Understanding the political risk of doing business in Africa

IN DAYS gone by, knowing the president of an African country, or having a business contact who did, was generally regarded as being the key that would unlock lucrative business deals. The next best thing was being close to a minister who could allow you to bypass competitors in landing contracts. This meant entering the rather opaque world of favours and political patronage.

Nowadays, making your company reliant on close political connections is a practice that tends to be frowned on as business becomes more transparent and ethical and anticorruption initiatives in key markets prevent the cosy relationships of the past.

But the grey area between state and business continues to work in favour of those who are still able to exploit it and have the connections to do so. Take Khulubuse Zuma, for example.

A few years back, our president’s nephew managed to whip a few oil blocks from under the noses of existing claimants in that bastion of business transparency, the Democratic Republic of Congo, despite his lack of experience in the oil industry.

The rights to exploit the same blocks were originally given to international company Tullow Oil. Two years later, they were given to a little known, but also politically connected, South African company, Divine Inspiration Group Oil. But Zuma’s political connections clearly trumped its, and his companies, Capricat and Foxwhelp, were not only awarded the rights to the oil blocks but the rights were backed by a presidential decree, something neither of the previous claimants had been given.

Now there are allegations that SA’s military misadventure in the Central African Republic (CAR) may have been more about African National Congress-linked business interests in the mineral-rich country than about national interest. The new “president” of the CAR, Michel Djotodia, has said he will review all contracts signed by his deposed predecessor, Francois Bozize. But this is likely to mean new money for old deals or new money for new deals rather than a clean-up of the system. And the South Africans are unlikely to be the only ones in the queue for political favours.

It is not unusual for new political leaders to reverse deals, even when they are democratically elected. Large contracts secured near election time, when there is likely to be a change of key political figures, are always risky.

In Nigeria, for example, several large deals involving Asian companies done near the end of Olusegun Obasanjo’s term were cancelled by his successor, Umaru Yar’Adua, when he assumed power in 2007, on the basis that they were allegedly corrupt or not seen to be in the national interest.

Reading the political wind is as important as following due process, as FirstRand found out in Zambia. The company failed to anticipate a political victory by veteran opposition leader Michael Sata in the 2011 election against incumbent Rupiah Banda — despite the fact that Sata had narrowly lost the previous election and was well placed to win.

Its acquisition of local commercial institution Finance Bank was reversed by a victorious Sata shortly after the poll. He fired the central bank governor who had facilitated the deal and handed the bank back to its original owners, who were widely known to be his key political backers. Africa’s business landscape is littered with examples of how political interests scuppered deals. It is difficult terrain to negotiate successfully and international arbitration clauses in contracts and political risk insurance remain musthave accessories for companies.

Although the number of conflicts in Africa may have been significantly reduced, political risk has become more nuanced and insidious and therefore harder to anticipate and manage. Investors entering African markets need to understand this in order to give them the best chance possible to avoid any nasty surprises.

Games is CE of Africa @ Work, an African consulting company.