n g t h e D R C , A n go l a a n d

Nigeria, given the returns to be made in these countries. However, managing the risk has been a

distinct challenge and continues to be a learning curve for companies. A new challenge is the

rapidly increasing competition from the BRIC nations in sectors such as mining, construction, ICT

a n d r e t a i l . A l l t h r e e o f t h e s e s t a t e s a r e d ys f u n c t i o n a l b e c a us e o f t h e i r t u r b ul e nt h i s t o r i e s a n d

economic structures shaped by governance crises and conflict. The business environment in each is

a particular barrier to entry and a factor that significantly increases risk. Excessive bureaucracy,

pervasive corruption and personality- driven government are major constraints to development in

t he s e c o u nt r i e s .

K n o w i n g w h o t o d o b u s i n e s s w i t h i s a l s o d i f f i c u l t , p a r t i c u l a r l y gi ve n t h a t w o r ki n g w i t h p o l i t i c i a n s

who fall out of favour could be more harmful than not pulling any strings at all. Many influential

local business people are linked to the powerful politicians of the day and the demise of the latter

can effectively undermine the influence of the former. It can be better to avoid getting too close to

e i t he r , gi ve n t he s h i f t i n g s a n d s o f p ol i t i c s .

Having political contacts is only part of the story, as former businessman Tokyo Sexwale

d i s c o v e r e d . H e u s e d h i s p o l i t i c a l c o n t a c t s t o s e c u r e a l l u v i a l d i a m o n d m i n i n g r i g h t s i n A n go l a

when he was chairman of Trans Hex. However, despite the relative ease of entry, the company

struggled; profits were badly hit by high costs, bad management and lower sales (Ryan, 2009). The

Supergroup logistics company was nearly put into liquidation over


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a f r a u d u l e n t d e a l w i t h r e l a t i ve s o f t h e p r e s i d e n t o f A n go l a o ve r u n p a i d b i l l s f o r f l e e t s of t r uc ks

(Rose, 2009), highlighting the potential problem of doing business with political elites who see

themselves as above the law.

D e s p i t e t h e c h a l l e n g e s i n a l l t h e s e ma r k e t s , c o mp a n i e s a r e l o o k i n g f o r e n t r y p o i n t s b e c a u s e o f t h e

p e r c e p t i o n o f s i gn i f i c a n t o p p o r t u n i t i e s f r o m o i l a n d g a s r e ve n u e s ; l a r ge r e c o n s t r u c t i o n pr oj e c t s ; t he

wealth of the elites; large expatriate communities, particularly in Angola and the DRC; and a dearth

o f go od s a n d s e r vi c e s .

Companies have encountered problems in some of these high-risk markets. In Angola, for example,

De Beers left in 2001 after the breakdown of an agreement with state-owned diamond company

Endiama. Once court battles over an outstanding loan were resolved, De Beers returned in 2005 in a

joint venture with Endiama. The market is too lucrative to avoid despite the reputational concerns

around "blood diamonds", a stigma not present in the other big regional markets, Botswana and

Namibia.

Another concern in Angola is ownership caps for foreigners, who are only allowed a minority stake in

the mines. Companies must assume all the exploration costs but cede majority ownership to

Endiama and private Angolans nominated by the state. Unless the expected profits are significant,

which is not guaranteed in an era of boom-bust commodity prices, this can be a major problem. It is

among the reasons why BHP Billiton and Petra Diamonds pulled out of Angola. Companies will not

comment publicly about problems for fear of

u p s e t t i n g t h e i r o pe r a t i o n s t h e r e ( R ya n , 2 0 08 ) .

The logistics in Angola are punishing. Flights to Luanda were once a major problem because of

protectionist behaviour by the national airline; while this has improved, many connections are not

direct. Road traffic has to be routed though Namibia, adding time and costs, while Luanda's port is

inefficient and undercapacitated, delaying goods for months at a time. The internal road network is

extremely poor, as are links to other countries in the region. Rail is non-existent, although the

rebuilding of the historic Benguela line linking Angola to the DRC and Zambia is under way.

Nigeria is another difficult market, with risk inherent in the unpredictability of regulation, the

distance from market, pervasive corruption, poor institutions and inefficient - but improving -

business systems. Shoprite Africa managers say the market is challenging, particularly the 80 days it

takes to get goods from Cape Town to Lagos because of the congested port. But the company plans

another 50 stores in Nigeria by 2013. Nigeria's main attraction is the size of the market: 150 million

people. Many companies say that having 1% of the Nigerian market is worth 10 or 15 smaller

markets in Africa. SABMiller says that its two competitors in Nigeria - Guinness and Heineken - do as much

business in Nigeria as SABMiller does in 24 other African countries, excluding South Africa

(Lloyd, 2009).



The risk of doing business rises considerably in lesser-known markets, particularly non-English-

s p e a ki n g c o u n t r i e s . T h e s e i n c l u d e t h e C e n t r a l A f r i c a n R e p u b l i c , E q u a t o r i a l G u i n e a , C o n go

Brazzaville, Guinea-Bissau and Guinea. These markets are not generally on the strategy list for

South African companies, except those operating in specific areas (oil and gas, mining, security and

some trade), as they are politically unstable and economically undeveloped, the business culture is

d i f f e r e nt a n d t h e r e a r e n o a i r l i n ks t o S o ut h A f r i c a .

In 2009, the South African government made overtures to the pariah Equatorial Guinea government

in a bid to open the door for South African oil and gas companies. This was surprising given the

poor human rights record of the Obiang government and South Africa's stated support for human

rights. A reciprocal agreement on the protection of investment was signed. The real value of such

agreements has not been well tested by the South African government and there are concerns that,

when a company is in dispute with a government, South Africa may be compromised by

d i p l o m a c y . N e v e r t h e l e s s , s u c h a gr e e m e n t s d o p r o vi d e s o m e c o m f o r t a n d gi v e t h e g o ve r n m e n t a t

least the right to intervene, where necessary, on behalf of its nationals.

Market failures

Although the number of high-profile business failures in the rest of Africa is relatively small, many

s m a l l e r c o m p a n i e s h a ve s t r u g g l e d b e c a u s e o f h i g h b a r r i e r s t o e n t r y a n d t h e d i f f i c u l t y o f s u r vi vi n g

troubled times without significant resources. Apart from the mining companies mentioned above,

the one high-profile withdrawal from another African country was Vodacom. It pulled out of

Nigeria just two months into a five-year deal with Zimbabwe's Econet Wireless Nigeria (EWN),

when the Nigerian partners paid "brokerage fees" to the state governments to invest in EWN.

Vodacom and its partner, Britain's Vodaphone, which jointly funded the $250 million deal, judged

a practice considered acceptable in Nigerian terms to be corrupt. Vodacom has been tied up in

c o u r t f o r ye a r s w i t h E W N o v e r t h e d e a l b u t h a s c o n t i n u e d t o l o o k f o r o t h e r w a ys t o e n t e r t h i s

lucrative market. The situation reflects the challenge of managing different business cultures in the

prism of South Africa's culture of corporate governance.

A n o t h e r c o mp a n y t h a t f a i l e d i n N i g e r i a , a n d i n K e n y a , w a s J o h n n i c C o mmu n i c a t i o n s ( n o w

Avusa). Its businesses included multimedia stores and cinemas in both countries, a majority stake

in a leading Nigerian newspaper (Business Day) and a CD manufacturing facility in Nigeria. But it

overstretched itself, particularly in Nigeria, and did not seem to have an efficient business plan. In

2 0 0 8, i t s ol d a l l i t s N i ge r i a n a nd K e n ya n a s s e t s , s a yi ng t h e c o m p a n y w a s n o t p r e p a r e d t o i n j e c t t h e

required capital into loss-making and undercapitalised entities. Management played a big role in

this. The drivers of the initial Africa strategy were overly zealous and failed to do proper due

d i l i ge n c e o n e nt r y. A ne w m a n a g e m e n t s u b s e q u e n t l y d e c i d e d t h a t t h e A f r i c a s t r a t e g y w a s a f a i l u r e

a nd d i d n ot


Page 36


want to pursue it. This highlights the importance of a solid entry strategy, detailed market research

and the commitment of management to doing business in difficult markets.

Another company that pulled back from African markets was Profurn, one of the first companies to

expand into the continent after 1994. In just a few years, it had opened stores in 15 countries,

including the north. But, after an initial spurt of success, its operations became unprofitable. The

reasons included the use of credit retailing in countries where there are no credit bureaux and little

customer information, reckless expansion, low disposable incomes in many markets, and

c o mp e t i t i o n f r o m l o w e r -p r i c e d l o c a l g o o d s . In 2 0 0 3 , t h e a i l i n g c o mp a n y w a s b o u g h t b y J D G r o u p ,

which sold 55 African stores, retaining about a dozen in southern Africa (Games, 2003).

Woolworths had a difficult time in Nigeria, opening a store there and being forced to close it shortly

afterwards when the government, at short notice, introduced an import ban on

clothing, among other products. (See also the example of Pick 'n Pay in the next section.)

Managing risk: The South African experience

South African companies have generally learned the hard way how to manage risk. In the early

days of investing in and trading with other African countries, many struggled as they did not

understand the markets (having assuming they were similar to South Africa) and did not know how

to analyse and manage the risks. Whitey Basson said, "You will face challenges you never knew

existed" (Planting, 2009).

Over the past decade, the risks have been reduced through political stability and market reforms.

Companies have also learnt to manage risks by better understanding their complexity and breaking

them into their component parts. Some companies have introduced dedicated risk staff or

departments.

According to an Ernst & Young (2008) survey on risk, two-thirds of respondents worldwide said

they would avoid a company whose risk management seemed insufficient; 48% said they had

disinvested from companies for the same reason, and 82% said they would pay a premium for

companies with good risk management.

Some risk management strategies used by South African companies on the continent are outlined

below.

Identifying risk

An important component of company-wide risk management is quantifying the risks upfront.

Companies often constitute a senior planning team consisting of managers from different divisions,

each with their own risk potential. The team holds scenario-planning meetings to identify potential

risks, plot management options, determine the likelihood of each risk and devise appropriate

responses. This needs to be a company-wide strategy, as gaps will



form if departments consider only their specific, but not company, risk. Murray & Roberts has an

executive risk committee, which reviews significant risk decisions before they are

submitted to the board.21

R i s k E x p e r t s 2 2

s a y r i s k m a n a ge m e n t i s a n o n go i n g p r o c e s s b e c a u s e t h e r i s ks c a n c h a n ge , ge t w o r s e

or improve, and regular reviews are necessary. While large companies tend to have their own in-

house risk teams, some use outside consulting firms, which offer valuable objectivity and a critical

analysis of the company's operations.

Managing political risk

Building relationships with the government of the day is one element of risk management

that many companies favour in the absence of institutions. This can be through voluntarily giving

the state an equity stake in the enterprise, giving important officials a seat on the board or simply

by getting the government's buy-in to the project.

Randgold Resources Chief Executive Mark Bristow, commenting on the purchase of the

Moto gold mine in the DRC, said the formal written support from the government had been

fundamental to the company's decision to proceed with the purchase. "Fostering mutually beneficial

partnerships with the governments and people of our host countries is a key principle of Randgold's

formula for success in Africa" (Randgold Resources, 2009).

A spokesman for Anglogold Ashanti says, "Government will always have a stake - we prefer

it that way because we look to ensure they have an interest in the fortunes of the enterprise"

(interview August 2009). However, this has not always worked for the company, which had

p r o b l e ms i n G u i n e a d u r i n g t h e r u l e o f f o r me r p r e s i d e n t L a n s a n a C o n t é a n d , a f t e r h i s d e a t h i n

D e c e mb e r 2 0 0 8 , w i t h h i s s u c c e s s o r . T h e mi l i t a r y r u l e r w h o s e i z e d p o w e r w a s c o n f r o n t a t i o n a l w i t h

the mines in what is viewed as an attempt to pressurise them into funding his regime. Still, it could

be argued that the problems may have been worse without the relationship.

Large South African companies normally deal with top government ministers and even

presidents upon entering a country because the size of the investment relative to the local economy

is usually seen as warranting high-level attention. While this may give comfort, it can also add to

risk when there is a change of government or minister or when local, state or provincial authorities

override the centre. The latter appears to be the case in the problems facing mining giant First

Quantum in the DRC in the wake of the wholesale review of mining licences in that country (see the

DRC case study). There may also be trouble if a company goes over the head of relevant agencies

a n d h a s a pr o bl e m d o w n t he l i ne .

21 See their website for more details on risk management: www.projects.murrob.com 22 This was

said to the author off-the-record.


Page 38


Massmart in Nigeria used its offices with then President Olusegun Obasanjo to get its

goods cleared from the Lagos port in time for its Nigeria opening. However, despite (some say

because of) the president's involvement, port authorities dug in their heels and the consignment was

not released any faster. When MTN ran into trouble with the Benin government over hefty new

licence fees and regulatory issues, then President Thabo Mbeki stepped in to broker a deal (Badaru,

2007). This is unlikely to have happened for a company with less political influence at home.

Blue Financial Services told a business breakfast on Nigeria in 2009 that if a company does

business though the regular channels, it has the moral high ground to argue about unfair regulation

and other issues when there is trouble. Increasingly, companies have recognised the tenuous nature

of political connections and are going though the correct channels, even though this may be slower

and more frustrating. But close ties with government can reduce regulatory risk. When unreasonable

or ad hoc regulations are introduced, companies at least have a channel of appeal if they have the ear

o f t op of f i c i a l s .

Local partnerships

Local partnerships, through equity or technical agreements, are increasingly becoming

a risk management strategy. (However, if they fail or run into problems, they can increase risk; this

appears to be happening to Vodacom in the DRC.23) A good partnership gives companies the

advantage of local knowledge and early warning about possible changes in policy, particularly in

post-conflict countries where the playing field shifts constantly and rapidly. Partners can also assist

i n b e dd i n g d o w n a n e w o pe r a t i on a n d s or t i n g ou t l o gi s t i c s .

H o w e ve r , r i go r o u s d ue di l i ge n c e i s ne c e s s a r y t o e ns ue t h e p a r t n e r s hi p i s a go od f i t a n d n ot

likely to scupper a new operation. Companies also need to allow their partners real decision- making

power although it is important to keep close tabs on local subsidiaries in order to protect their brand,

r e pu t a t i o n a n d o pe r a t i o n s f r o m a b us e .

James Hersov, Managing Director of International Development at Africa for Veracity

Worldwide, emphasises the importance of keeping close to the activities of local affiliates. Particular

r e d f l a gs i n c l u d e t h e w a y a f f i l i a t e s h a n d l e t r a n s a c t i o ns w i t h go ve r n m e n t s a n d p a r a s t a t a l s , w h e t he r

they use third-party agents, which may imply a lack of transparency, or claim special access to the

government and influential local players (Hersov, 2009).

23 Congolese Wireless Network (CWN), the mobile phone company that Vodacom acquired (49%) to facilitate its entry into the DRC, accused the South Africans, in legal papers, of fraud, abuse of trust and usury. The relationship broke down after 2005 when Vodacom, which has invested $350 million in DRC since then, brought in new funding arrangements that CWN saw as disadvantageous. Vodacom says CWN's directors had agreed to all the new arrangements. The situation suggests that CWN has become a financial liability to Vodacom in an era of falling profits and rising costs but the allegations could damage the mobile giant's reputation (Business Report, 2010).



Sound entry strategy

A sound entry strategy is pivotal to success or failure in a market. It requires rigorous analysis

of the market, competitors, potential partners, the regulatory framework, political stability and

future growth areas. Many South Africans have rushed into markets without doing the necessary

r e s e a r c h a n d ha ve f a i l e d .

Pick 'n Pay failed in Tanzania because, it says, of smuggling by competitors; logistical and

regulatory problems; and difficulties with warehousing, maintaining IT infrastructure and sourcing

relevant skills. It sold its stores to Shoprite, which has, in the eight years since, closed several stores

because of slow trading. It seems that both companies rushed into the market without doing proper

research. Pick 'n Pay's problem should have been uncovered by detailed due diligence but its

African expansion was seemingly driven by the success of Shoprite at the time rather than by

Tanzania as a viable market. Shoprite was buoyed by its success in Zambia and clearly thought its

broad African experience would counter the problems experienced by its predecessor.

It can take a year or more to prepare for entry into large and difficult markets such as

Nigeria and Angola. This allows time to follow the correct administrative paths, vet potential

partners, establish offices, review the business culture and competition, find out who is influential,

look for potential customers and do proper market research.

Blue Financial Services, for example, set aside 12 to 36 months to establish themselves in

another African country. Apart from the logistical and market issues, it takes time to become aware

of local cultural nuances in each country, which can make or break a business that is very exposed to

local customers.

Some failures result from an undue focus on the bottom line in a high-risk, high-reward

scenario and from shareholder pressure to perform. Successful companies generally have a long-

term view and are prepared to take the financial pain in the early stages of the investment.

Multinationals devise their own risk models for market entry. One of South Africa's largest

multinationals, for example, looks at the return on the average cost of capital. It assigns ratings to

c o u n t r i e s a c c o r d i n gl y, b a s e d o n c r i t e r i a s u c h a s p r o pe r t y r i gh t s , t h r e a t o f a s s e t n a t i o n a l i s a t i on ,

e x c h a n ge r a t e vo l a t i l i t y, t he a b i l i t y t o r e p a t r i a t e pr of i t s i n f or e i gn c ur r e n c y a nd t he l oc a l a va i l a bi l i t y

of foreign exchange. It then measures the returns required to offset the risk, with higher returns

required for higher risk.

In competitive environments, acquisitions are becoming a preferred strategy, as outlined

a bo ve i n t he s e c t i o n o n e nt r y s t r a t e gi e s . T he r e a r e s e ve r a l r e a s on s f or t h i s . Fi r s t , t he


Page 40


experience of other companies show the value of local knowledge and influence. Second,

as African economies mature, local firms are becoming stronger, more professional and able to

absorb equity deals to which they can add real value. Third, they often have complementary

operations or existing economies of scale, such as retail banking operations, for example. However,

some companies maintain that a partnership must add tangible value for both parties. Often local

partners do not have the equity for financial partnerships; they need to contribute something else to

t he pa r t ne r s hi p .

M i n i n g c o mp a n i e s a r e u s u a l l y f o r c e d t o h a v e g o v e r n me n t s h a r e h o l d i n g , w h i c h ma n y

accept as a hedge against risk. However, this has made little difference in some countries: in the

D R C a n d A n go l a , t h e s t a t e c o n t i n u e s t o c h a n ge t h e r u l e s r e ga r d l e s s o f t h e i r s t a ke . W h i l e a

government stake can reduce risk in less corrupt markets, it can increase frustration as it slows down

decision-making.

Where there are no local candidates for acquisition, South Africans have opted for greenfields

e n t r y f i r s t a n d t h e n r e c o n s i d e r i n g t h e i r o p t i o n s l a t e r . H o w e ve r , t h i s m a k e s i t h a r d e r - a nd l o n ge r -

to get market share.

Managing sector risk

Sector-specific risk management can be more important than country risk, particularly where the

investment is long-term and involves bricks and mortar. Two such risk management routes are building

relationships with the government and implementing social responsibility programmes.

A n o t h e r i s t o e n s ur e a d e qua t e f u nd i n g o ve r t he t e r m o f a pr oj e c t a nd ha vi n g b a c ku p s o ur c e s o f

funding in the event of unexpected cost overhauls. Futures markets and hedging are also used to

manage possible price shocks.

In Guinea, the government determines the price of fuel, adding 50% to the market price to boost

state revenues. Anglogold Ashanti says it manages this type of concern by getting information in

advance and budgeting for it. However, these costs, while manageable in boom times, assume a

greater significance when commodity prices drop.

R o y a l t i e s a r e a n o t h e r i s s u e o f c o n c e r n . F o r e x a m p l e , t h e Z a m b i a n g o v e r n m e n t , u n d e r p r e ss u r e t o

realise more benefits from the mining boom, unilaterally imposed a new tax regime in 2008, which

effectively raised the tax rate from about 31% to 47%. This had implications for company costs and

investment agreements negotiated on entry. Part of the problem is officials' lack of experience in

negotiating with large global companies. In the case of Zambia, the government did not

accommodate a provision for price fluctuations in investment agreements despite the known

vo l a t i l i t y of t he c o p pe r pr i c e .

There are other, less visible risks. As noted, SABMiller's Botswana market is threatened by a 30%

government levy on beer sales, introduced in 2009 in an attempt to cut consumption.



The company sees this as a major risk in a market that has never been regarded as risky. Other risks

to retailers include ad hoc import bans, unpredictable tariff regimes and even poor roads and

flooding, which may cut off transport routes.

Agriculture faces a plethora of risks, some of them related to governance. South African farmers,

s o u ght a f t e r i n t he r e s t o f A f r i c a f or t h e i r s ki l l s , a r e w a r y of go i n g i nt o c ou nt r i e s w i t h o u t s p e c i f i c

a g r e e m e n t s t o p r o t e c t t h e i r i n v e s t m e n t s . T h i s i s e s p e c i a l l y i m p o r t a n t gi ve n t he i r vu l n e r a bi l i t y i n

remote locations, the risk of hostility from local communities, the politically loaded nature of land

in Africa and the uncertainty of dealing even with host governments.

A n o t h e r s e c t o r a l r i s k i s c o m p e t i t i o n . R e t a i l e r s e n t e r i n g t h e K e n ya n m a r ke t f o u n d t h a t t h e s t r o n g

l o c a l c o mp e t i t i o n u n d e r mi n e d t h e i r o p e r a t i o n s . S A B M i l l e r h a s t r i e d t o b u y w h a t c o mp e t i t o r s i t

could and has battled with those it could not. Banking is going in the same direction, with South

Africans looking to buy their way to a competitive market share through strong equity partnerships.

Shareholding

Many South African companies believe it a benefit to have a government official or powerful local

business person on the board of a country operation or as a shareholder. For example, Vodacom has

a s t r a t e g y o f c h o o s i n g p o l i t i c i a n s o r t h e i r f r i e n d s a s b o a r d me mb e r s i n t h e i r A f r ic a n o p e r a t i o n s .

Mozambican President Armando Guebuza is on the board of its local operation, as are several

politicians linked to former president Joaquim Chissano. Similar situations exist in Tanzania and

the DRC. Defending its actions, Vodacom argued that it was the norm in Africa to have

participation by "governments, parastatal bodies, public investment institutions, political parties,

trade unions, empowerment groupings and government officials" (Brummer, 2007). But this can

b a c kf i r e a s p ol i t i c a l a l l e gi a n c e s a n d p o w e r s t r u c t u r e s c h a n g e , a s t h e y d i d i n S o u t h A f r i c a . S o m e

c o m p a n i e s b e l i e v e i t b e t t e r t o h a ve p o w e r f u l b u s i n e s s p e r s o n a l i t i e s o n t h e b o a r d r a t h e r t h a n

p o l i t i c a l l y l i n ke d

o n e s be c a u s e o f t he t r a ns i e n t n a t ur e o f t h e l a t t e r .

Corporate governance

This relates to both a company's operations in foreign markets and the structure of local subsidiaries

or joint ventures. In terms of the latter, buying into a listed company will provide an element of

comfort, though full compliance with the listing regulations (which may in any event be weak)

should not be taken for granted. Corporate governance principles, as they are understood in South

Africa, are not well known in most African countries.

S o u t h A f r i c a n c o m p a n i e s a r e u n d e r g r e a t s c r u t i n y i n A f r i c a n m a r k e t s b y b o t h t h e i r s ha r e h ol de r s

and the domestic market. This makes it imperative for them to adhere closely


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to the corporate governance principles dictated by their home base. However, this can be difficult

when business cultures are different and inflexibility is misinterpreted as arrogance or superiority,

which can be damaging to their operations.

I n 2 0 0 4 , t h e n M i n i s t e r o f P u b l i c E n t e r p r i s e s , J e f f R a d e b e , s a i d t h e g o v e r n m e n t w a s i n ve s t i ga t i n g

the option of legislation to regulate the behaviour of South African companies in the rest of Africa.

T h i s w a s i n r e a c t i o n t o c om p l a i n t s f r o m o t h e r c o u n t r i e s a b o u t t h e b e ha vi ou r o f c e r t a i n bu s i ne s s e s .

The initiative did not gain much currency and was never implemented. But one of the challenges

companies face is keeping to their home principles in markets where different rules apply.

Learning the local systems

Many officials and business people in African countries sell themselves to foreigners as being

people who can "get things done" but this is often not the case. Trusting the wrong people, who may

n o t h a ve t he a ut h or i t y t h e y c l a i m t o ha ve , c a n b e c os t l y.

O n a n o t h e r l e ve l , i t i s i m p o r t a n t i n a r e a s o u t s i d e t h e m a i n u r b a n c e n t r e s t o c u l t i v a t e

relationships with local chiefs, heads of police stations and state or provincial leaders. It is neither

possible nor recommended to keep calling top-level contacts about problems experienced at a lower

l e ve l , s u c h a s a po l i c e r oa db l oc k o r a p r o bl e m a t a p or t .

Procurement

Procurement in African markets can be a minefield and companies have to be clear about

the process in each country. A company may sign a contract with a government without,

u n w i t t i n gl y, h a vi n g go n e t h r ou gh t h e r e q ui r e d t e n de r p r oc e s s ; t hi s w i l l r e nd e r t he c o nt r a c t nu l l a nd

void. Not complying with the tender and procurement legislation can also affect the financing of the

p r o j e c t : c o m m e r c i a l a n d d e v e l o p m e n t f i n a n c e i n s t i t u t i o n s n e e d gu a r a n t e e s t h a t a c o n t r a c t i s l e ga l ,

b i n d i n g a n d e n f o r c e a b l e . T h e s e c a n n o t b e p r o vi d e d i f t h e l e gi s l a t e d p r oc e s s e s h a ve b e e n

circumvented.

Officials may claim the discretion to issue procurement contracts but most countries are

statutorily bound to the procurement standards of developed countries. This is particularly true when

contracts are linked to international funding; flouting these standards can be a criminal offence.

Access to information

Most African countries, particularly conflict and post-conflict states, have limited available statistics.

W h a t i s a v a i l a b l e i s ma y b e o u t o f d a t e a n d h a r d t o a c c e s s . A l t h o u g h S o u t h A f ri c a n c o mp a n i e s t e n d

to eschew paying for information, this can be crucial to success



in other markets. They typically need information about political and succession trends,

new competitors, security dynamics, local nuances and context, and issues in the sector.

One of the problems of identifying risk in Africa is that many questionable businesses - and

b u s i n e s s p r a c t i c e s - o p e r a t e w i t h g o v e r n me n t s a n c t i o n . U s i n g r e s o u r c e s s u c h a s T r a n s p a r e n c y

International rankings can be useful but companies should also obtain informal information from

l o c a l n e t w o r ks a n d o t h e r i n ve s t o r s f o r a n a c c u r a t e t a ke o n a p o t e n t i a l b u s i n e s s o p p or t u ni t y.

An important information gap relates to influential players and undisclosed relationships in politics

and business both between people and companies and with the interested party. There may be

undisclosed conflicts of interest that may become problematic. It is also important to keep abreast of

c o r r up t i on c a s e s a nd a l l e ga t i o ns .

Service self-sufficiency

In the absence of sufficient infrastructure, companies must provide their own utility services. For

example, Anglogold Ashanti constructed its own hydropower facility in the DRC to produce 30-

40MW of power. The company estimates the extra cost to be between 20% and 40% of total

i n ve s t m e n t c o s t s b u t t h e m i n e s c a n n o t f u n c t i o n w i t h o u t i t . I n m o s t c o u n t r i e s , ge n e r a t o r s a n d w a t e r

purification plants are also needed, and companies often build or maintain roads. Governments

barely contribute but these costs are typically built into the entry strategy.

Corruption

It is generally possible to operate successfully without paying bribes. It is easier for multinationals

to avoid bribes as they have the resources to play the waiting game or to get high-level intervention

for a problem, a luxury that many smaller companies do not have. Research in several African

c o u n t r i e s u n d e r t a ke n b y t h e a u t h o r o ve r s e ve r a l ye a r s h a s f o u n d t h a t s m a l l e r S o u t h A f r i c a n

c o m p a n i e s d o n o t a l w a ys w a i t f o r a b r i b e t o b e s o l i c i t e d b u t a r e q u i c k t o o f f e r " f a c i l i t a t i o n f e e s " t o

avoid onerous bureaucracy or get ahead of the competition.

Companies can avoid paying bribes by outsourcing functions to local agencies, law firms and the

like with the brief to get the job done, no questions asked. Another is to threaten to walk away from

a deal or an investment. However, the new interest in Africa from Asian countries has undermined

t hi s s t r a t e gy a s a ba r ga i ni ng t o ol .

N o t p a y i n g b r i b e s m e a n s i t m a y t a ke l o n g e r t o b e e s t a b l i s h e d i n a c o u n t r y a n d s t a r t c o n t r i b u t i n g t o

t h e b o t t o m l i n e . T h i s n e e d s t o b e we l l u n d e r s t o o d b y t h e h e a d o f f i c e t o

p r e ve n t p r e s s ur e o n t h e l oc a l o f f i c e t o c o nt r i b ut e t o t he b ot t o m l i n e s oo n a f t e r e nt r y.


Page 44


Risk insurance

Global risk cover, such as that offered by the World Bank's Multilateral Investment Guarantee

Agency (MIGA), covers most African markets but is affordable mainly to large corporates. More

commonly used are the facility offered by the Export Credit Insurance Corporation of South Africa

(ECIC)24 and the Credit Guarantee Insurance Corporation (CGIC), which cover exports against

payment default, whether local or international.25 In 2008/09, ECIC's biggest exposure was in

Mozambique (32%), followed by Iran (31,3%), the DRC (11,4%),

Zambia (6,7%), Turkey (6,5%) and Ghana and the Sudan, at 2,7% and 2,5% respectively.

For large investments and projects, risk cover is often mandatory and can be made part of an entry

strategy by a funder or foreign partner. It certainly gives comfort; when companies can afford to, they

usually obtain risk cover.

Demand for risk mitigation has changed over the years. The institutions offering it, such as MIGA

and the African Development Bank, used to provide mainly traditional political cover, which typically

related to currency inconvertibility, expropriation and civil unrest. They now include more

commercial concerns in their cover, such as breach of contract by governments, regulatory risk,

currency devaluation and subsovereign risk for other tiers of government (Biau et al., 2008).

Other risk mitigation strategies include the following:

Legal systems: Large companies usually include international arbitration in investment

agreements to counter poor and ineffective legal systems in African countries. Where

arbitration facilities exist, these are a preferred way to fast-track the resolution of disputes. Where

bilateral investment treaties exist, these offer some form of protection although many South

A f r i c a n s a r e u n a w a r e o f t h e r e l a t i o n s h i p s b e t w e e n t h e i r g o v e r n m e n t a nd ot he r A f r i c a n

governments.

Local offices: Having local offices keeps companies close to local markets, conveys

a c o mmi t me n t t o d o i n g b u s i n e s s i n t h o s e c o u n t r i e s ( w h i c h i s i mp o r t a n t f o r l o c a l

buy-in), gives them greater visibility, positions them to take up opportunities timeously and, in

some cases, even qualifies them for preferential access to bids and tenders.

L o g is t i c s h u b s a n d n e t w o r k s : H u b s a l l o w c o mp a n i e s t o a v o i d s o me o f t h e w o r s t

problems of long supply chains. They are generally located near markets and reduce

transport costs, border delays and other problems. Shoprite, for example, uses its Bulawayo

s t o r e a s a r e gi on a l hu b a n d i s l o o ki n g a t e s t a bl i s hi n g a w a r e h o us i n g f a c i l i t y i n L a gos . T r a ns p or t

companies have established hubs in Zambia and DRC for the central

24 The Department of Trade and Industry is the sole shareholder of the ECIC, which facilitates South African exports by underwriting bank loans and investments outside the country to enable foreign buyers to obtain capital goods and services from South Africa. The ECIC evaluates export credit and foreign investment risks and provides insurance cover on behalf of the government. See www.dti.gov.za/thedti/ecic.htm

25 www.creditguarantee.co.za



African region, while airlines have considered, but not successfully implemented, air hubs

outside South Africa. African Explosives Ltd, which services mines across Africa, has its West

A f r i c a n h u b i n G h a n a , w h e r e i t h a s m a i n t a i n e d o f f i c e s f o r m o r e t h a n a de c a de .

Understanding regional trade agreements: Few business people keep track of trade

agreements, notably those under the SADC, COMESA and the East African Community

(EAC), even though they can have a material effect on business. Understanding them helps

companies to be aware of tariff issues, which can affect trade strategies and the bottom line, and

developments to ease the supply chain, such as the harmonisation of requirements across

borders or new customs regulations.

Local sourcing and development of small suppliers: It is cost efficient for companies to

source goods and services locally. This has become a value add for local businesses, which

strive to improve their offerings to secure lucrative contracts from the South Africans.

H o w e ve r , i t h a s be e n ha r d f or f o r e i gn i n ve s t or s t o f i nd a pp r o pr i a t e l oc a l s u pp l i e r s a nd t h e

learning curve has been steep. Some companies, such as Shoprite and SABMiller, have

structured programmes with suppliers, which they train to provide quality agricultural inputs

f or l oc a l o pe r a t i ons .

Social responsibility programmes: These programmes build bridges with local communities

and allay the criticism that big companies do not support local development. For a

company like MTN, it is also a way of creating brand awareness and increasing sales in rural

areas. On the downside, some governments see such corporate spending as removing their own

responsibility for particular services. In Angola, for example, mining companies provide

i n f r a s t r u c t u r e , s c h o o l s , c l i n i c s a n d o t h e r s e r vi c e s o u t s i d e t h e i r c o r e b u s i n e s s . T h i s h a s n o w

become an expectation of both communities and governments. As infection rates rise,

HIV/Aids programmes have shifted from social responsibility programmes to being part of the

overall business strategy. Most multinationals have an in-house HIV programme, some of

which, such as De Beers in Botswana, are world class.

Competition: Because most African economies are small, the competition and market

share can change quickly, with one or two new players of size changing the landscape.

Companies watch the market closely or pay other companies to do so on their behalf to

identify new or fast-growing competitors.

Black economic empowerment: South African companies that have black economic

empowerment as a core strategy may find it had to maintain the purity of their black

South African shareholding in countries where empowerment is seen as a nationalist rather

t ha n a r a c e i s s ue .

T r a d e u n i o n s : A l t h o u g h t r a d e u n i o n s i n o t h e r A f r i ca n c o u n t r i e s a r e n o t a s p o w e r f u l

a s i n S o u t h A f r i c a , t h e y c a n n e ve r t h e l e s s b e a c o n c e r n . T h e y f o c u s o n t h e p r a c t i c e s

of foreign companies and may make (unfounded) allegations about wage structures


Page 46


and the like. Shoprite has had problems with trade unions because of its high visibility, large

workforce and African footprint, which allows for comparison. Companies manage the issue

by being aware of the unions in their sector and building relationships with them.

Case study 1: Democratic Republic of Congo

F o r e i gn i n ve s t o r s a n d f u n d e r s c o n s i d e r t h e D R C t o b e o n e o f t h e h i gh e s t - r i s k p l a c e s f o r b u s i ne s s i n

Africa.26 It has a long history of political instability but its valuable resources, such as copper, cobalt,

gold and diamonds as well as huge forestry reserves, make it an

attractive destination for investors willing to look at high-risk, high-return scenarios.

The DRC remains unstable despite a significant reduction in conflict after the end of a five-year

c i v i l w a r i n 2 0 0 3 . J o s e p h K a b i l a a s s u m e d t h e p r e s i d e n c y a f t e r h i s f a t h e r ' s a s s as s i n a t i o n i n 2 0 0 1 a n d

subsequently won the first democratic elections in 2006. He is supported by major Western

governments, including the United States, France and former colonial power Belgium, and has

widespread support in Africa, including from South Africa. These relationships are mostly based on

economic diplomacy. However, the eastern part of the country still sees frequent clashes between

the rebels and government forces, and there is sporadic fighting in other parts of the country. Much

fighting goes unreported because of the vastness of the country, coupled with a lack of

communication and transport connections. Almost $1 billion a month is spent on a large United

N a t i o ns f or c e , t o w hi c h

South Africa is a contributor.

T h e D R C i s t h e t h i r d l a r ge s t r e c i p i e n t o f W o r l d B a n k f u n d s i n A f r i c a , a f t e r E t h i o p i a a n d

Nigeria. The World Bank currently has $1,8 billion in outstanding commitments in the DRC and its

Country Assistance Strategy has provision for at least $1,4 billion in new lending up to 2011. This is

mostly for natural resources (mining and forestry) but also the rehabilitation of the water sector,

transport sector reforms, increased agricultural production and the expansion of the power sector

(World Bank, 2008).

The Investment Climate Advisory Services division of the World Bank has agreed to support

the DRC's planned special economic zone, which aims to encourage investment and job creation, to

use it as a model for initiatives in other parts of the country. The five-year programme, launched in

2008, focuses on four areas: improving the business environment through regulatory reform;

strengthening small and medium-sized enterprises and support institutions such as chambers of

commerce; rebuilding financial markets, banks and other institutions; and increasing private sector

involvement in infrastructure.27 The agreement for

26 The World Bank considers over 70% of the DRC portfolio at risk and more than half of the projects in the World Bank's DRC portfolio have 3 or more "risk flags", according to the Bank's internal risk-rating system (World Bank, 2008).

27 www.ifc.org



the zone was signed in August 2009 and the International Finance Corporation's Conflict

Affected States in Africa initiative will support the feasibility study (Faure, 2009).

T h e D R C i s a l s o a p r i o r i t y f o r t h e C h i n e s e go ve r n m e n t , w h i c h h a s p l e d ge d $ 9 b i l l i o n i n

reconstruction spending in return for commodities - its biggest African investment to date. The

money will be used for mining and infrastructure projects (i.e. roads, railways, hospitals and schools)

carried out by Chinese companies. In return, China will get metals worth about $50 billion at 2009

prices: 10 million tonnes of copper and 600 000 tonnes of cobalt (Centre for Chinese Studies, 2009).

The economy of the DRC still depends on the mining sector, despite strides made in areas

s u c h a s t e l e c o m m u n i c a t i o n s a n d s e r v i c e s . A s i n m o s t A f r i c a n c o u n t r i e s , a g r i c u l t u r e c ont r i but e s

48% to GDP but production is declining. Conflict has prevented the development of commercial

agriculture and small farms and subsistence agriculture dominate the sector. The DRC is one of 11

African countries that invited South African farmers to produce food there.

In 2007, the DRC recorded economic growth of 6,2%, up from 5,1% in 2006 (OECD, 2008).

The growth rate rose to 8,5% in 2008, despite the start of the global crisis (Standard Bank, 2009).

According to the government in Katanga Province, the headquarters of the DRC's mining industry,

more than $2 billion was committed to mining projects in 2006 and 2007, 38 joint ventures were

formed with mining parastatal Gecamines and the number of

mining licences granted rose to 1 635 (Cuvelier, 2009). A ban on the export of unprocessed

metals resulted in a mushrooming of metallurgical plants, thus increasing employment.

After hitting highs of nearly $9 000 a tonne in mid-2008, the copper price plummeted

by nearly 40% in October 2008 alone. Since late 2008, about 40 mining companies have suspended

operations in Katanga province. By early 2009, an estimated 200 000 people had lost their jobs.

Southern African Resources Watch (2009) says mining output was expected to decrease by 38% in

2009 and employment by 13% because of the global crisis, although a rising copper price could

counter some of this risk.

In response, the DRC Ministry of Mines revised its output forecasts and cut official budgets by up to

a quarter. The central bank raised interest rates three times in short succession, from 28% to 66%,

and dipped into foreign reserves to prop up the weakening Congolese franc (Cuvelier, 2009). The

government also reduced the export tax on minerals from 28% to 1% to aid struggling mining

companies but, given that minerals comprise more than 50% of exports, this has major revenue

implications.

Despite billions of dollars in investment since 2003, government policies are not generating broad-

based growth and the DRC remains near the bottom of the United Nations' Human


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Development Index. In 2009, it was ranked last out of 181 countries in the World Bank's 2009 Doing

Business global rankings, the same position it held in 2008. It ranked 173rd in terms of enforcing

c ont r ac t s, 15 4t h i n t h e eas e of st ar t i n g a b usi nes s ( w hi c h t a kes

1 3 pr oc e du r e s a nd 15 5 d a ys ) a nd 1 60 t h i n t r a di n g a c r o s s b or de r s . 2 8

Mining sector

Potential investors usually view the state of the crucial mining industry is as a signal for

doing business in the DRC. The DRC contains about 4% of the world's copper reserves and a third of

its cobalt reserves. It is the third largest diamond producer in terms of output, although only the

s e v e n t h i n t e r ms o f v a l u e , a s a r t i s a n a l mi n i n g a c c o u n t s f o r 7 0 % o f p r o d u c t i o n . A l l mi n e r a l d e p o s i t s

are owned by the state but holders of mining rights can retain the profits from commodity sales. The

i n du s t r y i s r e gu l a t e d b y t he M i ni s t r y of M i n e s a n d go ve r n e d b y t h e N a t i o n a l M i n i n g C o d e , d r a w n u p

with the World Bank and implemented in 2002.

Investors in the sector are willing to discount the political risk premium during periods

of high commodity prices but operating problems are brought into sharp relief when prices drop. In

2008, before the global crisis, the government set in motion a review of all mining contracts to

r e gu l a r i s e t h e i nd u s t r y a f t e r t h e c ha os a n d c or r u pt i o n t ha t c ha r a c t e r i s e d t he s e c t or du r i n g t h e w a r

ye a r s .

B y O c t o b e r 2 0 0 9 , s e v e r a l l a r g e o p e r a t i o n s s t i l l a wa i t e d t h e c o n c l u s i o n o f t h e r e v i e w. Of t h e 6 1

mining contracts already reviewed, the government said 14 were found to be regular and 25 would

be renegotiated or modified. The remaining 22 were classified as "red light" contracts that were out

o f s t e p w i t h m a i n s t r e a m i n t e r n a t i o n a l p r a c t i c e s a n d f a c e d c a n c e l l a t i o n . T h e p r o c e s s o n l y c o ve r e d

kn o w n a s s e t s ; f o r f u t u r e d i s c o ve r i e s , o w n e r s hi p w ou l d b e s ha r e d b a s e d on t h e i nt e r na t i on a l s t a n da r d

practice of a 51%:49% split between parastatals and private companies. The government also

undertook to introduce compulsory subcontracting to Congolese-owned companies (Swanepoel,

2 0 0 8) .

The mining review was extended several times; some analysts argued that the government was

waiting for commodity prices to rise to give them more leverage in the negotiations. One of the

outstanding reviews is that of the Tenke Fungurume mine, one of the biggest copper and cobalt

o p e r a t i o n s i n t h e w o r l d . T h e o p e r a t o r s t h r e a t e n e d t o p u l l o u t s h o u l d t he r e vi e w s t i l l n ot be

completed by the end of March 2010 (Reuters, 2009a).

T h e r e i s a l s o a d i s p u t e w i t h a n o t h e r l a r ge c o n s o r t i u m i n t h e D R C - m i n i n g gi a n t F i r s t Q u a nt u m a nd

its partners, South Africa's Industrial Development Corporation (10%), the International Finance

Corporation (7,5%), the DRC government (5%) and state mining

28 See the World Bank Doing Business website: www.doingbusiness.org/EconomyRankings



company Gecamines (12,5%). The state has sealed off a tailings facility, part of the giant Kolwezi

Mine operated by First Quantum, claiming that the company is in violation of agreements relating

t o t h e o p e r a t i o n . T h e c o m p a n y , w h i c h h a s f i l e d f o r i n t e r n a t i o n a l a r b i t r a t i o n , d e n i e s t h i s , s a yi n g t h e

sealing order is illegal. It is speculated that the real reason for the confrontation is that the

government wants to increase its stake in the consortium without paying for the shares. If these

companies were to withdraw from the DRC, Chinese investors would be eager to negotiate more

favourable terms with the government. This trend that has echoes in Guinea, where Chinese

investors are also looking for lucrative opportunities, some of the best of which are held by Western

mining companies.

These cases show the power of government officials to interfere with commercial operations for

unspecified reasons. These companies have invested several billion dollars and paid state taxes for

years but have little say in the outcome - a major risk for them.

Risk analysts and companies investing in the DRC believe a long-term view of the investment is

necessary and that community investment is important, given the remoteness of many operations.

T h e p r o s p e c t o f i n t e r n a t i o n a l a r b i t r a t i o n a n d l e g a l a c t i o n i s a l s o a m a j o r c o ns i d e r a t i o n , a s t h e

government is not renowned for respecting contracts.

The lack of properly functioning institutions in the DRC means politicians have great personal

influence and a change of guard in, for example, the mining portfolio can have a major effect on

the industry. But it is nevertheless necessary to build relationships with politicians along the chain

to keep operations secure; this comes at a cost in terms of money, ethics and time, as important

p e o pl e a r e n ot or i o us l y u n a va i l a bl e .

Another problem is the high cost of finance for projects in the DRC because of the perceived risk,

which affects the country's international credit rating. Companies prefer to spread the risk of

projects by having multiple external partners, such as financiers and operators. The externalisation

of risk is only possible to a certain extent and is easiest in terms of financing. Eventually the

country risk comes to bear, as it did for First Quantum and Tenke Fungurume. The government has

p r o v i d e d m i n i n g c o m p a n i e s w i t h g u a r a n t e e s b u t t h e l e ga l s ys t e m i s n o t s t r o n g o r e f f i c i e n t e n o u gh

to enforce them, making them little more than a goodwill gesture.

In 2008, the DRC became a candidate country for the Extractive Industries Transparency Initiative

(EITI), a multi-stakeholder effort to increase transparency in transactions between governments

and the extractive industries. However, progress towards validation

has been slow.

South Africa and the DRC

South Africa's political relationship with the DRC was put on the map in 1997 when

then President Nelson Mandela attempted to resolve the conflict between then President


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M ob ut u Se s e Se ko a nd r e be l l e a d e r L a ur e nt K a bi l a , f a t he r of t he c ur r e nt p r e s i de nt .2 9

Since then, South Africa has maintained an active engagement with the DRC. During 2002 and

2003, South Africa hosted the Inter-Congolese Dialogue, which aimed to design a peace deal

b e t w e e n t h e m a n y f a c t i o n s i n t h e D R C . I n J a n u a r y 2 0 0 4 , t h e n P r e s i d e n t T h a b o M b e ki w e n t o n t h e

first state visit to the DRC, accompanied by a large business delegation. In 2006, South Africa

assisted with the country's first democratic election; in 2007, President Kabila visited South Africa.

I n t h e e a r l y p a r t o f t h e d e c a d e , S o u t h A f r i c a d i s p l a c e d B e l gi u m a s t h e D R C ' s b i g ge s t

trading partner. Two-way trade rose from R1,8 billion in 2005 to R2,6 billion in 2006.30 In 2009,

South Africa was its tenth biggest trading partner (down from sixth in 2008). The movement of

goods is skewed heavily in favour of South Africa, with exports to the DRC of R8,27 billion in 2008

and imports of only R49 million.

A Binational Commission was established between the two countries at presidential level,

w h i c h h e l d i t s f i f t h m e e t i n g i n A p r i l 2 0 0 8 . A r e a s c o v e r e d b y t h e e x i s t i n g a gr e e m e n t s i nc l u d e

telecommunications, mining and energy, infrastructure development and tourism. The South African

government is involved in some reconstruction efforts in the DRC and in the plan to develop

hydroelectric power on the Inga Dam. Its interests are political stability in the DRC, given its

potential for destabilising the continent; the Southern African Power Pool (SAPP); and creating

opportunities for South African business and parastatals.

But companies have found the going tough. Almost non-existent transport routes to most

o f t h e c o u n t r y, e x p e n s i ve a i r t r a ve l , t h e l a n gu a ge b a r r i e r , a d i f f e r e nt b u s i n e s s c u l t u r e , d e e p - r o o t e d

c o r r u p t i o n a n d p o l i t i c a l i n s t a b i l i t y h a v e c o n s t r a i n e d t h e e x p l o i t a t i o n o f p ot e n t i a l o p po r t un i t i e s .

Kinshasa, the capital, and Katanga province, the mining centre in the south-east, are the preferred

destinations for South Africans. The Zambian Copperbelt is the springboard for much business into

n e a r b y K a t a n ga a n d L u s a k a i s a h u b f o r t r a d e i nt o t hi s c o r n e r of t he D R C . T h e r e a r e di r e c t f l i gh t s

from Johannesburg to Ndola in northern Zambia and to Lubumbashi, and regular flights between the

two towns. One problem for mining companies is the inefficiency of the border crossing between the

DRC and Zambia at Kasumbalesa. It is one of the most corrupt and inefficient crossings on the

c o n t i n e n t a nd go o ds c a n be de l a ye d f or s e ve r a l w e e ks o n e i t h e r s i d e o f t h e b or de r .

B u r e a u c r a c y , n e c e s s a r y f o r g e t t i n g l i c e n c e s , w o r k p e r mi t s a n d o t h e r d o c u me n t s , i s a

l e n g t h y a n d f r u s t r a t i n g p r o c e s s , w h i c h c a n d e l a y p r o j e c t s t a r t -u p f o r mo n t h s , i f n o t

29 The mediation effort was unsuccessful. Less than two months later, Kabila led his forces into Kinshasa and Mobutu fled the country.

30 Department of Trade and Industry website: www.thedti.gov.za



years. Environmental impact studies must be done, soil and mineral samples analysed and other

processes completed before a bankable study can be drawn up. "It is two years before you even dig a

hole in the ground," one mining engineer says.

A p p l i c a t i o n s f o r gr i d p o w e r c a n b e m a d e o n l y i n K i n s h a s a . M a n y vi s i t s a r e r e q u i r e d b e f or e a n y

progress is made, adding to cost and time. Officials from the power utility need to be flown to the

site, at company expense (including per diems), to sign off on arrangements; this can require more

than one trip. One mining company says it can be easier and cheaper to bring officials to

J o ha n ne s b ur g t o n e got i a t e a n d s i gn d e a l s . T hi s h a s t he a d d e d be ne f i t of s t r e n gt he ni n g r e l a t i on s h i p s

w i t h t h e s e of f i c i a l s .

Companies complain that government officials have no sense of urgency to get projects under way,

n o o n e w a n t s t o t a k e c h a r ge o f t h e p r o c e s s , m e e t i n g s c a n b e m o n t h s a p a r t a n d s e ve r a l o f t h e s e a r e

r e q u i r e d b e f o r e a s i gn a t u r e i s l i ke l y t o b e a p p e n d e d t o a n yt h i n g. T i m e o ve r r u n s o n p r o j e c t s r e s u l t

in cost overruns, which can sometimes be a tipping point for companies. But business persists

because of the returns from high grades and volumes. For example, in the DRC, 5% of copper is

recoverable from every tonne, compared to 1% to 1,5% in neighbouring Zambia. In gold terms, 7-8

grams a tonne are recovered

in the DRC but only about 1 gram in South Africa.

South African business in the DRC

Inga Dam Power Project

The Inga project is the biggest planned infrastructure project on the continent. Its potential political risk is high and rests heavily on the goodwill of the government in Kinshasa, a big potential

problem given the size and timetable of the project.

South Africa's Eskom is involved through its membership of Western Power Corridor Company

(Westcor), established in 2003 by five members of the SAPP31 to explore renewable energy options

in the SADC region. On completion of the project, Eskom will draw power from Inga, which will

allow it to close several coal-powered stations. However, the project is fraught with risk, given its

dependence on the DRC. There have already been problems. In 2009, Westcor threatened to

withdraw from the agreement, as it believed the DRC government planned to shed Westcor's

involvement: BHP Billiton had offered to develop the project with the state to allow it to draw power

for its proposed aluminium smelters there.

However, after the September 2009 SADC summit in Kinshasa, President Kabila reaffirmed his

commitment to Inga as a regional, multi-utility project that the DRC would not go alone. Westcor is

back on board, although shareholding is to be enlarged to include governments in the rest of

southern Africa, presumably to spread the risk.

31 The five are Société nationale d'électricité (SNEL) in the DRC, Angola's Empresa Nacional de Electricidade (ENE), Nampower (Namibia), Botswana Power Corporation (Botswana) and Eskom.


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DRC consultant, John Kaninda, told the African Business Network meeting in November 2009 that

W e s t c o r h a d i r k e d t h e g o v e r n m e n t b y t r y i n g t o d i c t a t e t h e t e r m s o f t h e c on t r a c t , r a t he r t h a n

following the government's lead. Recognising sovereignty, even with regional projects, is important

in project deliberations; it is one of the factors holding back effective regional integration.

Anglogold Ashanti

Anglogold Ashanti (2009) is one of the biggest South African investors in the DRC. It invested in

1996 with a licence to explore a gold deposit in Ituri District in the north-eastern Congo. At the time,

the area was overrun by the Front des Nationalistes et Intégrationnistes (FNI), a rebel group that

violently seized control of the area and was accused of serious human rights abuses. The company

inherited the mine when it merged with Ashanti in 2004. It currently holds 86% of the shares, with

the remainder held by Ashanti Goldfields Kilo and Offices des Mines d'Or de Kilo-Moto (Okimo), a

local parastatal.

The company's operations in the DRC highlight one of the prime risks of doing business in conflict

areas - the ethical compromises necessary to ensure smooth operations and the safety of staff. The

company attracted controversy after it was accused by human rights organisations of paying the FNI

rebels to allow it to operate. According to the United Nations Global Compact, in 2005, the

exploration team paid $8 000 to the FNI to allow the company to operate unharmed. It accused the

company of providing accommodation and transport and paying levies on cargo flown into the local

airport. It asserted that having dealings with FNI lent the group political legitimacy. The company

defended itself by saying that it subscribed to global business principles, including the promise to

ensure that communities were better off for it having operated there. But it admitted to the payment,

saying it was made under duress for the safety of its on-site employees and fell far short of the $15

000 demanded by the rebels. Payments totalling $1 100 were made in 2004 in landing "taxes" at the

local airstrip to ensure the safe delivery of goods and equipment. However, these stopped after a

United Nations Panel of Experts investigating breaches of the arms embargo pointed out that such

payments contravened United Nations Resolution 1493. Some ground transport was also offered to

FNI militants who threatened company drivers (Kapelus, 2006).

So, ultimately, the company subscribed to its business principles until the safety of staff and

operations was threatened. In rebel-held conflict areas, companies cannot call on the government for

a s s i s t a n c e . T h e y m u s t d e c i d e , b e f o r e go i n g i n t o s u c h a r e a s , h o w f a r t h e y a r e p r e p a r e d t o go t o

secure their operations, as it is almost certain to involve a compromise of international ethical

principles. This issue is a particular concern for resource companies and also arises in countries such

as Angola, the Central African Republic, Guinea and the Niger Delta in Nigeria.



Divine Inspiration Group and the South Africa Congo Oil Company

S o u t h A f r i c a n s h a ve b e e n e m b r o i l e d i n a n o t h e r c o n t r o ve r s y r e l a t i n g t o a n o i l c o n c e s s i o n o n t h e

DRC side of Lake Albert. A consortium, Divine Inspiration Group, was set up, headed by

politically connected businessman Tiego Moseneke and the South Africa Congo Oil Company

(Sacoil), of which the Moseneke family's Encha Group is the main shareholder. The consortium was

given the rights to the concession although it was held by Canada's

Tullow Oil, which also held the rights also to an adjoining concession in Ugandan waters.

The Sacoil consortium was backed by state oil company, PetroSA, and the South African

government, which used their relationship with the DRC government to secure the deal (Sunday

Times, 2008). The group apparently paid $6 million in "bonuses" to the DRC government to secure

the rights after DRC Hydrocarbons Minister Lambert Mende cancelled Tullow's concession in 2007.

Tullow challenged the decision in the Kinshasa High Court. In April 2009, before the court had

ruled, Oil Minister Rene Nkeka announced that Tullow would retain its rights. There was media

s p e c u l a t i o n t h a t t h e c h a n ge s r e l a t e d t o a p o w e r

struggle between the ministries, reflecting the power of individuals in post-conflict states.

Tullow maintains that the South Africans, who are awaiting the finalisation of three other claims in

the DRC, acted in bad faith, as they knew the oil block was already taken. The latter maintains they

did nothing wrong by bidding for a block for which the government had issued invitations. But the

most basic due diligence would have highlighted this as a problem and the South Africans took a risk

that did not pay off, possibly hoping that the connection with the South African government would

help them. The situation suggests that the South African relationships did not extend to all the

relevant ministers and that the minister who had awarded the Tullow contract possibly had an

i nt e r e s t i n t he s t a t us q u o .

The examples above highlight some of the primary problems of investing in the DRC, particularly

in long-term projects. Government and political risk is high, contract enforcement lax and the

b u r e a u c r a c y o ve r be a r i n g.

Other business

Vodacom has had some success in the DRC since it invested $94 million in 2002 in partnership with

a Congolese operator Congolese Wireless Networks (49%). By December 2008, the company had

a 38% market share and a subscriber base of nearly four million people. While 16 operators had

been licensed in DRC in 2001, by 2009 there were just four main players.32 However, the company

has seen falling revenues because of weak economic conditions, growing competition, rising excise

d u t i e s a n d t h e ge n e r a l l y e xp e ns i ve o pe r a t i n g e n v i r o n m e n t . I t r e p o r t e d a n 1 1 , 2 % d r o p i n a v e r a g e

r e ve n u e p e r u s e r i n t h e q u a r t e r t o

32 www.vodacom.com/drc.php


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June 2009, from $64 in the same quarter of 2008 to $39 (IT Online, 2009). New funding

arrangements with Congolese Wireless Networks have led to tension between the parties and a legal

case may be looming.

Shoprite invested about $80m to build two supermarkets - one in Lubumbashi and one in Kinshasa.

Although the first supermarket was due to open in 2009, Chief Executive Basson says they are

looking at starting trading early in 2011 (Reuters, 2009b).

Various mining companies also invest in the DRC, such as Mvelaphanda Holdings, Afriminerals

Holdings Group and Metorex. The first two companies are led by political heavyweights Tokyo

Sexwale (until recently) and Zwelakhe Sisulu, whose political connections may have

he l pe d t o s e c ur e t he i r e nt r y.

Case study 2: Mozambique

Mozambique is generally regarded as one of Africa's big success stories. It has used its

post-colonial and post-conflict revival to good effect, becoming one of the fastest growing

economies on the continent, albeit off a low base. Political stability and huge needs made it a top

d o n o r d e s t i n a t i o n , a f a c t o r t h a t h a s b e e n b o t h g o o d a n d b a d f o r t h e c o u n t r y . On t h e o n e h a n d , i t h a s

unlocked development funding on a large scale and created new economic activity. On the other, it

has perpetuated the dependency mindset fostered by socialism and strong government control of the

economy.

The effect of Mozambique's proximity to South Africa has been significant. This has,

first, allowed the development of megaprojects such as the Mozal aluminium smelter, the location of

which was based on its proximity to Gauteng. Second, it has enabled the rapid penetration of goods,

s e r vi c e s a n d s ki l l s i nt o t h e c o u nt r y. T hi s c on t r i b ut e d t o t h e s ke w e d n a t u r e o f d e v e l o p m e n t i n

M o z a m b i q u e - a h i g h c o n c e n t r a t i o n o f d e ve l o p m e n t a r o u n d M a pu t o a n d l i t t l e i n t h e r e s t of t he

c o u nt r y.

Mozambique has been one of South Africa's top three African trading partners for more

than a decade. With Maputo a four-hour drive away, South Africans have moved into the market in

large numbers, despite the potential language and cultural barriers. A short drive or flight to Maputo

makes it easy to explore this market.

It is the site of a number of megaprojects, which have been a big opportunity for South

Africa in terms of business linkages, supply and inputs, but also to investors from elsewhere. BHP

Billiton's Mozal aluminium smelter project, which is the biggest employer and taxpayer in the

country, is still the biggest megaproject. But there are others, such as the Sasol gas pipeline to South

Africa, the $450 million Moma titanium mine and smelter in northern Mozambique, the $1,5 billion

Moatize coalmine being developed by Brazil's Vale in the



north and BHP Billiton's $500 million Corridor Sands titanium project (Games, 2007).

Mozal alone attracted double its investment value in new investment in supplementary services,

most of it from South Africa.

Between 1994 and 2008, real GDP growth averaged 8%. Inflation has decreased from more

than 50% in the mid-1990s to near single digits today. Mozambique has good investment ratings

from international agencies, which have, along with the other positive indicators, boosted investor

confidence.33 As a Heavily Indebted Poor Country (HIPC), it also benefited from major debt write-

offs, and reached its HIPC completion point in September 2001. Per capita GDP, although low at

$956 in 2008, is much higher than its mid-1980s level of $120 (Department of State, 2009).

Mozambique approved 836 investment projects with a value of $11 billion in the past

five years ($8 billion in 2007 alone), of which $6,5 billion was foreign direct investment. The ten

largest sources of such investment were the United States, Switzerland, Mauritius, the United

Kingdom, South Africa, China, Portugal, Tanzania and Canada. In the first quarter of 2009, the

country received $110 million in new investment pledges for 59 projects, most of them in agriculture

and agro-industry (Mozambique Investment Promotion Centre, 2009a).

The government, aided by foreign consultants and donors, has done much to improve the

economy. Companies say the operating environment has improved dramatically in the past five

years, even though the country continues to grapple with its transformation from a centrally

planned economy to a liberalised, market-driven system. For example, good laws are often not

followed by good implementation and a distrust of the private sector remains part of the official

mindset. Government subsidies and most restrictions on exports have been lifted, while operating

requirements, licensing, import tariffs and other important areas of the economy have been

simplified. A new Commercial Code was introduced in 2006 - an update on an 1888 version in use

until then - and many other legal reforms have been undertaken to modernise the economy.

The country rose by five places in the World Bank's Doing Business Index from 2009 to

2010.34 Its biggest improvement - a jump of 47 places to 96

th - was in the category of the ease of

starting a business, reflecting the government's commitment to the development of small and

medium-sized enterprises. It also showed some improvement in the ease of registering property,

a n ot he r h e a da c he f or bo t h l oc a l a n d f or e i gn i n ve s t or s , b ut de c l i n e d i n c a t e gor i e s s u c h a s pr ot e c t i n g

i n ve s t or s a n d t he e a s e of ob t a i n i n g c r e di t .

33 Mozambique received a B (stable) rating from both Standard & Poor's and Fitch.

34 World Bank Doing Business Index 2010: www.doingbusiness.org/exploreeconomies/?economyid=133


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D e s p i t e ma n y ma c r o e c o n o mi c i mp r o v e me n t s , M o z a mb i q u e s t i l l r a n k e d 1 7 5 t h o u t o f 1 7 9 c o u n t r i e s

o n t h e U n i t e d N a t i o n s ' H u ma n D e v e l o p me n t In d e x i n 2 0 0 8 . P o s i t i v e e c o n o mi c g r o w t h h a s f a i l e d

to translate adequately into broad-based development. Most investment is still in the Maputo area

and, despite a few pockets elsewhere linked to megaprojects, the country is moving slowly in terms

of poverty alleviation. More than half the government's budget is still supported by donors.

Government is centralised in Maputo, with most planning and budget decisions emanating from the

capital. This has presented significant logistical and cost problems for companies operating

e l s e w h e r e , p a r t i c u l a r l y gi v e n h i g h t r a n s p o r t c o s t s a n d t r a n s a c t i o n a l d e l a y s . H ow e ve r , t he r e h a s

been some attempt by the central government to provide the country's

128 districts with more financial capacity.

This decentralisation will become increasingly important as growth nodes develop around

megaprojects, such as Nampula and Tete in the north. The country's "second city" of Beira is not

faring well. It has been adversely affected by the economic decline and political turmoil in

Zimbabwe. This has affected tourism in Beira, where previously busy hotels are empty. The

manufacturing and industrial concerns of the pre-war city are mostly gone. Agriculture, fishing and

transport now drive the provincial economy but unemployment is high. South Africans have been

slow to take up opportunities in Beira, given the deterioration

of the city and its logistics.

T h e M o z a mb i c a n e c o n o my i s r e a c h i n g a n e w l e v e l w i t h t h e p r o s p e c t o f c o mme r c i a l

oil finds. In 2008, Petronas became the fifth major oil company to be licensed to explore for oil

(allafrica.com, 2008).

T h e g o v e r n me n t h a s b e e n c r i t i c i s e d f o r r e l y i n g o n me g a p r o j e c t s t o d r i v e i t s e c o n o my

because of claims of limited linkages to the local economy. But there have been many positive

spinoffs. For example, Mozal created more than 15 000 temporary posts during the construction of

its two phases, 65% of which were for Mozambicans. It buys $10 million in supplies every month. It

spent $8 million on training for 10 000 people and continues to allocate $2,5 million a year to

training. It has established a training centre that is used by other companies and has extensive

community development programmes (Games, 2007). Mozal has also had a significant effect on the

secondary tier of the economy through the creation of supplier companies and linkages, thereby

i nc r e a s i n g t he t a x b a s e a n d c r e a t i n g n e w o pp or t u ni t i e s f or t r a i ni n g a nd s ki l l s t r a ns f e r . T he di ve r s i t y

of companies surrounding each megaproject has opened up new opportunities and helped to create a

n e w s ki l l s b a s e .

In 2004, the Anti-Corruption Law was passed, mainly to regulate the public sector. It includes

d e f i n e d p r o c e d u r e s f o r t h e s i gn i n g o f c o n t r a c t s b e t w e e n t h e p r i va t e a n d p u b l i c s e c t o r s , w h i l e a

Banking Law governs issues relating to money laundering. The President has been



outspoken on the issue of corruption but companies complain that these measures have

had little effect; petty bribery is still pervasive.

The banking sector in Mozambique is highly regulated and considered restrictive for private

operators. The level of interference from the regulator is a big challenge for private institutions. One

change introduced in 2007 was the requirement for all non-exporting companies to borrow in local,

rather than foreign, currency. The regulations on borrowing make it punitive for the banks to lend to

non-exporters in foreign currency. This has resulted in the institutions themselves regulating such

borrowing, rather than the authorities. The downsides of local borrowing are higher and less stable

interest rates; the absence of hedging instruments; and the fact that returns have to be in local

meticais.

O p p or t u ni t i e s f or l a r ge pr oj e c t f i na nc i n g a r e r e s t r i c t e d b e c a u s e of l e n di n g c a p s i n t h e l oc a l

market and the limited availability of finance. As with most African countries, long-term project

f i na nc e i s ge ne r a l l y r a i s e d of f s hor e .

Land remains a controversial issue in Mozambique and any deals that involve securing

land can be problematic. The slow process of registering property means that there can be multiple

claimants on land and projects can be held up for years while these issues are sorted out. Mortgage

financing is also limited because land, which is owned by the government, is not accepted as

collateral for private deals. It is only viable for the banks to look at financing additions and

improvements to land once a building is about 80% complete; otherwise, the transaction becomes

high-risk, except in the case of regular low-risk clients. Such financing must also be done in the

local currency, as noted, which can make it costly for clients.

Access to finance, including credit, is circumscribed by restrictive lending policies and is

not supported by the legal framework. Getting a court date to deal with issues such as bad debt can

take several years, for example, and the conclusion of a case much longer. This has encouraged

b a n ks t o b e c on s e r va t i ve i n t he i r l e n di n g pr a c t i c e s .

Telecommunications is still a developing area and the country has yet to be fully connected.

The sector has been dominated by government monopolies that have stifled competition. War and

floods have damaged infrastructure and the high cost of transporting equipment has been a

compounding factor.

The problems undermining agriculture include inadequate infrastructure, particularly rural

roads; limited access to finance, especially credit; a lack of commercial focus; weak knowledge of

export markets among local enterprises; and business inefficiency. Most farmers are still engaged

in subsistence agriculture. Poor roads and high transport costs restrict the movement of surplus

crops. However, commercial operations benefit from a good climate,


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the availability of land, access to several ports, a lack of competition in the market, and a

s ur pl us of c he a p l a bo ur .

Companies operating in Mozambique cite excessive bureaucracy as an important concern.

The government maintains complex procedures and onerous documentation for simple requirements

and business people see its hands-on approach to private companies as a way of getting bribes.

Government officials require details of staff leave schedules, salaries and related information, and

inspectors regularly visit offices to check that companies are operating lawfully.

A lack of delegation of government authority and the micromanagement of issues by top

officials cause delays in delivery, while the frequent changing of rules means companies spend a lot

of time to stay on the right side of the law.

Labour laws were eased with legislation introduced in 2007, making the issue much less

onerous for employers. One of the main areas of dispute was the generous redundancy packages

that employers were forced to pay. The emphasis is still on the protection of the employee rather

than the employer, something employers say employees use to their advantage.

T h e g o v e r n me n t h a s b e e n r e s p o n s i v e t o o v e r t u r e s f r o m t h e p r i v a t e s e c t o r a n d t h e

President has established an advisory board35 to assist him in improving the investment climate. The

board has focused primarily on tourism to date. The government also strives to improve its rankings

on the World Bank's Doing Business indicators, with some success (Mozambique Investment

Promotion Centre, 2009b).

However, broadly speaking, the government still has a socialist mindset. For all its impressive

s t r i d e s i n i mp r o v i n g t h e c o u n t r y , i t s e e ms t o h a v e r e a c h e d a p l a t e a u i n t e r ms o f h o w mu c h

e c o n o m i c c o n t r o l i t i s p r e p a r e d t o r e l i n q u i s h . A s t r o n g d o n o r p r e s e n c e h a s a l s o c o ns t r a i ne d a n

emerging entrepreneurial culture.

But none of these challenges curbed investor interest, which is premised on the country's

political stability; large donor inflows; improving business climate; potential for agriculture, tourism

and mining; and its proximity to South Africa.

South Africa in Mozambique

Between 1994 and 2003, South Africa was the leading investor in Mozambique, followed

by Australia, the United Kingdom and Portugal. Over this period, Mozambique received

35 The Brenthurst Foundation, the Oppenheimer-family think tank, was asked to invite leading business people to sit on the board. They include Jonathan Oppenheimer of De Beers, Lakshmi Mittal, representatives of Vale and others.



51% of investment by South African companies into the SADC region, followed by Malawi,

Tanzania and Zambia, with 10%, 9% and 9% respectively (Pingo, 2002).

In 2009, according to figures from the South African Department of Trade and Industry,

Mozambique was the biggest destination for exports to the rest of Africa, up from third place in

2008. However, the large trade imbalance is in South Africa's favour: most of Mozambique's

exports - primarily aluminium from Mozal - go to a trans-shipment centre in the Netherlands (in

ne a r l y 60% 200 6) .

Investments are in a variety of sectors, from retail, property and services to mining and

a gr i c u l t u r e . T h e r e a r e a n um b e r o f S o u t h A f r i c a n b a n ks w i t h s t a ke s i n l o c a l b a n ks , w h i l e S t a nd a r d

Bank has an operation in Mozambique.

Vodacom clinched a 15-year licence in Mozambique in April 2002, launching in 2003, in

competition with state-owned mcel. Vodacom expects its investment in Mozambique to increase to

$200 million over ten years and the market to grow to 2,0 million users by 2012. In 2008, the

company announced it had 1,5 million subscribers and a 40% share of the market (International

Telecommunications Union, 2008).

South Africa-Mozambique trade, 2003 to 2008 (R 000)36

Year

2008

2007

2006

2005

2004

2003

Imports from Mozambique

3 310

2 388

319

199

205

281

Exports to Mozambique

13 497

9 016

6 240

6 403

5 078

5 676

Source: Department of Trade and Industry.

The Maputo Corridor spatial development initiative links Gauteng and Maputo. It generated

more than $3 billion in investment between the two governments, banks and construction

companies, and has facilitated increased business between the countries.

Maputo still takes the lion's share of investment; its rapid growth and sophistication

clearly reflect the influx of new money and the growing incomes of its residents. Retail

36 It is not clear what caused the big jump in trade from 2006 to 2007 but several analysts suggested factors such as Sasol's planning for hydrocarbons exploration, increased exports of gas from the Pande field to South Africa, as well as a number of mining, steel, agricultural and building projects.


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developments are expanding rapidly, with South African supermarkets such as Game and

Shoprite as anchor tenants, and incorporating offices and upmarket apartments. All of this

development is premised on rising future incomes.

P o o r r o a ds a n d hi gh t r a n s po r t a n d s hi p pi n g c o s t s ha ve ke p t t he c o s t o f d oi n g b us i n e s s no r t h

of Maputo high. There is a lack of support services for companies operating in Beira and services

often have to be imported from the capital. Transporters reckon the cost of moving a truck from

Beira to Maputo is about $2 000 one-way. Most building materials and other inputs are imported

from South Africa.

The size of South Africa's interests in Mozambique does not mean the country is necessarily

an easy business destination. Despite huge improvements, Mozambique retains many of the

characteristics of a state in early transition partly because of the mindset of the politicians, rather

than legislative problems. But South Africans have shown a large appetite for the market, mostly

because of the geography and the size of the opportunity. They get comfort from the strong political

ties and the investment-friendly attitude of the government. However, they are slow move into

other areas of the country because of the logistics, costs and uncertainty of the market. In the

northern areas, investors from Zimbabwe, Malawi and other parts of the world are more in evidence.

S o u t h A f r i c a n s a r e i n vo l ve d i n t h e t o u r i s m s e c t o r b u t m o s t l y t h r o u gh s m a l l o p e r a t o r s .

Apart from Southern Sun in Maputo, European and other investors run most big hotels. Despite

generous investment incentives, tourism is a high-cost business in Mozambique and most South

African operators are small. Air links are poor, particularly beyond the capital, and ticket costs are

h i gh . M a n y r e s o r t s a r e o f f s h o r e , w h i c h r a i s e s t h e c o s t o f t r a ve l a n d f a c i l i t i e s ; p o o r i n f r a s t r u c t ur e

also pushes up costs, and the length of the country means long travelling times. Other costs are

providing potable water in more remote areas, moving building equipment and supplementing

p o w er .

South Africans are very involved in agriculture. For example, Tongaat Hulett has large sugar

holdings in Mozambique and plans to double its output. As did the DRC, Mozambique invited

South African farmers produce food; the two governments have put in place strong political

agreements to this end.

The border crossing between South Africa and Mozambique - Ressano Garcia - is one of

the busiest in the region. It is the proposed site of a second one-stop border post in the region (the

pilot project is at Chirundu on the Zimbabwe-Zambia border) to alleviate serious congestion.

Exporters in South Africa complain that, although it is a short four-hour drive to Maputo from

Gauteng, cargo trucks can be stuck at the border for a week or more.



South Africans have succeeded in Mozambique because they moved into niche markets ahead of

other competitors, they can easily leverage their domestic market, and proximity means they can test

the market, making failure less likely. But many companies have been frustrated by the overzealous

bureaucracy, slow decision-making by government, labour issues and increasing competition from

o t h e r S o u t h A f r i c a n s a n d i n t e r n a t i o n a l i n ve s t o r s . T h e l o w f a i l u r e r a t e i s a l s o l i nke d t o t h e t e n d e n c y

a m o n g i n ve s t o r s t o p u r s u e t h e e a s i e s t oppor t uni t i e s .

T h e m a i n f i n d i n gs o f a 2 0 0 4 r e p o r t o n t h e e x p e r i e n c e o f S o u t h A f r i c a n c o m p a n i e s i n

Mozambique are still relevant today (Grobbelaar, 2004). These include the following:

The successful implementation of megaprojects such as the Mozal aluminium smelter and the

Sasol pipeline had a huge impact on the confidence of South African, foreign

and domestic businesses. Both projects highlight the ability of Mozambique to respond to the

demands and requirements of large investors.

Government cooperation and support from both countries were critical to the success of

t he s e pr oj e c t s .

The introduction of South African products to the market and the development of the

local distribution network have led to a more consistent supply of goods, greater price

stability and higher consumer awareness.

South African companies engage in strategies of peer learning and coping to overcome

logistical bottlenecks. As an example of peer learning, Sasol tailored its model for

engagement with the Mozambican government on that of Mozal and its model for community

engagement on that of Shell. Coping strategies are evident from moves such as opting to

transport goods by sea rather than land and investing in sewerage farms, generators and water

b o r e h ol e s .

The experiences of smaller and larger investors diverge. The latter are generally insulated

from the constraints of the domestic economy because they benefit from fiscal incentives

and an exemption from red tape. In contrast, small South African businesses face many of the

same difficulties as local businesses, and are more exposed to petty corruption and harassment

b y of f i c i a l s .

T h e i mp a c t o f S o u t h A f r i c a n i n v e s t me n t o n e c o n o mi c p o l i c y , i n d u s t r i a l i s a t i o n ,

the transfer of technology and the regulatory framework has generally been positive.

In many instances, it has set standards of best practice in labour and business.

S o u t h A f r i c a n a n d o t h e r f o r e i g n b u s i n e s s d o mi n a t e t h e s ma l l p r i v a t e s e c t o r o f

Mozambique. Careful management of local sensitivities and strict adherence to good

corporate governance are required to ensure the continued positive reception of South African

investors in Mozambique.


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State-owned enterprises in Africa

S o u t h A f r i c a 's s t a t e -o w n e d e n t e r p r i s e s ( S O E s ) , w h i c h f o r me d a v i t a l p a r t o f t h e

government's economic diplomacy after 1994, have a chequered history in the rest of Africa. Their

penetration of African markets was widely hailed as South Africa's contribution to the ideals of the

New Partnership for Africa's Development (NEPAD) by using available skills for the development of

t h e c o n t i n e n t . In 2 0 0 2 , a t t h e h e i g h t o f S O E i n v e s t me n t n o rt h w a r d s , t h e n P u b l i c E n t e r p r i s e s

Minister Jeff Radebe said in a 2002 speech: "South Africa's key SOEs perform development

f u nc t i on s b e yo nd ou r b or de r s t hr o u gh pa r t n e r s hi p a g r e e m e n t s , j o i n t v e n t u r e s , i n f r a s t r u c t u r e

development and business transactions. Their activities in Africa provide a solid platform upon

which much of NEPAD's development agenda can be based. South Africans generally should be

proud of the extent of the engagement of SOEs in Africa" (Radebe, 2002: no page). He emphasised

t he need f or

responsible corporate governance and the development of a culture of "ethical probity".

A t t h e t i m e , E s k o m E n t e r p r i s e s h a d i n ve s t e d a b o u t R 3 2 5 m i l l i o n i n a r a n ge o f

telecommunications, electricity supply, consultancy, infrastructure and hydroelectric projects in about

32 African countries, with projects valued at R2,5 billion in the pipeline. Spoornet had agreements

w i t h s e ve r a l c o u n t r i e s , s u c h a s M o z a m b i q u e , f o r l i n e r e h a b i l i t a t i o n a n d

the leasing of locomotives, and South African Airways was expanding its Africa network.

G o v e r n me n t a n d me d i a r h e t o r i c s u g g e s t e d t h a t S o u t h A f r i c a w a s p l a y i n g a l e a d e r s h i p

role in reconstructing the continent in line with its responsibility as an African superpower. Foreign

policy was linked directly to the efforts of SOEs in various countries.

H o w e ve r , w h i l e t h e e x p a n s i o n o f t h e p r i v a t e s e c t o r i n t o A f r i c a h a s b e e n i m p r e s s i v e ,

the performance of the SOEs has not. This, combined with funding issues and development

priorities at home, has resulted in the withdrawal of most SOEs from the rest of Africa.

O n e p r o b l e m w a s t h e e x p e c t a t i o n t h a t S o u t h A f r i c a , a s p a r t o f t h e c o n t i n e n t , w o u l d h a ve

preferential access to contracts and that being fellow Africans would obviate many of the business

risks and problems experienced by other foreign investors. However, this was not the case and South

African state employees were unprepared for the challenges.

S O E s a l s o d i d no t h a ve t he b e ne f i t of b e i n g a i d d o no r s , w hi c h w ou l d pu t t h e m i n go o d s t e a d

f o r p r e f e r e n t i a l b e n e f i t s a nd e n a b l e t h e m t o l e ve r a ge o p p o r t u n i t i e s f o r t h e p r i va t e s e c t o r . T h e y

lacked the historical ties of former colonial powers who, although the subject of much vitriol in

Africa, continue to have strong links with their former colonies.

The aggressive expansion of these organisations, coming in parallel with private sector

expansion, quickly elicited resentment about the country's economic power and threatened


Page 63


the political goodwill engendered by the end of apartheid. South Africa was soon perceived

to be operating in its own interests - to pave the way for capital accumulation by its private

companies - rather than in the spirit of African solidarity.

A d e c a d e l a t e r , mo s t S O E s h a v e l i mi t e d e n g a g e me n t w i t h t h e r e s t o f t h e c o n t i n e n t .

Eskom Enterprises had a good run with deals across the continent in more than 32 countries in the

p o w e r a n d I C T s e c t o r s . F o r e x a m p l e , i t h a d a c o n t r a c t w i t h t h e N i ge r i a n p o w e r u t i l i t y w o r t h $ 1 6 4

million to string fibre optic cable along power lines but allegations of corruption and moving

goalposts scuttled the project. Eskom was involved in power projects up to Mali and Mauritania and

had ambitions of a massive trans-Africa power grid. Currently, its remaining ties are with the

s o u t h e r n A f r i c a n r e g i o n t h r o u g h i t s i n v o l v e me n t i n t h e S A P P . P o w e r c h a l l e n g e s b a c k h o me

n e c e s s i t a t e d a p u l l b a c k f r o m A f r i c a n o p e r a t i o n s . C h a l l e n ge s i n o t h e r c o u n t r i e s , c o u p l e d w i t h

increasing demand at home, also drew back Eskom subsidiaries such as Roshcon and Rotek, which

h a d b e e n i n vo l ve d i n e n gi n e e r i n g a n d ot h e r p r oj e c t s a c r o s s t he c o nt i n e n t .

S p o o r n e t h a s h a d l i mi t e d s u c c e s s o n t h e c o n t i n e n t . It w a s o n c e i n v o l v e d i n r a i l w a y

concessions, management contracts or rehabilitation programmes in 14 countries but many ventures

were not successful. Two joint venture concessions in Zambia and Mozambique were cancelled in a

short time.

U m ge n i W a t e r h a d a n u m b e r o f s u c c e s s f u l p r oj e c t s i n t h e r e s t o f A f r i c a . H o w e v e r , o n e

of biggest - a contract in Nigeria in 2001 - was problematic as Umgeni chose to enter this market

through Rivers State, then one of the most corrupt of the country's 36 states. The deal collapsed

when the state government failed to pay.

Telkom has had patchy success in the continent despite its wide footprint across 38 countries.

It quickly spread its footprint by buying Kenyan Internet service provider Africa Online in 2007,

which had businesses in seven countries (Telkom, 2007). In the same year, it paid $280 million for

a majority stake in Nigerian telecommunications operator Multi-Links but, in 2009, announced

m a j o r f i n a n c i a l p r o b l e m s i n t h a t m a r k e t o w i n g t o h i gh o p e r a t i n g e x pe ns e s , ba d d e bt s a nd t h e

general economic downturn.

The African ambitions of the Airports Company of South Africa also failed to take off.

The company says it does not search for opportunities elsewhere but rather responds to these as

they arise. It has experienced tough times in negotiating bids in other African countries because of

a lack of experience by negotiators there and the failure by many governments to adhere to proper

processes. It pulled out of a bid to manage Abuja's new airport in 2006 owing to concerns about

information on the viability of the deal (e.g. traffic statistics, tariff regimes and the regulatory

framework); the Chinese subsequently won


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the contract. In Mozambique, it was in negotiations for nearly four years over the terms of

the 15-year concession contract to manage Maputo's airport. An executive said the problems included

i g n o r a n c e a m o n g M o z a m b i c a n c o u n t e r p a r t s a b o u t n e g o t i a t i n g s u c h d e a l s , i s s ue s of pr i c e f or t he

rehabilitation of the facilities, and so on. The deal was finally concluded in 2004 and the funding was

put in place. However, after Mozambique's 2004 election, the new minister decided not to go ahead

with the project. The company says it will not consider deals in Africa where supply side advisers are

not involved as their absence adds to the risk of these deals and the time to negotiate them. It

maintains that the appointment of such advisers signals the seriousness of the government about a

d e al .

South African Airways (SAA), despite its funding woes at home, has been successful on

the continent. From 2001, it expanded its African routes in earnest under the guidance of American

C h i e f E x e c u t i ve C o l e m a n A n d r e w s . I t i s s t i l l i n c r e a s i n g i t s n e t w o r k, a n d i n t r o d u c e d f l i gh t s t o

Gabon in 2009. SAA has withstood significant competition from carriers such as Kenya Airways

and Ethiopian Airlines, and remains a major player in the African skies. However, some of its forays

have tarnished its reputation. One of these was the multi-government deal with Tanzania and Uganda

to run Alliance Air, a regional airline launched in 1995. The airline lost money and experienced

shareholder problems. Its East African partners accused SAA of dominating the arrangement, while

the company complained that the partners failed to attend shareholder meetings. The airline

collapsed in 2000. It subsequently lost the bid for a stake in Uganda Airlines in what was believed to

be i nt e r na l p o l i t i c s b u t a l s o a q u e s t t o ke e p S A A o u t , o w i n g t o p e r c e p t i o n s o f i t s a r r o ga n c e a n d i t s

likely domination of the airline (Business in Africa, 2001a, b). SAA also had problems in Nigeria

after taking over state carrier Nigeria Airways' route between Lagos and New York in a code share

with the ailing local airline. The venture lost money and was terminated in 2002. Two years later,

SAA was a frontrunner in the bidding for a core investor in Nigeria's new national airline (to replace

the defunct Nigeria Airways). However, it lost out to Virgin Atlantic when it would not agree to

promise the Nigerian government 10% of SAA when it privatised. No such demand was made of

Virgin but some Nigerians viewed the issue as an example of South African arrogance in business

with other African countries (African Standard, 2004).

South Africa is also active in the oil and gas sector in Africa through agencies such as PetroSA,

which has exploration activities in several countries, and the Petroleum Agency of South Africa,

which is working with other state-owned oil companies to market the continent.

Two parastatals with seemingly different experience on the continent are the Industrial

Development Corporation (IDC) and the Development Bank of Southern Africa (DBSA). Both have

expanded their operations on the continent and have facilitated, directly or indirectly, South African

private investment in Africa.



The IDC expanded its continental reach in 2002 in support of the NEPAD vision. It invests across

sub-Saharan Africa, provides credit lines to regional organisations and facilitates the export of

South African goods and services. The DBSA's mandate remains confined to southern Africa but it

has increased its funding disbursements in this region. In addition to regional projects with a strong

developmental impact, it funds improved infrastructure, which supports business.

Many SOEs consider doing business with governments in Africa a high-risk operation.

Bureaucracy and large-scale corruption can result in long payment delays, prevent the completion

of projects and even scuttle big projects altogether. The fact that SOEs, as government agencies,

are dealing with counterpart quasi-official and official organisations may help in obtaining contracts

but otherwise seems to makes little difference to their success.

Different business cultures have been a factor; being African SOEs may even have worked against,

rather than for them. Most other African countries are used to working with foreign companies,

mostly from developed countries, and the success of another African country such as South Africa

h a s b e e n r e s e nt e d, r a t h e r t h a n c e l e b r a t e d, e l s e w he r e o n t h e c on t i n e nt .

The rapid penetration of Chinese companies and SOEs offering preferential deals backed by large

amounts of money is a real threat to the operation of South African SOEs, which do not have this

luxury. The government may need to work harder to persuade African governments

t ha t S o ut h A f r i c a i s a pa r t ne r o f c ho i c e i n s t a t e de a l s .

Funding mechanisms

C o mp a n i e s i n t e r v i e w e d f o r t h i s p a p e r g e n e r a l l y h a d l i t t l e a w a r e n e s s o f f u n d i n g b y

d e v e l o p m e n t f i n a n c e i n s t i t u t i o n s i n t e r m s o f m e c h a n i s m s , u s e f u l n e s s t o t h e p r i va t e s e c t o r o r

p o t e n t i a l t o f un d p r oj e ct s a n d e x p a n si o n . H o w e ve r , t h e r e w as i nt e r es t i n un der st an di n g a p ossi bl e

n e w r e v e n u e s t r e a m . S o m e o f t h e n e g a t i v e p e r c e p t i o n s w e r e a b o u t t h e h a s s l e f ac t o r - t h e i d e a t h a t

there would be many conditions on such funding and a long process to access it - and the

involvement of government, which some companies felt might compromise their independence.

SOEs seemed well disposed to funding by development finance institutions: the cost of

f i n a n c e w a s l o w e r t h a n c o m me r c i a l b a n k s , t h e i n s t i t u t i o n s h a d a b e t t e r u n d e r s t a n d i n g o f a n d

appetite for risk as lenders of last resort, and they gave comfort to commercial lenders. The longer

decision-making time associated with such financing was cited as a downside.

In high-risk markets, companies were more receptive to the idea of having a state agency

a s p a r t n e r , gi v e n t h a t i t c o u l d a s s u m e m o r e r i s k . H o w e v e r , m o s t c o m p a n i e s a r e e i t h e r


Page 66


s e l f - f u n d i n g o r r a i s e m o n e y f r o m m a n y d i f f e r e n t b a n k s a n d g e o gr a p h i c a l l o c a t i o n s .

This allows them to access money more easily in a credit crunch, deal with local shortages of hard

currency, and spread their risk.

The difficulty of raising money in the global downturn had not yet manifested itself in

t h e c o m p a n i e s s u r ve ye d , a l t h o u gh a r e c e n t p r o j e c t f un d i n g c o n f e r e n c e i n J o h a n n e s b u r g h e a r d t h a t

development finance institutions such as the European Investment Bank and Proparco had recorded

a bi g i nc r e a s e i n f u nd i n g r e q ue s t s i n t h e w a ke of t he c r i s i s .

Currency risk means companies prefer to reinvest their local currency profits or keep them

to offset local costs. In some countries, South Africans may borrow from local banks for local

c u r r e n c y c o s t s , a l t h o u g h i n t e r e s t r a t e s a r e ge n e r a l l y e x t o r t i o n a t e . T h e s e h a ve t o b e w e i gh e d a ga i n s t

currency fluctuations. One large mining company said it raised money offshore as a company,

rather than for specific projects, thus lowering the premium for projects in high-risk countries.

Companies also use South African banks, including merchant banks, either alone or as

p a r t o f a s yn d i c a t e d l o a n . B a n ks s u c h a s S t a n d a r d B a n k o f f e r l i n e s o f c r e d i t t o o p e r a t o r s i n t h e r e s t

of Africa and most South African banks provide trade and project finance on the continent, even

w h e r e t he y d o no t ha ve c or p o r a t e o f f i c e s .

Self-funding gives a firm more control and allows it to be self-regulating, rather than directed

by funders or given conditions for financing. Where companies are involved in deals funded by

clients, they sometimes assist in putting together funding packages to ensure that the deal is not

vulnerable to financial problems.

B i g c o mp a n i e s , i n g e n e r a l , s e e me d u n a w a r e o f f u n d i n g f r o m d e v e l o p me n t f i n a n c e

i n s t i t u ti o n s a n d h o w t h e y c o u l d a c c e s s i t . T h e y d i d n o t s e e m t o c o n s i d e r s u c h f u n d i n g i n t h e r a n g e

o f o p t i o n s o p e n t o t h e m . T h i s i m p l i e s t h a t d e v e l o p m e n t f i n a n c e i n s t i t u t i o n s n ee d t o w o r k h a r d e r t o

e n ga ge a n d b r i e f t h e p r i va t e s e c t o r o n w h a t t h e y o f f e r a n d h o w t h e y c o u l d b e n e f i t t h e p r i va t e s e c t o r

in the rest of Africa. Many said they would look at funding from development finance institutions if

they had more information on what is offered and how this could be tailored to their needs. All

funding options have to be justified and motivated, so the instruments of development finance

institutions would have to measure up to other funding options.

Concerns centred on perceptions of long turnaround times in getting approvals, a lack of

flexibility, the kind of conditions that may be imposed, and the development mandate,

w h i c h c o ul d c on s t r a i n t he p r oj e c t s a nd t ype s o f b us i ne s s t h a t w ou l d qu a l i f y f o r f u n di n g.



Conclusion

As the engagement of South African companies in the rest of Africa matures, there is a better

understanding of the problems inherent in the political and business environment. This assists

companies in managing risk and maximising opportunities. However, the nature of many African

markets is such that risk is still high, particularly in conflict and post-conflict countries.

Conflict countries pose the highest risk. Because of the fluid and erratic nature of governance in such

p l a c e s , c o m p a n i e s n e e d t o d e c i d e u p f r o n t w h e t h e r t h e o p p o r t u n i t i e s a r e w o r t h t h e un pr e di c t a bi l i t y

of risks, challenges and ethical compromises. The DRC and Guinea are examples of such countries.

The more the resources and the more these are sought after by international investors, the more the

arbitrary power of the government.

An added factor in this scenario is the increasing influence of non-traditional investors such as

China and India. Investors from these countries may not be concerned about the ethics of the

p o l i t i c a l s i t u a t i o n . T he y c a n s e c ur e l u c r a t i ve c o nt r a c t s a n d de c r e a s e t he i r r i s k b y l i n ki n g t h e i r

business deals to major infrastructure and other funding deals.

Some post-conflict countries remain difficult places for business, notably Angola and the DRC, as

they are slow to develop systems and institutions and are still constrained by politics and corruption.

However, the business opportunities in these difficult markets are compelling,

particularly for South African companies that have the benefit of strong political ties and their

proximity to the market.

A country such as Mozambique is still emerging from its socialist legacy, which means many

challenges remain. Mining resources brought keen foreign interest in this country and years of

international engagement mean it has relatively little risk, which is attractive even for non-resource

business. The risk is, again, lower for South Africans owing to their proximity to the market.

M o s t c ou nt r i e s s t i l l c a r r y a l a r ge de gr e e of r i s k, w he t h e r p ol i t i c a l , s e c t o r or a n ot h e r t ype of r i s k.

Many of these are not obvious but are related to undisclosed relationships, emerging

competitors, low-level corruption, poor infrastructure, inefficient bureaucracies and so on.

Some of the major findings of this paper are briefly outlined below.

South Africans mainly invest in the following sectors: mining, financial services, ICT, construction (mostly with private sector projects or public-private partnerships backed

by international funders), retail, hospitality, property development (often in conjunction with

i n t e r n a t i o n a l e q u i t y c o mp a n i e s a n d l o c a l d e v e l o p e r s ) , i n s u r a n c e ( mo s t l y i n p a rt n e r s h i p w i t h

strong local players) and agriculture (typically large multinationals such as Illovo and Omnia).

Bu t S o u t h Af r i c a n s a r e a l s o d o i n g b u s i n e s s i n a r e a s s u c h


Page 68


as management consulting, education, health, advertising and media, although this is usually

technical support and training rather than investment.

Investment has broadly followed two trends. First, non-resource companies opted for

investment destinations based on proximity, reasonable logistics and similar business

cultures in the hinterland. This was primarily SACU countries but also Zimbabwe, Zambia and

Mozambique. Second, they tended to prefer countries with improving governance, political

stability, economic liberalisation and greater transparency, such as Zambia, Mozambique,

Tanzania, Uganda and Ghana. The trend is slightly different for resource companies, which have

invested heavily in Angola, the DRC, Mali and Guinea, in addition to some of the countries listed

a b o ve .

While non-resource companies tend to avoid conflict zones, except as suppliers to

multinationals, they are quick to look at post-conflict countries for new opportunities.

Mozambique was the first because of its proximity but companies are increasingly investing in

Angola, the DRC, the Sudan (mostly outside the oil sector), Rwanda and the Republic of the

Congo.

A f r i c a n e x p a n s i o n i s d r i ve n b y t h e n e e d t o f i n d n e w m a r k e t s f o r p e n t - u p c a p i t a l ,

expertise and goods; higher returns than in South Africa; rising demand for goods and

services; improving economies and reduced risk; political support for investing on the continent;

generous investment incentives from African governments; and improving trade facilitation and

r e gi on a l i nt e gr a t i o n .

South African companies succeed because they have the following: an appetite for risk

and risk management experience; the goods and services needed in African countries;

historical familiarity with many countries, particularly in the SADC region; similar business

culture and language; reasonable transport links; proximity to markets; and a more nuanced

view of the continent than many competitors. Being another African country has some

a d va n t a ge s , p a r t i c u l a r l y f r o m t h e s t r o n g t i e s b e t w e e n S o u t h A f r i c a a n d ot he r A f r i c a n

governments. However, the downside is that resentments build easily about South African

arrogance and companies are under more scrutiny than investors from elsewhere.

South African companies, agencies and institutions are involved in all sectors in some

way. They have even engaged in the small enterprise sector: a South African manages a

large informal covered market in Lagos, for example. Likewise, small and medium-sized

enterprises in South Africa increasingly link with their African counterparts through the

Department of Trade and Industry and other government agencies. Even though South Africans

are relatively small players in the global oil and gas picture, they are suppliers to the oil

multinationals. There are also increasing links between institutions in health and education.

E n t r y s t r a t e gi e s h a ve t yp i c a l l y b e e n gr e e n f i e l d b u t e q u i t y a n d t e c h n i c a l p a r t n e r s h i p s

a r e b e c o mi n g t h e n o r m b e c a u s e o f t h e b e n e f i t s o f r a p i d c r i t i c a l ma s s , s o u n d l o c a l

knowledge, established business networks and complementary services. There are some



downsides but companies have learned that rigorous due diligence is required before taking on

a partner. Another common entry strategy is as a supplier to a multinational company or

t hr o u gh p r i va t i s a t i o n o r a s s e t s a l e s .

The main challenges for South African companies in the rest of Africa are: infrastructure

d e f i c i t s , p a r t i c u l a r l y r e ga r d i n g p o w e r ; h i gh o p e r a t i n g c o s t s r e l a t e d t o i n f r a s t r uc t u r e ,

inefficiencies and shortages; currency volatility and limited availability of foreign exchange;

regulatory and tax uncertainty; supply chain difficulties; corruption; lack of institutional

structures; weak domestic businesses and suppliers; increasing competition, particularly from

Asia; limited protection of property rights; violation of contract agreements; visa and work

permit problems; and ineffective legal systems.

C o n f l i c t z o n e s h a v e mo r e c h a l l e n g e s i n a d d i t i o n t o t h e a b o v e : r e p u t a t i o n a l r i s k ;

nationalisation of assets; a premium on finance; a lack of state utilities and services;

skewed macroeconomic fundamentals; stifling bureaucracy; high-level corruption; high crime

levels and security risks for staff and assets; increased demand for bribes;

difficult supply chain and logistics; escalated political risk; and high cost of goods.

In post-conflict countries, many of these problems linger but there are advantages such

as the goodwill of new governments towards foreign investment; the ease of negotiating

generous investment incentives; early-to-market advantages; large donor inflows and donor-

linked project opportunities; increased demand for goods and services; improved funding

options; and lower cost of finance (compared to conflict states).

The primary risk management strategies include: identifying risk before entry; having

ongoing reviews; having dedicated risk staff or supplier companies; building relationships

with politicians (important in the absence of institutions but also sometimes difficult to

manage); establishing local partnerships and offices; having sound entry strategies;

u n d e r s t a n di n g s e c t or r i s k, n o t j u s t s o ve r e i gn r i s k; e xt e n di n g t h e c or po r a t e go ve r n a nc e p r i nc i pl e s

of home operations to cross-border affiliates; avoiding corruption; learning to work local

systems effectively; seeking detailed information on markets; and buying risk cover.

Although many South African companies, including a large number of listed firms, have

invested in the rest of Africa, many have not. This is based on several factors, including:

a perception of risk being bigger than opportunity; the attraction of markets further afield such

as India, Australia and South America; tight margins that preclude putting risk capital up for

uncharted territory; a belief that African markets are too small and poor to matter; and the need

to build critical mass in the local market.

T h e S o u t h A f r i c a n g o v e r n me n t p l a y s a n i mp o r t a n t r o l e i n s u p p o r t i n g b u s i n e s s o n

t h e c o n t i n e n t b y f o r gi n g r e l a t i o n s h i p s w i t h t h e i r A f r i c a n c o u n t e r p a r t s , n e go t i a t i n g

investment protection agreements, having a diplomatic presence and arranging trade

d e l e ga t i o n s t o A f r i c a n s t a t e s . S O E s h a ve l a r ge l y p ul l e d ba c k f r o m t h e c on t i ne nt b e c a us e o f

problems in their local corporate structures and markets. They met with limited success in

difficult African markets, already well patronised by Western - and increasingly


Page 70


Asian - SOEs and companies. Eskom is an exception by virtue of its involvement in regional

power structures while SAA continues to dominate aviation - although it is facing strong

competition from Kenya Airways, Emirates and Ethiopian Airlines.

S o u t h A f r i c a n c o mp a n i e s t e n d n o t t o u s e f u n d i n g f r o m d e v e l o p me n t f i n a n c e

institutions and know little about it. Large companies are generally self-funded or

f u nd t h e i r op e r a t i o ns t hr o ugh i nt e r na t i on a l f i n a nc i e r s a n d s yn di c a t e d f un di n g i n vo l vi n g

local banks.

South Africa's engagement with Africa is a double-edged sword - countries want the benefits of South

African investment but appear to resent the fact it comes from another African country, rather than

embracing this. Perception issues, rather than outright risk, may be one of the biggest challenges

that companies face on the continent.

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Annexure: South Africa in Africa: A Background

Successive post-apartheid governments have prioritised trade and political ties with the rest of A f r i c a t o f a c i l i t a t e o p p o r t u n i t i e s f o r S o u t h A f r i c a n c o mp a n i e s a n d u n d e r p i n t h e c o u n t r y 's

d i p l o ma t i c i n i t i a t i v e s f o r A f r i c a n d e v e l o p me n t . In 2 0 0 8 , f o r e x a mp l e , D e p a r t me n t o f T r a d e a n d

Industry Director Tshediso Matona said: "South Africa has been part of initiatives to stimulate

regional economic development and we are already starting to see the positive outcomes of these

initiatives with faster economic growth taking place on the African continent for the first time in

many years. For South Africa, trade in Africa now exceeds trade with the United States and we

anticipate that Africa will be the investment destination of choice for the next 15 to 20 years"

( M a t o na , 20 0 8) .

S o u t h A f r i c a ' s t o t a l t r a d e w i t h t h e c o n t i n e n t gr e w b y a b o u t 6 5 9 % b e t w e e n 1 9 9 4 a n d 2 0 0 8

(Grobbelaar & Besada, 2008). It has a large trade surplus with African countries, bar a few oil-

producing states such as Nigeria, Angola and Congo, from which it imports petroleum products. The

trade imbalance has caused friction politically and the South African government has committed

itself to improving the balance; it has yet to spell out measures to do so. The cause of this politically

l o a d e d s i t u a t i o n i s t h e s o ph i s t i c a t i o n o f S o u t h A f r i c a ' s o w n e c o n o m y c o m b i n e d w i t h t h e l a c k o f

i n d u s t r i a l a n d a g r i c u l t u r a l d e v e l o p me n t i n o t h e r A f r i c a n c o u n t r i e s , a s w e l l a s t h e h i g h c o s t s o f

doing business, which makes products uncompetitive.

A f r i c a n s a c c u s e S o u t h A f r i c a o f u s i n g n o n - t a r i f f b a r r i e r s s u c h a s s o p h i s t i c a t e d r u l e s o f o r i gi n t o

inhibit imports from the rest of Africa; South Africa argues that the rules prevent dumping (Imari

Development Austral, 2004). Informally, African companies complain that South Africa uses its

greater expertise in trade negotiations and its efficient legal system to keep out competition from the

rest of Africa.37 Many African countries believe that South Africa, given the imbalance of its trade in

the region, should offer preferential trade deals to its African partners.

There is also resentment about South Africa's trade diplomacy, which involves trade agreements

with major international partners without the region, such as with the European Union and IBSA.38

The situation was exacerbated by the conflict between South Africa and its trade partners over the

European Union's Economic Partnership Agreements.

South African politicians, in response to the competition from the East, have made much of the fact

that South Africa can provide African solutions for African problems. They also stress that this

country has many things to offer other African countries beyond investment, such as skills training,

exchange programmes, capacity building and models of development.

37 These allegations have been made for years in interviews with African companies on the issue of South Africa's trade in Africa.

38 The IBSA Dialogue Forum aims to promote cooperation and information flows between the three member countries - India, Brazil and South Africa - and to improve trade flows between these emerging markets.



In v e s t me n t , t o o , h a s i n c r e a s e d a n d a l t h o u g h t h e f i g u r e s a r e n o t e n t i r e l y r e l i a b l e , t h e S o u t h A f r i c a n R e s e r v e B a n k e s t i m a t e d t h a t i n v e s t m e n t g r e w i n r e a l t e r m s f r o m a b o u t $ 1 ,2 b i l l i o n ( R 6 , 1 b i l l i o n ) i n 1 9 96 t o j us t o ve r $ 4 bi l l i o n ( R 2 4 b i l l i o n) i n 2 0 01 ( G r o bb e l a a r & B e s a da , 2 0 08 ) . S i n c e t h e n , investment has shot up; it could even be double this amount by 2009, given the large number of investments in countries such as Nigeria, the DRC, Kenya and Angola. These include the following: Phase II of the Mozal aluminium smelter (over $1 billion), the Sasol pipeline in Mozambique ($1,2 billion), Vodacom's entry into the DRC ($94 million), MTN in Nigeria ($395 million in 2008 for its five-year expansion plan); Nampak in Angola ($75 million) and Nigeria ($28 million); the merger of Anglogold with Ashanti Goldfields of Ghana ($1,4 billion), Standard Bank's acquisition of IBTC in Nigeria in 2007 ($525 million), and Shoprite in the DRC ($80 million),39 among many others.

R e c or de d f i gu r e s f oc u s o n o u t f l o w s f r o m t he c o nt i ne nt a n d a r e l i ke l y t o i n c l ud e t r a ns a c t i o n s b y South African multinationals based abroad. The United Nations Conference on Trade and Development (UNCTAD) estimates total outflows of foreign direct investment from Africa at $8,2 billion, mostly from South Africa. Although the figures are not specific, UNCTAD recorded the general flows of trade and investment from South Africa. Since the end of apartheid in the early 1990s, South Africa has emerged as a powerhouse for outward foreign direct investment, with a strong focus on the services sector: communications, finance, electricity, trade, transport and storage. Some South African transnational corporations are also engaged in the primary and secondary sectors (UNCTAD, 2007).

South Africa's foreign direct investment in the rest of Africa has been vital for the region, accounting, for example, for up to 40% of the inward foreign direct investment stock in Botswana in 2003. In 2004, the government of South Africa abolished limits and eased foreign exchange r e s t r i c t i o ns on i t s t r a ns n a t i o n a l c or p or a t i o ns i n ve s t i n g a br o a d . S i n c e t h e n , t r a ns na t i on a l c o r p or a t i o ns from the country have carved a strong presence in virtually all sectors within Africa and abroad. The expansion is also attributable to South Africa's robust economy, characterised by a high degree of industrial development and technological capability at the corporate level relative to other countries in the region. The country's strategy of encouraging outward foreign direct investment is important for the development of other countries in Africa, through increased investment in their economies (UNCTAD, 2008).

To encourage investment on the continent, the national Treasury, in the 2005 Budget, lifted the

maximum amount that companies could invest in Africa without prior approval from R750 million to R2 billion. The suggestion of further easing foreign exchange controls in the 2009-10 Budget was apparently partly in response to the demand for investment into the rest of Africa, possibly as a way of helping the South African economy to recover.

South African investment has changed the pattern of overall investment in Africa, which was typically in oil and gas (Shell and Exxon Mobil), financial services (Standard Chartered, Barclays and Citigroup) and consumer goods (companies such as Unilever and Heineken).

39 Shoprite's African operations showed turnover growth of 39,9% and trading profit of more than 50%, contributing 13,6% to total turnover in the financial year to June 2009 (Mathe, 2009).


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Although there has been investment into some of these sectors, it also reached sectors such as ICT, property, advertising, insurance, hotels, retail, packaging and media.

South African companies kick-started the renewed interest in Africa by highlighting its o p p o r t u n i t i e s . T h e y r e d u c e d t h e r i s k t h r o u g h t h e s i z e a n d s c a l e o f t h e i r i n v e s t me n t s a n d th e measurable return on investment, which has attracted interest from other regions. They also helped to improve lifestyle choices in African capitals. Not only did some of the high-profile successes highlight the opportunities in this market of just under a billion people but Asian companies are also looking at South African companies as partners in their own expansion plans.

Top ten export destinations in Africa, 2005 to 2009 (R billion)40

Country 2005 2006 2007 2008 2009 to June

Mozambique 6,40 6,24 9,01 1 3 ,5 0 7,03

Zimbabwe 7,48 7,41 8,50 1 4 ,0 8 6,26

Zambia 5,44 7,98 1 0 ,0 8 1 6 ,3 5 5,90

Kenya 2,98 3,24 4,60 5,93 4,03

Angola 3,53 4,74 5,50 7,44 3,45

Nigeria 3,40 4,00 4,83 7,88 3,06

DRC 1,81 2,55 4,44 8,27 2,41

Tanzania 2,75 2,76 2,74 4,17 1,84

Malawi 1,64 1,68 2,17 3,84 1,80


Top ten sources of imports from Africa, 2005 to 2009 (R billion)41

Country 2005 2006 2007 2008 2009 to June

Nigeria 4,16 9,28 1 2 ,4 8 1 5 ,7 4 5,75

Angola 1,89 2,47 1 1 ,5 8 2 2 ,3 5 5,12

Mozambique 0,20 0,32 2,38 3,31 1,92

Zimbabwe 3,13 4,63 6,03 6,53 0,77

Zambia 1,30 1,84 2,49 2,38 0,65

Botswana 1,92 1,80 1,54 1,37 0,45

Liberia - 1,14 0,03 0,18 0,45

Ga b o n 0,68 1,15 0,18 0,17 0,41

Mauritius 0,17 0,26 0,44 0,54 0,28


40 The rankings are based on 2009 figures but the same countries have been in the top 10 in the past few years. 41 The

rankings are based on 2009 figures.



T h e mo v e n o r t h o f t h e L i mp o p o w a s a l s o d r i v e n , t o s o me e x t e n t , b y t h e g o v e r n me n t ,

p a r t i c u l a r l y i n e n s u r i n g t h e s u c c e s s o f s o me o f t h e s t r a t e g i c i n v e s t me n t s i n t o A f r i c a . T h e b u il d i n g

of Sasol's Mozambique pipeline, for example, was preceded by a range of bilateral agreements

aimed at ensuring a supportive regulatory framework for a deal of this magnitude (Grobbelaar &

Besada, 2008). The political relationship also underpinned the development of a successful public-

private partnership, the Maputo Corridor, which links Gauteng with Mozambique.

The timing of economic reform in Africa coincided with South Africa's own political

freedom, which made northern markets more attractive and more welcoming. South Africa's

liberation-era ties were leveraged to boost business and South Africa benefited from its status as a

post-liberation state and an economic power. This was cemented by the launch of the New

Partnership for Africa's Development (NEPAD) in 2001. Many bilateral agreements were signed or

updated, and binational commissions and joint ministerial commissions were established with

countries such as Nigeria, the DRC, Zimbabwe, Algeria, Senegal,

Equatorial Guinea, Gabon, Ghana and many other states.42

T h e s e l i n ks a r e va l u a b l e b e c a u s e t h e y h a ve r e s u l t e d i n t h e s i gn i n g o f m a n y c o o p e r a t i o n

agreements, which include investment protection and double taxation agreements. However, it is

hard to get information on what exactly has been signed and how companies can use it - the relevant

government departments can be quite secretive about the information. Information is often issued

on an ad hoc and need-to-know basis.

S t r o n g p o l i t i c a l r e l a t i o n s h i p s b a c ki n g b u s i n e s s i n A f r i c a n m a r k e t s a r e a c o m f o r t f o r

c o m p a n i e s a n d a c h a n n e l f o r t h e m t o u s e w h e n t h e r e a r e p r o b l e m s . H o w e v e r , i t i s n o t cl e a r h o w

effective the investment protection agreements are as they can be undermined by political

c o n c e r n s . T r a d i t i o n a l l y , s u c h a gr e e m e n t s j u s t p r o t e c t e d p r i v a t e i n v e s t o r s o p e r a t i n g i n o t h e r l e ga l

and sovereign jurisdictions. But the South African government, which takes into account the needs

of the host country in terms of development, regional trade arrangements and black economic

empowerment, is currently reviewing some of

these arrangements (Erasmus, 2009). South Africa's need to address the perception of

being the regional "bully" because of the size of its economy may make it less effective in

pr ot e c t i n g i n ve s t or s .

South Africa's Department of Trade and Industry arranges and supports business missions.

The Department provides partial funding for accommodation and travel to potential exporters and

investors through the Marketing and Investment Assistance scheme.43 State visits have been used to

foster business ties and are usually accompanied by business delegations.

42 See the Department of Foreign Affairs website for full details: www.dfa.gov.za/docs/2006pq/pq616.htm

43 See www.thedti.gov.za/exporting/SSA_Project_Funding_Guidelines.pdf for details of the sectors that qualify for the scheme.


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One of the largest delegations to date - more than 100 companies - accompanied President

Jacob Zuma on his August 2009 state visit to Angola, the first such visit ever (Mail & Guardian

online, 2009).

Ultimately, business tends to go where it sees opportunity and the political linkages play only a part

in facilitating interest in certain markets. But, broadly, the new South African political dispensation

created a more welcoming climate for business, and treaties and agreements were signed with a

view to facilitating investment. These include investment protection agreements, double taxation,

vi s a s a n d s o o n .

U n f o r t u n a t e l y, t h e x e n o p h o b i c a t t a c ks a ga i n s t f o r e i g n e r s i n 2 0 0 8 , a n d t h e f a i l u r e b y t h e S o u t h

African government to act swiftly and decisively against the attackers, allowed resentment against

S o u t h A f r i c a t o f e s t e r . W h i l e t h i s m a y n o t a f f e c t b u s i n e s s d e a l s d i r e c t l y, i t h a s i n c r e a s e d t h e

hostility that had already built up around the success and market domination of South African

companies on the continent.


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