Investment in Africa: Non-legal risks to consider

Africa has ample land for investment purposes, but the land is shrouded with multiple issues because land is not only an economic asset but also a social, cultural, and political resource. In multiple African jurisdictions, registry for land ownership are incomplete, outdated or inaccurate, boundaries are not properly managed, small pieces of land are subdivided among growing families, lack of land planning and clear authorized uses of land, Government expropriation and re-planning, multiple land tenure systems within the same country, land grabbing etc.

Those are just a few challenges grappling land ownership in Africa. Any investor looking to invest in large pieces of land e.g. agriculture, extractive sector, carbon projects, real estate etc. will encounter challenges to access suitable land for the required project. Also, support from Government Authorities is usually lacking because there is conflict of interest between protecting the voters (i.e. the land occupants) and guaranteeing future political interests versus the investor who may bring economic benefits to the communities. Also, compensation and relocation policies and laws are outdated or do not reflect the current market conditions and protection of the means / ordinary way of life of the occupants. Even when the investor successfully acquires the land and follows all the required legal processes, there is usually continued resistance from local communities and former occupants which makes continuation of business operations challenging. 

Localization vs shortage of human capital and skills

Most African countries have some sort of mandatory local ownership, procurement from the domestic market by entities owned by locals, and/or minimum local hiring quotas for specified positions ranging from skilled, semi-skilled and unskilled laborers. This is a sensitive subject in African countries because on one hand Governments want jobs and skills transfer for nationals, whilst investors need readily available, experienced talent to operate efficiently and generate profit. The challenges go like this: African Government wants investors to hire locals quickly, investors argue that there are limited qualified candidates. African Governments insist on urgent and immediate localization of senior/managerial positions, investors are insisting on continued expats for senior and managerial positions due to lack of local qualified candidates who understand the international markets and requirements. African Governments insist on use of local suppliers and investors are of the view that the local suppliers are not able to meet the quality and/or quantity of the materials/goods required or same local suppliers import from outside of the country and add a profit margin which makes an investor pay higher cost for the goods which would be lower if the investor imported directly. Again, most African countries are not manufacturing hubs and even those who manufacture some of the required goods, the pricing is usually higher than importing fromm for example Asia. Overall investors want to manage costs by keeping them lower but localization leads to increased costs of production and operation. 

Infrastructure & Operational Risks

Most African countries have infrastructure and operational challenges, including, unreliable power supply and high energy costs, poor transport and logistics (ports, roads, rail) from the project site to the target market, limited digital infrastructure in certain regions and high operating costs due to inefficiencies. This may lead to a considerable increase in operational costs, and at times prevents the project from taking off. 

Informal Competition

Whilst is relatively manageable to identify formal competition, their market share and establish a manner to effectively operate and compete in the same market, there is informal competition that must be taken into account. Informal competitors operate at a small scale, hardly pay their taxes, low regulatory compliance meaning their operation costs are relatively lower compared to a larger investment. They are able to source their materials at a much cheaper price compared to a larger investment and taking into account the lower and uneven consumer purchase power, it impacts the larger investment’s profitability. Informal competition is not to be ignored. Any investor seeking market entry in any African country must take into account the information competitors in the market and assess how the same will impact its investment and plan accordingly. 

Political-Economy Competition Risk

This is quite common in most African jurisdictions, where you find either a handful of strong and prominent families who have influence in the Government or politically exposed persons (PEP) owning companies operating in a particular sector. Whilst the law appears to allow equal opportunity to any person, a new investor seeking entry in the similar sector will encounter extreme challenges with the aim of deterring competition. The investor quickly finds out that the whole field is tilted against him: delayed or refused regulatory approvals, constant scrutiny and penalties for every issue, unequal access to inputs or overpriced inputs whilst the competitor is offered at a lower rate, if its bidding for government projects - constantly losing bids, restricted distribution, harassment by endless tax audits with made up defaults, labour disputes encouraged and publicized to create hate towards the investor, pressure to partner with the prominent families or PEP, refusal to grant of land or allocated land so far away from required infrastructure, constant power cuts for pro longed periods. If the investor seeks to report, prosecute or dispute against such treatment using local dispute settlement mechanisms, from the onset either the claim will not be entertained, or heard but the investor loses the dispute. 

Control pricing and mandatory supply to domestic market

Due to currency fluctuation affecting African currencies and uneven distribution of purchasing power in most African countries, Governments have opted to fix maximum price benchmark for prices of some goods / services including food, water, electricity, fuel and public transport. Also, as of recent some African countries have imposed restrictions on use of foreign currencies in local markets meaning only local currency can be used to trade locally. In order to ensure the local market needs are met first before export, at times there have been bans against export of particular products, and for some African countries, the law is clear that a certain percentage must be sold locally. This means that, the investor may fail to reach the desired profit, including ability to pay off domestic and non-domestic loans if the investor did not consider this as a risk prior to investing and building it in the financial model. 

Exit challenges

Investors usually have a timeline fixed on their projects. This means that the investment is established with a clear timeframe of when operations should commence, profit to be earned and planned exit of the market to free capital for the next investment. Exiting a project in Africa is a challenge and so far it has been proven that, exits take longer than expected and this means that, the investor should realize that, this may lead to delay, reduce, or prevent the ability to sell an investment, force an investor to exit at a discount or trap capital longer than planned, which may cause issues with the financiers and shareholders. 

All of the risks above are material but can be managed if they are identified and considered early, before entering the market. All risks can be navigated but it requires doing proper upfront work and engaging advisers who understand the local legal framework as well as how business is actually done on the ground. Having advisers who are experienced, reliable, and familiar with the local environment can make a real difference in navigating challenges as they arise and, over time, can help protect the investment and support more sustainable outcomes. 

Disclaimer

The views expressed in this paper are those of the author only and should not be considered as an official interpretation, defamatory or interference of any legislation, laws or policies of any country including Tanzania. The contents of this paper should not under any circumstances be reproduced or used without the express written consent of the Go2Experts. It should not be considered as legal advice to any of its recipient(s) and should not be relied upon without obtaining further legal advice. We accept no liability for any loss occasioned or suffered due to the contents of this paper.