Circumventing Africa's risks

This year’s Mining Indaba in Cape Town will highlight Africa’s great opportunities — but also the potential risks faced by investors in Africa, writes Leon Louw, editor and writer for the magazines African Mining and Mining Mirror.

Although the ‘Africa Rising’ narrative has lost momentum over the past year or two, the continent still presents ample opportunities for investors, especially in the mining space.

Much of the African continent remains unexplored. However, venturing into the ‘last frontier’ is a challenging undertaking, and could be an extremely high-risk endeavour. I asked three experts about their views on the current investment opportunities in Africa, what to look out for, as well as the pitfalls, risks, challenges, and possible scenarios.

Warren Beech, Mining Subsector head of the ENRG Sector at Hogan Lovells

With recent political and regulatory developments in South Africa, Tanzania, and Zimbabwe, people are asking whether Africa has lost its investment lure. It may seem strange to ask this question within the context of positive sentiment, which is often expressed publicly about the African continent. It is often said that Africa is a continent of endless opportunities; that the continent has significant natural and human resources; and that the investability of many African countries has improved. The reasons for the improved investability are listed as, among others, mature banking; finance and legal institutions; investment-friendly policies and regulatory frameworks; and national development plans that demonstrate governmental support for sustainable infrastructure and development.

There are probably two main reasons for this question being asked. Firstly, positive views of investment in Africa do not always extend to the mining and natural resources sector. While it is often acknowledged by stakeholders that the mining and natural resources of a country can meaningfully contribute to growth, development, and transformation, there is a growing questioning of the impact of mining on aspects such as the environment, host communities, social structures, tourism, and industries such as agriculture, versus the benefits that often flow from mining and beneficiation operations. As the voices of concern increase and develop, the benefits that flow from mining and beneficiation operations are likely to be questioned even further.

Secondly, significant concern remains about policy and regulatory uncertainty, and the perception that investors are at the mercy of the politics of the day and those in power in the relevant countries, continues to grow. The recent examples of mining legislature changes in Tanzania and South Africa have brought into sharp focus the fragility of investment decisions relating to so-called ‘frontier markets’, such as Tanzania, and emerging markets, such as South Africa.

Tanzanian President John Magufuli signed into law the Natural Wealth and Resources Bill 2017, and the Natural Wealth and Resources Contracts Bill 2017, on 3 July 2017. These laws, which were fast-tracked though the Tanzanian Parliament, in a matter of weeks, have had far-reaching consequences for foreign companies with investments in Tanzania. Tanzania is one of Africa’s largest gold producers (depending on the figures used, Tanzania is either the third or fourth-largest gold producer in Africa).

There has been extensive investment in Tanzania’s gold mining industry, with a sizable percentage of the investment focused on prospecting operations. Prospecting and exploration are of course critical in the creation of a pipeline that can be converted into mines in the future. The uncertainties flowing from the new laws are likely to quite dramatically impact on junior mining companies, who are focused on exploration, and it will make capital raising exercises extremely difficult, if not impossible. Where ownership of mining assets in a company is put at risk, this is likely to scare off would-be investors and make existing investors exercise extreme caution.

On 15 June 2017, the South African Minister of Minerals, Mosebenzi Zwane, published the Reviewed Broad-Based Black Economic Empowerment Charter for the South African Mining and Minerals Industry, 2016. The response was immediate, dramatic, and far-reaching. It is estimated that mining stocks lost approximately R50-billion in value following the announcement, with the rand losing ground. The Chamber of Mines, representing more than 90% of the miners in the South Africa mining industry, has challenged Zwane through court processes. While the discord was significant across the board from various stakeholders, the most recent developments, where the Centre for Applied Legal Studies and Lawyers for Human Rights has applied to the High Court, to join the court process initiated by the Chamber of Mines, is a further, significant positive step in South Africa’s democracy. The applications to intervene must be seen within the context of South Africa’s democratic and judicial processes, and South Africa’s commitment to the rule of law, enforced through the court system, is widely regarded as one of South Africa’s most positive attributes.

While the South African and Tanzanian examples are of concern, this does not mean that Africa is uninvestable. To the contrary; Africa has a significant and often thriving mining and minerals industry, providing millions of jobs and opportunities.

It is likely that demand for certain precious metals will continue to grow, and that the demand for the so-called ‘battery metals’ will grow exponentially. All of this creates opportunities for investors, provided that the investors have a proper understanding of the various risks that are faced in these investment opportunities.

The investability of Africa is likely to depend, significantly, on balancing the growing need for mineral resources with addressing the concern of multinational companies extracting value without returning benefits for the host countries, and ensuring that the vast socio-economic benefits that can flow from mining operations, materialise.

Jakkie Cilliers, chairperson of the Board of Trustees and head of African Futures and innovation at the Institute of Security Studies (ISS)

Perceptions about Africa, including South Africa, are currently somewhat negative among foreign investors, despite the many opportunities South Africa offers. Yet, South Africa, in contrast to most other African countries, has strong institutions, sophisticated financial systems, and a dynamic private sector. South Africa is quantitatively different from many of its African peers. This is best reflected in the wave of resistance, across the spectrum from business and labour to civil society, against the efforts at state capture under the Zuma administration. It is something you will not see in other African countries.

In my view, the worst is probably behind us and South Africa can expect a positive bump early in 2018, as new leadership will bring greater certainty and direction to a country that has been rudderless.

Business wants predictability and reliability, and under Jacob Zuma, South Africa has not experienced this. Because of its developed infrastructure, size and sophistication of its domestic market, and international access, South Africa should be one of the top African countries to invest in. But the ruling African National Congress (ANC) is going through a crisis similar to that experienced by liberation movements in the rest of Africa, but because of its differences, this is occurring much more rapidly. If the ANC is not able to renew itself and modernise, the party’s death will be swift. In one sense, the quicker the ANC goes through this crisis, the better for South Africa.

With the kind of leadership in the DRC (Joseph Kabila), Tanzania (John Magufuli), South Africa (Jacob Zuma), Zambia (Edgar Lungu), and Zimbabwe (despite the recent nominal change in president to Emmerson Mnangagwa), many people are starting to question democracy in Africa and whether there has been a return of the so-called ‘strongman syndrome’. However, contrary to widespread belief, and despite a democratic regression elsewhere in the world, there continues to be a steady strengthening of democracy in Africa. Although many leaders overstay their welcome (DRC, Burundi) and manipulate the constitution to extend their stay (Uganda, Togo), most leaders now come to power through some kind of democratic process. Competitive party processes and elections continue to expand in popularity year on year.

 Yet, although the era of Robert Mugabe and Eduardo dos Santos has come to an end, it does seem that southern Africa has a particular problem. It is the most recently liberated region in Africa and, therefore, still have a number of colonial hang-ups. In the rest of Africa, especially in West Africa, competitive politics has become a more significant feature, although the quality of democracy is often questionable. It is also becoming more difficult to cheat in elections (witness, for example, recent events in Kenya), mainly because of modern technology, and to steal and hide money. There is no doubt that competitive politics is the future of Africa and that globalisation works in favour of accountability and effectiveness.

Rwanda and Ethiopia are exceptions. Both countries experienced a genocide and had very low levels of development when the current leaders came to power. In specific circumstances and lots of luck, strong authoritarian leadership can deliver positive developmental results more rapidly than democracy. However, as a country moves up the income curve and graduates to middle-income or high-income country, the relationship between democracy and growth strengthens.

At low levels of income, the nature of the governing elite is critical. It is great if a country gets a competent, strong leader, but if it lands up with a bad or mediocre leader (more often the case), then it really is a problem. Ethiopia and Rwanda do well because these countries have developmentally orientated parties and leadership. These outcomes were shaped by the genocide experienced in each country (the Red Terror and Rwandan genocide, respectively), and one must not be hasty to think that these exceptions prove the rule.

The quality and depth of democracy should be related to the level of development. One cannot, for example, compare democracy in Tanzania with democracy in South Africa. Moreover, democracy in Africa cannot be compared with the matured democratic systems in Europe. It is a slow-burning fuse, but Africa’s future is democratic, competitive politics.

Potential investors in Africa must do research on the individual country they intend investing in. The big risks in Africa are political volatility and regulatory uncertainty; yet, overall, risks seem to be reducing. That said, Africa will remain turbulent because the population is young (50% of Africans are younger than 19), and not forgetting rapid urbanisation, high levels of unemployment, and its history of past violence. The size of a country’s youth bulge (the portion of the population between 15 and 29 years of age) is a large determinant of violence, and Africa has a very large youth bulge. Young men are generally responsible for violence and serve as a source of instability.

That said, longitudinal studies by the World Bank and others indicate a general trend towards more responsible macroeconomic management, and greater inclusion. However, to expand and diversify, each country needs to be assessed individually.

In East Africa, Kenya is doing well, and of course the Democratic Republic of the Congo (DRC) has tremendous potential. However, the DRC remains inherently problematic given the fact that it is not governed in any normal sense of the word.

Although there are countries with huge mining potential, especially in West Africa, each country faces its own unique challenges, and each one of them has made progress in a particular way. Mali has an insurgency problem, for example. Eventually, it is really a question of how big a risk the investor is prepared to take in a country and how well these risks are understood. Africa remains a huge source of natural commodities and its 55 countries are set to grow at about 5% on average in the long term — significantly higher than the global average. In the future, Africa will remain the second-fastest growth region behind Southeast Asia, and it will likely maintain that growth long term.

Claude Baissac, managing director of Eunomix

Mining risk in Africa is obviously a hot issue with the current situation in Tanzania and South Africa. We need to ask ourselves: what is this a manifestation of? If you are a cynic, you will say it is a manifestation of bad faith, corruption, and predatory behaviour on the part of governments who are acting to advance certain interests, and the mining industry seems to have become a victim of that. If you have a more Africanist view, you will say that it is an African government doing what is long overdue, which is to take back the natural endowment of the country and continent — and trying to ensure that they are mobilised to advance the interest of the people. I subscribe to neither interpretations. I think governments often use nationalist or patriotic rhetoric to advance private interest or to advance ideologies that sound good on paper but are simply unachievable. That does not mean that one shouldn’t have an understanding or sympathy for the very complex relationship between mining and development in Africa, though.

The governance problem in Africa can be dealt with through good leadership in mining, and intent. Guinea, for example, does not have the best track record of good governance, but they have a phenomenal mining minister. He had very little capacity in his cabinet and administration, but had a clear mission and a vision to turn the sector around, and put to bed the geological scandal of Simandou. There is no doubt that the odds are stacked against him, but he is trying.

Botswana is a perfect example of a developmental state-centric mineral dispensation, the purpose of which is to benefit the nation. You hardly hear Botswana blowing their trumpet about it, but they really did a hard-nose deal. The Botswana government used the threats of expropriation against diamond mining giant De Beers to obtain critical, credible, workable concessions. But, government does not control the mining industry — they have created space for competition.  

After all, it is not the responsibility of governments to take risks. Governments should govern, not invest in businesses. Government should only set the rules and ensure true and competitive competition. This entails ensuring that corporates behave according to certain principles of governance and that they contribute to the fiscus. The fiscus, in turn, is responsible for investing in public infrastructure, in education, and in health care — that is the basic social compact that we need to adhere to. Let the fools of Wall Street put their money into holes in the jungle. It is absurd to think that you can borrow sovereign money and put it into a state mining company. The evidence is there: show me one parastatal in Africa that works.

For any company, big or small, that wants to invest in Africa, country risk is extremely important. Unfortunately, in the real world, country risk is often an afterthought. Companies that did not do proper risk assessments only find out about the political risks when they are in trouble, and then it is too late. At Eunomix, we assess the risks by looking at fundamental drivers of stability and instability before our clients enter a specific country. These drivers can be political stability, social stability, economic stability, or regulatory stability. Irrespective of the form of political regime in a certain country, there are drivers of stability and instability, and there is a lot of data, theory, and indicators that allow us to come up with good assessments and accurate predictions of whether a country has what it takes to sustain a prospective development or an operational project.

Countries are normally ranked in four broad categories in terms of investment potential: the best category is the strong, consistently growing, democratic, rich, competitive countries — these are, among others, the advanced economies like Japan, France and Belgium, and countries in transition, like Chile. Then there is a group of relatively strong, sometimes very rich, sometimes not so rich, competitive non-democratic states like Singapore (very rich, non-democratic), but also capricious states like Russia and Saudi Arabia. These countries provide a good investment environment (for example China), but are not quite democratic. That increases instability and the risk of instability, particularly if the state is not very strong or if the state is dependent on one or two sources of income. The third family of countries is the fragile, poor, relatively democratic, low competitive countries like Senegal, C?te d’Ivoire, Equador and Indonesia. These countries are investable, but less so. The last group is the least attractive: neither democratic nor competitive, and very fragile. The DRC, and many other African countries, will be grouped in this category. It is a high-risk investment, but the rewards are great as well. However, the ability to predict and anticipate what is going to happen in these groups decreases. The poorer the country, the more fragile the state, the less competitive the economy, the less democratic, the more difficult it becomes to predict long-term stability and growth.

And here lies the rub about mining. If you sell phones or fast-moving consumer goods, you can go to almost any country in the world. If there are sudden changes, a company can stop selling and get out. If it is a banking service that requires setting up infrastructure and branches, then you do not want to plan for two or three years — you want to plan for 10 years.

In this case, a company needs to be prepared and more sophisticated about the likelihood of something going wrong in that country. If the business is a 20-year investment, like mining, and you require consistency and stability of politics, policy, and regime, and if you need significant capital to take care of, say, infrastructure, it is imperative that you plan and undertake in-depth country risk and political risk assessments. The challenge is that the weaker the state, the more a mining operation must invest and the higher the risk of instability. In countries like Mozambique, Tanzania, the DRC, and even now, South Africa, it is difficult to predict what will happen in the next five years. However, I am not saying do not invest in these countries; all I am saying is: do your homework.  

Leon Louw, editor, writer and specialist in African affairs and mining.