Long-term Investment Requires Stability
AOP talks to Africa Risk Consulting’s Shawn Duthie about doing business in Africa in 2018, especially what steps governments can take to encourage investment.
What do you see as the primary challenges for doing business in 2018?
I think the primary challenge for doing business in Africa will be the continuing risks for investors in regards to corruption and poor governance. While there have definitely been improvements over the past decade, the risks of corruption are still rife – particularly in the oil and gas sector – and a lack of stable governance could result in changes to fiscal or sector-specific regulations which can greatly compromise a company’s bottom-line. While governments do need to focus on revenue collection, it must be balanced with an incentive for companies to invest a significant amount of time and money into exploration, particularly in places without proven reserves. As an example, Kenya’s revised oil code, which will allocate oil revenue to different levels of government, has resulted arguments amongst the government regarding the allocations and thus there have been production delays as companies await clarity on this issue. On the other end of the scale, Madagascar has decided to scrap the planned changes to their oil and mining codes in favour of a more stable regulatory environment in order to increase investment in that sector.
How do you see recent political developments, such as the coup in Zimbabwe, impacting investor confidence in Africa in 2018?
The fall of Robert Mugabe in Zimbabwe, as well as the resignation of Jacob Zuma in South Africa and the decision of José Eduardo dos Santos to not run in the 2017 Angolan elections, should all signal to investors that Africa’s political governance is maturing. In all three cases, the transfer of power was peaceful and even the coup in Zimbabwe was done without bullets.
However, it is still early days for the new leaders of these important countries in Southern Africa, and investors should remain cautious as new leaders consolidate power. Angola’s new president, João Lourenço, and South Africa’s Cyril Ramaphosa have both moved quickly to remove those in state-owned enterprises who were loyal to their predecessors. Zimbabwe’s new president, Emmerson Mnangagwa, has shored up support within the military, but Zimbabwe may still be a wild card as Mnangagwa may decide to resort to Mugabe’s former tactics if he believes he will not win the July election. Companies investing, or looking to invest, in these countries should be aware of the fluidity of politics in the region and be sure they conduct the proper pre-investment research to make sure they are aware of the potential risks, and rewards, in any particular country.
What steps can governments take in 2018 to attract private investments in the coming years?
Governments need to show they are working towards a stable political and regulatory environment to attract investment. For oil and gas companies to make the huge investments needed to explore for deposits, they need to know that their investment will be safe in ten to twenty years. Any talk of expropriation without compensation, such as in South Africa, or unilateral decisions to change mining charters, such as in the DRC, will be detrimental to future investments into those countries. Regulatory changes need to be done in conjunction with major stakeholders, which include government departments, civil society and the private sector.
What do you see as the primary opportunities for the sectors in 2018?
While there is a shift towards electric cars, which may decrease demand for oil while increasing demand for minerals such as cobalt and lithium, the oil and gas sector will still be important in Africa for the energy sector. Natural gas, particularly, will be a major opportunity as the use of natural gas to enhance power generation is expected to increase greatly across Africa, especially due to recent finds of substantial reserves along the East African coast. According to the International Energy Agency, natural gas is expected to become the leader in meeting future energy needs over oil and coal, ultimately becoming the world’s primary fuel source by 2050. This is good news for Africa, which had over 500 trillion cubic feet of reserves at the end of 2016, and for investors as private investment will be needed to recover and ship the gas. As said above, there are also risks here – this investment will have to be long-term and investors will want to know that a change of government will not result in a loss of assets, but African governments appear to have learned that prosperity is more likely to come with public/private partnerships rather than solely government-run.