By Leon Louw, founder of WhyAfrica
18 April 2021 – Investing in Africa should not only be about big profits in the back pocket. Any African country is a high-risk investment destination, and proper risk assessments should be carried out before you wet your feet. However, high-risk investments can be extremely rewarding if you are in it for the long run, but most of all, if you are prepared to invest in the people of Africa.
To invest in Africa is a risky business. Extensive country and political risk assessments are key before making a final investment decision. Large engineering projects like the LNG development in Mozambique or the Grand Ethiopian Renaissance Dam (GERD) in Ethiopia, in fact, becomes political enterprises that run the risk of turning into political battlefields, at the expense of the investors, and ultimately, of the local communities who should really benefit from these large projects.
French multinational Total’s development in Mozambique has the potential to uplift the entire southern African region, but a group of insurgents has put a spoke in the wheel (for now), while GERD has stoked nationalistic fervour in both Ethiopia and Egypt. The gargantuan 1.1 mile-long concrete colossus is set to become Africa’s largest hydropower plant. Poor farmers and rich business executives are all awaiting the 5 gigawatts of electricity the project is expected to produce. However, negotiations between Egypt, Ethiopia, and Sudan about when and how to fill the dam has put the brakes on electricity production to the detriment of shareholders and investors, both in government and the private sector.
But it is not only the multinational mega-projects that need to invest in a proper risk assessment before entering a high-risk investment destination. Smaller enterprises like quarries, agricultural endeavours, mineral exploration projects or renewable energy developments all need to be as vigilant and prepared. In fact, one of the first companies to feel the brunt of the insurgents’ attack in Mozambique was a quarry and cement operation close to Palma.
Security is one thing, but there are several additional factors to consider before entering a country. For example, political instability can lead to regime change, or macroeconomic and financial imbalances can result in the malfunctioning of the economy. Social, cultural, and environmental risk, however, should top the list when venturing into Africa today. Communities have become more vocal and aware of their rights, and in countries like South Africa and Nigeria, where activists are well established, not recognising these risks are recipes for disaster.
How can your company improve conditions?
Any company with a vision to expand operations or establish a new operation in any African country, should recognise and take cognisance of the impact their operations will have on the local community, and how they could improve the plight of the African population in the long-term. Extraction activities by multinational companies in the oil rich Niger Delta, in south-east Nigeria, brought them profits in the pocket in the short-term, but in the long-term their activities harmed the environment. Local fisherman depended on this environment for their survival, and eventually the entire region became a political and social quagmire. These challenges will not be resolved soon.
The bottom line is that if you decide to invest in projects in Africa, you have to be prepared to invest in the people of Africa. It is no longer only about profits in your back pocket. It was with horror that I read an article in an Australian publication recently lamenting the requirements to invest so much in the communities and development of Africa, and that it is detrimental to the company’s profits. What the author disregards though, is that shareholders are beginning to insist that their money is spent on social development and protecting the environment. The writer is tone deaf. Not investing in local communities and their development is a short-term approach, it is not sustainable, and an extremely high-risk undertaking.
Finding a balance between risk and reward
Finding a balance between the risks and rewards will always be a gamble. But as the saying goes: no risk no reward, no pain no gain. Investing in Africa is by nature a high-risk exercise, and you should know it, without doing an in-depth risk assessment. On the other hand, risk can be highly rewarding, not only in terms of the bottom line, but if you do it the right way, seeing the difference you make on the ground, in the long-term.
If you want to invest in Africa, but not in its people, do not waste your time and money. If you want to be a fly-by-night and make money through ripping off local people and expect them not to rip you off, you are in the wrong neighbourhood. If you are already invested and the kitchen is getting too hot, or you have burned your fingers in the past (as the author of the abovementioned article has done) do some introspection and ask yourself what you have done to make a difference. If you complain about corruption but you give the government official a backhand in the hotel lobby to secure your exploration license, do not expect free favours later and then voice your concern about the “culture” in Africa. Minimise the risks, think long-term; and think sustainability. Work with government and not against government. If you have been awarded an exploration license, do not sit on it for years and expect government to extend your tenure, and then use social media platforms to voice your anger. Then it becomes an extremely high-risk venture, and the rewards will be meagre.
Leon Louw is the founder and editor of WhyAfrica. He specialises in natural resources and African affairs.
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