Changing the Perception of the Risk of Doing Business in Africa

Tony O. Elumelu, C.O.N
Chairman at Heirs Holdings

Changing the Perception of the Risk of Doing Business in Africa

October 19, 2016 •

I want to start by thanking Thomson Reuters and the US Chamber of Commerce for this kind invitation to speak to you today.

I also want to commend you for highlighting this important topic that must be addressed if we are to increase and strengthen US-African economic ties, the objective which has brought both business leaders from Africa and the United States to join our political leaders, as they also attend the opening of the US General Assembly.

OPPORTUNITY

Let me first start by stating the obvious. For any investor or business to consider venturing into a market, there must be OPPORTUNITY and there must be the potential for good RETURNS.

As an investor, I can tell you that there is opportunity in Africa, particularly in the following areas:

Power
Oil and gas
Infrastructure
ICT
Real Estate
Agriculture
Healthcare etc.

PERCEPTION OF RISK

However, any investment in Africa comes with a perception of higher risk. And we know that often times, perception is as powerful as the truth.

The kinds of perceived risks associated with doing business in Africa include:

High volatility
Policy inconsistencies between African countries and between governments when political transitions occur e.g. on key issues like property rights etc.
Ease of doing business (With the exception of Rwanda and South Africa, African countries rank very low on the World Bank’s ‘Ease of Doing Business Index.’)
Infrastructure deficits
Regulatory Challenges
Macro-Economic challenges
Corruption and political rigidities etc.

OVERCOMING THE PERCEPTIONS OF THESE IDENTIFIED RISKS

However, these risks are not insurmountable. Literature and common sense tell us that business is not about risk avoidance, it is about risk mitigation. And the higher the risk, the higher the reward. You can tell from World Bank statistics, that Africa rewards its investors richly, particularly those that take a long-term approach to their investments.

Succeeding companies operating in Africa have learned how to live with and manage institutional rigidities and structural challenges in their operating environment and have converted them to competitive advantages.

CASE STUDIES IN RISK MANAGEMENT BASED ON PERSONAL EXPERIENCE AS AN INVESTOR

FINANCIAL SECTOR: The United Bank for Africa

UBA had a long-term ambition of living up to its name and becoming a pan-African bank. However, there were two key risks associated with the African expansion:

A. Lack of human capital

UBA resolved this by establishing the UBA Academy to provide in-house training and professional development for its staff on a rolling and continuous basis.

B. Institutional Rigidities

East Africa was a key market in the UBA expansion. However, the Kenyan authorities refused to grant the bank a license to operate as a domestic retail financial institution.

UBA disregarded issues of perceived risk, such as the lack of trust in Nigerian investors as potentially fraudulent (419) and refused to be deterred. Instead, it focused on managing the real or technical problem, which was the denial of the license due to the lack of a proper framework to govern employment of Kenyan and Nigeria nationals in the other country.

UBA managed this real risk by engaging the Nigerian government to negotiate with the Kenyan government, a framework to establish rules/regulations for companies to deploy staff in the other country. This was successfully accomplished and UBA has been operating in Kenya since then. Not only that, our efforts have benefitted other Nigerian and Kenyan businesses wanting to operating in each other’s countries.

So, managing this risk was a win for UBA, a win for countless businesses and a win for the Nigerian and Kenyan governments in promoting regional trade and increasing their government revenues.

2. POWER SECTOR: HEIRS HOLDINGS AND GENERAL ELECTRIC

A. Policy Inconsistencies

When the Nigerian government decided to reform the domestic power sector and turn it over to the private sector, Heirs Holdings saw an opportunity to make a profit for its shareholders, through its Transcorp subsidiary, while making a significant contribution to the economic development of the country.

Under the terms of the PFA, the tariffs for power would be centrally controlled but adjusted should any one of the following conditions occur:

Negative macro-economic impact
The cost of gas/fuel for the power generation plants was to rise
However, by 2015, all three conditions had occurred, but due to overwhelming public pressure, and in an election year, both the outgoing and incoming governments were reluctant to adjust the tariffs. This had a very costly impact on the power generation companies, as we had financial obligations to creditors, suppliers and shareholders to honour.

We managed this risk by coming together to form an association of power generation companies to engage in collective advocacy with the government in a united and coordinated manner, and we were very successful.

Now, clearly there was a significant risk to us in the policy inconsistency of the government. The power sector is a long-term investment proposition, but I can tell you in all honesty that Transcorp turned a profit in the very first year of our investment in that sector.

As I said earlier, High risk, High Reward.

B. Lack of a Skilled Workforce

As I described earlier with the case of UBA, accessing a skilled workforce on the continent is a challenge. However, that did not deter General Electric, a global leader in the power space. GE has similarly mobilized companies like Heirs Holdings and the Dangote Group, which operate across the continent to develop a private sector initiative to address the critical skills gap on the continent needed to operate effectively and efficiently, spur growth and attract new investors.

CONCLUSION

In closing, I will reiterate that business is not about risk avoidance, it’s about risk mitigation. Investment in Africa, like anywhere else, comes with some level of risk but it must be approached with optimism. And there is reason to be. After all, moguls like Carlos Slim and Aliko Dangote, two of the most successful entrepreneurs in the world, have successfully grown business in developing countries.

I always say that where there is a challenge, there is an opportunity. The question is where is the will?

This keynote address was given at a breakfast event hosted by Thomson Reuters for attendees of the USABF, themed ‘Changing the Perception of the Risk of Doing Business in Africa.’ on September 22nd 2016.

Written by

Tony O. Elumelu, C.O.N
Chairman at Heirs Holdings

SOURCE: http://heirsholdings.com/profile-news/changing-the-perception-of-the-risk-of-doing-business-in-africa/