In Washington last Friday, I boarded a flight to Addis Ababa at 11:00 am. By the time I arrived in Johannesburg, Egypt’s president of 30 plus years was no longer in power. The pace of change in the Middle East and North Africa is mind boggling. Anyone doing business in the region is trying to grasp the implications, and the risk profile of doing business in some of the countries has suddenly changed.
In the meantime, sub-Saharan Africa is looking more and more attractive to investors. At least that was the consensus at today’s MIGA-sponsored seminar on managing political risk for cross-border investment. For too long, Western media has portrayed the region as a place of war and famine.
No doubt Africa has had its fair share of both. But the average person from “the West” wouldn’t be able to tell you about Mozambique’s journey from war-ravaged economy to a country that has posted average growth rates of seven to eight percent since the end of conflict.
Luisa Diogo, Mozambique’s former prime minister, was the seminar’s keynote speaker and shared some secrets of her country’s success in moving from a planned to market economy. In addition to strong leadership and hard-working people, international partners played an important role. She said the government identified key areas for investment and then sought the support of the World Bank, IFC, and MIGA to make it all happen. One area of focus was the sugar industry, which went from employing 3,000 workers to over 40,000.
So what about risks? Panelists agreed that certain risks remain in sub-Saharan Africa, but they are largely manageable. Certainly, smart investors know that the region is extraordinarily diverse in terms of political risk. But this is the region of cobalt and copper, where the business needs to be done—and these investors will find a way to manage those risks.
So how can businesses thrive here? Our panelists shared some common-sense experience. First , a social license to operate is very important. The chances of populist upheaval are greatly reduced if the local community welcomes your presence. So, while investors may be daunted by the performance standards of the likes of IFC and MIGA, these are important risk-mitigation tools. And, a little plug here, MIGA can offer free support to investors in this regard.
In addition to the people, governments also need to feel they’ve gotten a good deal. Investors looking at sub-Saharan Africa are keen to build new infrastructure, tap into the growing consumer markets, and extract the resources needed to run today’s economy. Governments suddenly aware of their country’s offerings may rush into deals only to realize they probably could have done better if they had negotiated harder. Fair, transparent, and competitive concessions are key to their long-term success. When new governments come to power they may try to extract additional revenues from licenses granted by a previous government; this is more likely if there is a perceived injustice.
All of this advice underscores the findings of MIGA’s World Investment and Political Risk report: more than overt political violence, investors are concerned about adverse government intervention.