US investment in Africa is at an all-time high. Some of the biggest American companies, like General Electric and Walmart, have fast-tracked expansion plans, setting up dozens of stores and establishing new regional headquarters across the continent.[hidepost=9][/hidepost]
The US government, for its part, has rolled-out ambitious new initiatives to support their efforts through new policies like “Power Africa” and “Trade Africa”. Cabinet secretaries have been dispatched to advance their take up. In May, Secretary Pritzker led the Commerce Department’s first trade delegation to Africa in 20 years. Her visit was followed by Secretary of Energy Moniz’s attendance at a high-level energy conference in Addis Ababa, Ethiopia – the first time ever a Secretary of Energy had visited the continent. The activity culminates this summer in the first ever high-level US-Africa gathering, the US-Africa Leaders Summit, a gathering of African heads of state in Washington set to take place in early August.
But something’s still missing. Old perceptions about Africa persist. “Corrupt”, “incompetent”, and “greedy” still characterise how most investors perceive African governments. While some of this is justified, some is not. Illustratively, Transparency International ranks eight African countries higher than Brazil, China, India, and Russia in global corruption. Despite these improvements, most firms still resist interacting with government officials, fearing something will be asked of them, or expectations will become unmanageable. As a result, many resist engaging until they absolutely have to – usually the worst time possible. What’s needed is a better understanding of modern African governance and policy-making.
Over the years that we have worked on the continent, we have developed a different approach to government relations. What we have put together are 11 steps for healthy engagement between US business and African governments. To make it practical, we’ve divided the 11 steps chronologically into three phases: pre-commitment phase, commitment (contract) phase, and post-commitment phase.
1. Understand the country’s vision for development. Keep in mind that an African government’s development goals are extremely complicated and multi-faceted. Don’t presuppose what is important to a local government in a particular transaction – the government may have broader goals in mind, such as training local workers or developing a related service industry. Be sure to ask how a project fits into the country’s development and policy goals, which can help you to understand local dynamics and could provide opportunities for creating mutual value.
In a hotel deal, you might agree to host a seminar for local guesthouses on how to train customer-service employees, or you could agree on a joint marketing budget to promote the country’s tourism industry in the US.
2. Leverage your firm’s intangible assets. Concerns by US companies around sharing too much information with the government about their company are often unfounded. Being open and sharing knowledge and industry expertise demonstrates interest in partnering with a government. Would the ministry like to see a report on global industry trends? Can you provide an introduction to a potential export customer? These actions demonstrate that you bring special value as a commercial partner, and they indicate that you care about the local community.
In an agricultural equipment deal, you could agree to make introductions to large agricultural buyers in the US. In a mining deal, you could provide an industry report on global pricing trends. Exploiting information asymmetries between your firm and the government only ends up costing both parties (see the cautionary note in step 6, below).
3. Suggest paths for a long-term relationship beyond a specific project. In frontier markets, almost nothing goes exactly as planned. In longer-term relationships, the parties are more likely to invest in fixing problems that arise along the way. The promise of benefits beyond a specific project can also give you an advantage over your competitors.
Are you installing a solar or hydro power project? Indicate that if the project goes well, you intend to help grow the country’s power capacity with additional projects.
Commitment (contract) phase
4. Develop a clear escalation process – going both ways – to deal with problems as they arise. Escalation processes create accountability at all levels of an organisation. Without them, mid-level employees are tempted to downplay complications, which can quickly turn into major obstacles. While escalation processes like these are common in the US, they are less so in Africa, so you should emphasise the importance of these procedures and make them a key term in your contract.
When you encounter unexpected delays at the customs office, your government counterpart may assure you for weeks that clearance of your equipment is imminent, while hoping that the problem will resolve itself without ruffling feathers.p Similarly, you may have a local manager who is behaving badly or making enemies within the government, and you want to learn about the problem before it threatens the entire project.
5. Obtain high-level and visible government support for your project. Government employees are generally fearful of impeding pet projects of the President or other high-level executives. Conversely, if they believe your project is under the radar, they may be more tempted to exploit the transaction for their own advantage, and less likely to stick their neck out to help you.
You might issue a joint press release, published in local papers, stating that (i) the President views your project as critical to the development of the particular industry, and (ii) your company is excited to be working on a critical development project for this promising African country. You could also request that a government minister designate your projects as a “priority project” within the agency.
6. Align each stakeholder’s incentives and don’t try to be too clever with your legal contract. Sometimes when foreigners complain about “rule of law” in Africa, they are blaming the victim. American companies may have done similar deals dozens of times, and their lawyers may know every pitfall in the contract. But for an African government, this may be its first, and its lawyers may be unfamiliar with the structure or details of the contract. They may be relying instead on the promises in your original PowerPoint sales presentation. When it turns out that the contract doesn’t match their expectations – reasonable or not – they may rationally seek to extract justice in other ways. Make sure the key terms of the contract are well understood by both sides.
In a mineral resource contract, you might emphasise that if the commodity price goes up, most or all of the benefit goes to you, whereas if the price goes down, you can decrease your activity. Explain the commercial reasons for this structure, rather than trying to obscure it. Otherwise, don’t be surprised if the government feels cheated later on and employs its own tricks – fomenting local outrage, claiming that your transaction didn’t follow proper government procedures – to punish you or invalidate the contract.
7. Don’t expect a high financial return on your first project. While experienced investors and businesses in Africa can generate higher financial returns than in other regions, first-time projects often require over-investment in due diligence and other start-up costs. You have to “pay your school fees” as they say. For this reason, we recommend starting small – dipping your toe in the water before placing larger bets – so that you can learn the environment without risking too much at first. Your African government and commercial partners, likewise, will view you as an unproven partner, and so will be less likely to pay you a premium price for your project.
There are plentiful opportunities for renewable power projects in Africa, but in your first project, you might plan to break even or lose money – do it right, learn your lessons, and make your money in the longer term by becoming a proven market leader in repeatable projects.
8. Be present. In many parts of Africa, personal reputation matters more than institutional reputation. If you rely too much on local eyes and ears, your impermanence can undermine the deal by diluting trust and commitment among the parties. There is a rational fear in Africa that after an American businessperson visits once or twice, they will never return. If a high-level executive is not living onsite, they should at least visit at regular intervals and communicate regularly and promptly by email and phone, and you should schedule regular status conferences. Long plane flights cannot be an excuse for neglecting your investment.
As public private partnerships become more common, companies will need to think seriously about how to manage the various different parties to a transaction – including the Ministry of Finance, Presidency, national utility. Lack of follow up in one place can unravel deals rapidly.
9. Don’t just rely on one point of view, triangulate information sources. Local dynamics – political, social and commercial – can be difficult to interpret from the outside. In informal economies, often your largest competitor will not be the one you expected upon entering the market; rather, it could be a collection of small ones. If you develop genuine friendships within the local business community, you can ask questions you might otherwise not ask your government or commercial partners, such as “What is Minister Kayunda’s reputation within the government? Have we chosen a reliable local partner?” Ideally, you might form these relationships during the pre-commitment stage, but developing trust can take time.
In a factory development deal, you might meet with local business people operating in related industries and develop at least two solid friendships. You can ask them the difficult questions: “The government assures me that there will be no problems relocating the local community to make way for our factory. What do you think will be the local reaction, and how should we deal with it? Who are the local competitors – the ‘street-corner’ competition – who will suffer from our new factory, and how can we ensure they won’t retaliate in a way that hurts our business?”
10. There will be delays – manage them carefully. It’s tempting to blame delays on dysfunctional African governments or the business environment, but the reality is that many American-led projects include elements that are new to the local environment. If you fail to deal head-on with inevitable delays and complications, you risk being viewed as an absentee owner. Trust can quickly erode. Keep in mind that “yo-yo” investors – those than come in when times are good and pull out at the first sign of trouble – have a long history in Africa.
Imagine that you’ve encountered delays at customs, the government is slow to install an electrical grid power line, and you are late to receive proper title to land. If you threaten to pull out – a reasonable negotiation tactic – you risk being viewed as a permanent adversary, another yo-yo investor who might flee at any time, leaving broken promises in its wake. The government may begin planning back-up scenarios that don’t include you. Instead, you should arrange meetings to learn the reasons for the delays and develop a cooperative plan to resolve problems.
11. Plan carefully for taxes and repatriation of profits. Tax laws in many African countries are constantly evolving, and there can be many grey areas in the law. In addition, when it comes time to convert profits to US dollars, you may encounter delays owing to low reserves of foreign currencies. Be sure to obtain top-quality legal counsel and negotiate these issues directly with the government for larger projects (some governments will negotiate project-specific tax regimes and repatriation rules).
If you are opening a chain of retail stores, be sure to understand the income tax rules in each country: What types of deductions are allowed? What types of evidence are sufficient for tax purposes? When is revenue recognised for tax purposes? What are the depreciation schedules and categories? You might also develop a regular schedule for repatriating profits and meet regularly with the central bank to minimise delays.
Africa is not America – it is fast developing, and often its infrastructure, institutions and human resources struggle to keep up. At the same time, it is probably the most exciting place on the planet to do business because its potential is so great and every project – even those that are small by US standards – can have a strong impact on economic development.
It is unfair to expect everything in Africa to work like it does in America. The government continues to play an outsized role in commerce. But it is equally important to realise that American and African business aspirations are not so far apart, and world-class corporate governance and “best practices” are typically welcomed rather than feared.
Today’s African business and government leaders are less likely to be the entrenched hippos of the past. Instead, they are mostly hard-working innovators who abhor corruption and inefficiency, and they are eager to join with American companies in promoting a business-friendly environment. For American companies that can respectfully demand high standards while allowing for the continent’s growing pains, Africa may be the most promising market in the coming decades.
Eliot Pence is the director of Africa Practice at McLarty Associates and founder of Upstream Analytics. Robert Fogler, an attorney, has managed a venture capital fund in East Africa and a pan-African television company operating in 30 countries in sub-Saharan Africa.