Mitigating Political Risk for Investors in Africa

Cote D'Ivoire, one year ago.

According to the global thought leaders in finance, Africa is primed for growth.  McKinsey, the global management consultancy, released a report a few months ago titled “Lions on the Move” highlighting the collective buying power of the continent – $1.6 billion, or roughly equivalent to the GDP of Brazil or Russia – and its uniform growth, with 27 out of the 30 largest economies growing quickly.  The Economist is quick to point out that, in its projections, seven out of ten of the fastest-growing economies between 2011 and 2020 will come from Africa.  Africa, according to Citigroup’s managing director for Europe, Africa, and the Middle East, is becoming “more and more competitive.”

A confluence of inter-connected forces over the last decade explains the continent’s growth spurt.  Better leadership and more transparent governance have led to more effective allocation of resources and greater domestic investment.  Regional cooperation, in terms of labor, trade, and security, through economic blocs like ECOWAS in the West and the EAC in the East has created mutual benefits for markets.  Innovations in technology have improved communication and access to information by orders of magnitude.  Ten years ago, you were lucky to have a cell phone signal in a city in Africa.  Today, mobile phones are ubiquitous and the myriad technologies that have piggy-backed on their success, like mobile money and Internet, have changed the way people do business.  Lastly, in-kind infrastructure loans from China in exchange for access to minerals and other natural resources are changing transportation (roads, bridges) and energy (hydro-electric dams) on the continent.

These changes have not been lost on China and India, which see economic opportunity in Africa where others see conflict and disease.  Both countries have invested heavily in the continent, while the West has relied on foreign aid to build influence.  If Africa “is a wonderful place to make money,” in the words of entrepreneur Mo Ibrahim, then why do so few private equity firms and investment funds in the West have a presence here?  There are a few explanations – few viable investments beyond natural resources, too few mature companies to purchase.  But one main reason is political instability.  Let me explain.

I have lived in Africa now for a year and change.  When I lived in Ghana, I had friends to the West in Cote D’Ivoire who were evacuated after the election that saw Laurent Gbagbo unseated turned violent.  To the north, I had other friends who left Burkina Faso when riots erupted after President Compaore failed to quell a mutiny.  To the east in Nigeria, Boko Haram, the fundamentalist Islamist group began bombing churches in the Northern part of the country.  Since I moved to Kenya, 36 people were killed in an attack on a bar in Burundi, and violent protests marred the recent elections in the Congo.  And, in the coup de grace, the country in which I currently reside, Kenya, recently invaded Somalia, otherwise known as the most dangerous place on earth.

China’s state-run capitalism allows it to play the long game.  It has the size to negotiate with the worst dictators in Africa.  It doesn’t matter which party is in power – both have an interest in maintaining cordial economic ties with China.  A private equity firm, on the other hand, has no such clout.  Not even the oil companies have been able to find a way not to be nationalized (though Shell has come pretty close in Nigeria).  So, when there is a threat that they might not just lose their shirt, but their entire wardrobe, investors look for more stable risky plays in other parts of the world.

But now, there is a solution to that problem, compliments of the Overseas Private Investment Corporation, the development finance arm of the U.S. government.  Led by Elizabeth Littlefield, a veteran microfinance leader who I used to read and write about on this blog, OPIC has created a political risk insurance product for investors wary of the threats to their investments in historically unstable places, like Africa.  The East African has the story:

A new insurance product has been launched to cover private equity fund investments in Africa and other emerging markets against political risk.

It aims at shielding investors from the political uncertainty that characterises doing business in the emerging markets and damages arising from violence related to political activity.

East Africa has, in recent years, witnessed several incidents of politically instigated chaos leading to destruction of property.

Besides providing protection against such eventuality, the new product also targets offering cover from other unforeseen circumstances that may affect deals.

“For example, OPIC is developing insurance products for the renewable resources sector, specifically to protect investors against a government’s change in the feed-in tariff that the investor has relied upon to structure its project; and to cover investment in forestry projects, including Reducing Emissions from Deforestation and Forest Degradation (REDD) projects,” PIC said in a statement.

Now, funds can hedge against those risks by purchasing insurance.  This is great news from both an economic development perspective and that of the United States and its position in the world.  The longer the West delays, the more China will secure a political and economic foothold in the region.  And with more money flowing into the continent, the capital constraints that held back growth will be freed up.

Hopefully we will see a boom in investment from Western investment funds in Africa.  But, with ample untapped investment opportunity in Latin America, Southeast Asia, North Africa, and other regions, Sub-Saharan Africa may be at the end of a long line.

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