Dealing with political and security risk in Africa 

AFRICAN MIRROR

by Mike Davies

African Analyst, Control Risks

To the casual observer, Africa is a daunting place to do business, with international media focusing on stories about crime, corruption, ethnic conflict and political unrest. However, while businesses operating in Africa in 2006 will continue to face a range of difficulties, they will also be attracted by lucrative business opportunities. Many local and international companies have shown that it is possible to operate successfully on the continent, with several South African companies leading the way with recent investments across the continent. As companies look to explore opportunities further afield, there are important lessons to be learnt on how to deal with political and security risk on the continent.

After being the focus of international attention in 2005, with the Commission for Africa and the G8 summit of world leaders in Scotland, Africa will find itself out of the limelight this year. The Commission for Africa Report identified many of the causes of the problems facing the region, and the G8 agreed a comprehensive package intended to accelerate Africa’s progress toward meeting the Millennium Development Goals, from a doubling of aid by 2010 to debt relief, and from near-universal access to HIV/AIDS treatment by 2010 to free and compulsory education for all children by 2015. However, despite such renewed efforts, businesses operating in Africa in 2006 will continue to face a range of difficulties, many of which are well known. These range from corruption and HIV/AIDS, to labour issues, to uncertain policy regimes, and from government interference to, in the most extreme case, expropriation. Security risks such as crime, terrorism, social unrest and ethnic conflict also present operational challenges to businesses operating in the region. However, it is important to recognise that sub-Saharan Africa is not a homogenous geographical entity. Rather, the political, operational and security issues facing businesses in sub-Saharan Africa differ from country to country and, indeed, from region to region.

With this in mind, the business outlook for sub-Saharan Africa in 2006 remains mixed. The holding of elections in a number of post-conflict countries in 2005, such as Liberia, Burundi, the Central African Republic and Guinea-Bissau, has helped to improve stability indicators. In some cases, this has generated cautiously increasing investor confidence in the business environments of these countries, as reflected in a large steel deal in Liberia. Lucrative opportunities for foreign companies could also attract investments in Angola, even prior to presidential and parliamentary elections that are expected to take place in September, and in Congo (DRC), where President Joseph Kabila appears set to win the watershed presidential election.

Nevertheless, lingering security concerns in some of these countries, including Congo (DRC), and the region’s remaining areas of instability will continue to deter investors: the political, economic and social crisis in Zimbabwe is expected to persist; the failure to hold elections in Côte d’Ivoire in October 2005 is likely to result in a fragile transitional government and peace process; and the looming death of ailing President Lansana Conté threatens to result in instability in Guinea that could hamper regional security. Strategic interests will result in significant attention being paid to the issues of local insurgencies, piracy and community unrest in countries in the Gulf of Guinea. The issue of terrorism will remain high profile, particularly in East Africa, where developments in Somalia will concern observers, but the overall risk posed by terrorism to businesses will be low. However, as in previous years, crime will present the most significant security risk in the majority of African countries.

African countries will also, by and large, continue to lag behind their international counterparts on the operational front in terms of relaxing business regulations and implementing reforms that encourage business, despite the positive introduction of one-stop investment agencies in many countries. Large companies benefit the most from these facilities and have the resources to overcome more burdensome regulation. However, over-regulation minimises the competitiveness of the region, while governments’ failure to enact reforms that support the growth of small and medium-sized enterprises not only reduces the potential market size for international investors, but also undermines growth rates, creates imbalances in the economy, and increases the likelihood of social unrest or protest action. Exceptions will include South Africa, Botswana and Mauritius. The poor quality of infrastructure and bureaucracy will further increase the cost of doing business, while the perennial issues of a lack of judicial independence, clarity and certainty of policies, and labour skill shortages, will present further challenges for businesses.

COMBATING THE RISKS 

Given the mixed outlook for sub-Saharan Africa, it is imperative that companies operating in the region, like in many other regions, employ a range of risk management solutions at each stage of the investment cycle. At both the pre-investment stages and throughout the investment cycle, businesses should keep abreast of issues that could have a negative impact on operations. Such information should be accurate and detailed, but also timely, so that action can be taken before a situation develops into a crisis. By identifying, evaluating and assessing the potential impact of the various political, operational, security and reputational risks at the outset, companies will be able to identify suitable risk controls that can be can be integrated into business strategies and allow them to manage exposure to these risks.

Entering into new markets or joint venture arrangements with local partners can pose particular risks as the interests of all parties may not coincide and may undermine the project. Fraud, corruption, money-laundering, financial malpractice, information leaks and anti-competitive practices all present credible risks. To enter new markets or joint ventures with confidence, companies should consider gathering target intelligence on the interests and activities of individuals and companies that they may want to engage with. This will avert any potential reputational issues that might arise from association with less savoury business partners and ensure that potential operating partners are compatible with corporate interests.

Reputational and ethical risks are particularly high when operating in a complex environment. Control Risks’ recent survey of companies operating in the mining sector found that the implementation of corporate commitments to human rights in conflict and post-conflict environments is increasingly seen as crucial. However, only 9% of respondents were completely confident that personnel in a conflict environment would be able to manage an incident of alleged company complicity in a human rights abuse. Although many companies possess commitments to protecting human rights, the successful balancing of security and reputational issues is highly complex. By identifying the issues, putting policies in place, training employees for the ethical dilemmas they may face, and implementing management programmes and controls, companies will be better placed to avoid such issues.

The security issues facing companies in some parts of Africa also mean that businesses must implement certain measures to ensure the safety of personnel and operations, and to equip staff to properly deal with the range of issues related to the political and security environment. Security surveys, which assess both the local and regional risks that may affect assets and personnel at a particular site, and business continuity and contingency planning are all necessary in high-risk areas, or in areas where political or environmental factors - as shown by the effects of Hurricane Katrina and the earthquake in Kashmir - can have a sudden impact.

Many of the companies operating successfully in sub-Saharan Africa employ at least some of these risk management tools. However, this is sometimes done in an intuitive or ad hoc way, relying on local knowledge and experiences. This approach can clearly place a company at a disadvantage in a new or unfamiliar market, particularly if the risks are higher. If a company is to successfully deal with the range of risks of investing in developing countries, it is crucial that companies codify and internalise risk management practices.

Only by conducting a systematic assessment of political and security risks, alongside financial and legal risks, can companies be said to be taking a comprehensive approach to risk management. Africa is far from homogenous, with its diverse range of countries presenting unique opportunities and risks. By adopting a systematic approach to assessing and dealing with political and security risks, companies will be able to successfully explore opportunities, not only in Africa, but in any environment. 

This article is based on the Africa regional outlook in Control Risks’ report RiskMap 2006, which forecast political and security developments that businesses will face this year and beyond for more than 150 countries. Further information can be obtained at www.crg.com.