Corporate investigations in Africa - Council of International ...

Corporate
investigations in Africa
The country risk perspective
Eunomix de-risks mining and resource investments in Africa
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Africa rising
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► The rise of Africa is upon us! Your presence here, I hope, testifies to
this
► There is much talk of an African Renaissance, even of an African
decade, with the continent at long last joining Asia and Latin
America in the club of emerging economies
► This ‘Afroptimism’ contrasts spectacularly with the Afro-pessimism
of the 1980s, 1990s and early 2000s. Only ten years ago, The
Economist famously described Africa as the hopeless continent. It
recently expressed remorse for this mistaken call
► Many facts support the new outlook
Corporate investigations in Africa: the country risk perspective

Africa rising
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► What a difference a decade make!
2000 2011
Corporate investigations in Africa: the country risk perspective

Africa rising – the economics
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► Average growth was 4.6% in the 2000s, up from 1.9% in the 1980s
and 2.2% in the 1990s
► Today, six of the world’s fastest growing economies are in Africa
► The continent’s population is 1 billion, and is set to double by 2050.
Its emerging middle class is still comparatively small at 320 million,
but growing rapidly
► FDI into Africa has grown spectacularly
► Firms from the Old World are competing against those of the New
New World for access to markets and resources
► Investment banks, private equity firms and hedge funds are
flocking in, scouting the continent for opportunities
Corporate investigations in Africa: the country risk perspective

Africa rising – the economics
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► What a difference a decade makes!
Source: World Bank
Source: World Bank
Source: Unctad
Corporate investigations in Africa: the country risk perspective

Africa rising – the politics
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► And it is not only about economics. Africa’s stability and
governance record has significantly improved
► The 2000s saw a record low number of wars, civil wars and coup
d'état
► There are now a majority of democracies, where they were the
minority until the late 1990s
► There is greater freedom of expression, including a vibrant press,
and access to cell phones. It is not an exaggeration to say that the
cell phone has revolutionised Africa
► Human rights have significantly improved
Corporate investigations in Africa: the country risk perspective

Doubts of the Africa hand
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► For an “Africa hand” like me, who resisted the strong calls to “go
East”, back in 2000 these are exciting and lucrative times
► But in a world of speculative bubbles, this spectacular change of
destiny is raising some discomfort with Africa hands:
► Richard Dowden, of the Africa Institute, wonders if the growth is
sustainable without a larger middle class
► Diane Gammes, who has just released a book called ‘Business in Africa:
Corporate Insights’, questions the data behind the hype
► As for me, while I see the sea change, from Dakar to Nairobi, I also
see that the growth is shallow and the long-term conditions its
sustainability remain largely absent
Corporate investigations in Africa: the country risk perspective

Unpacking the story
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► A few facts stand-out from our own analysis:
► The six African star performers of 2010 had growth of between 8% and 13%,
and maintained this in 2011, but: combined, these countries GDP represent less
than 0.4% of the GDP of the USA, and less than 0.01% of the world’s. The global
economic impact of their growth is negligible
► The top ten economies only represented the equivalent of 3.6% of the USA, and
less than 1 percent of the world
► Sub-Saharan Africa’s total GDP was only 4.6% of the USA, and 1.3% of the world
► Of the star performers only Ethiopia and Liberia are not rent economies –
dependent on either oil & gas or minerals (or both) for growth
► Most of the star performers are highly dependent on the rent for their growth:
60% for the Congo, 50% for Angola, 40% for Chad
► The 24 resource-rich countries account for 75% of the region’s economy, FDI,
and contribute to its growth in the same proportion
► FDI is concentrated in resources (oil & gas and mining) and infrastructure
Corporate investigations in Africa: the country risk perspective

Unpacking the story
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► Much ado about nothing?
Corporate investigations in Africa: the country risk perspective

Unpacking the story
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► Much ado about nothing?
Source: Unctad
Corporate investigations in Africa: the country risk perspective

Unpacking the story
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► Why does this matter?
► Because a strong correlation between resources and growth means a
great sensitivity to commodity booms and busts
► Because resource economies suffer from Dutch disease, and are
therefore afflicted by low levels of agricultural and industrial
development – Africa has systematically missed industrialisation, and
appears to be set to continue to do so
► Because these economies require very little investment in social capital,
and tend to encourage rent-seeking and predatory behaviours –
economic and political – on the part of the ruling elite
Corporate investigations in Africa: the country risk perspective

Unpacking the story
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► It should therefore be no surprise that:
► During the 1970s Africa grew at an average 4%; between 1970 and
1974 it grew at 5.6%, and then tumbled down – this was during a
commodity boom, and after…
► That growth collapsed in 2008-09 for most countries, particularly the
resource rich ones, and recovered after the massive Chinese fiscal
stimulus pumped USD 586 billion in the economy, and fed a commodity
guzzling construction boom – with many bridges to nowhere
► That the star performers of today and of the past few years do not have
good democratic credentials and stellar human rights records
► That growth remains very skewed toward the few, has done little to
create sustainable employment for the rapidly growing youth, and is
not leading to the creation of a sound economic foundation
Corporate investigations in Africa: the country risk perspective

Page 12
The fundamentals of transformation are weak
► Africa remains exposed to instability, from the top, from the bottom
and from the middle
► From the top, democratisation is still partial and vulnerable to
capture by the same old elite or by challengers who want power
(the army captains who don’t know what they don’t know)
► From the bottom, the masses of poor and unemployed have much to
lose to economic booms and busts, and are prone to riots of
survivals and are easy pray to the populism of the typical African
strong man
► The middle class is pushing for democratisation and economic
reform, but it is still in minority and is highly dependent on the
services sector, itself dependent on the resource rent. It is fragile!
Corporate investigations in Africa: the country risk perspective

Page 13
The fundamentals of transformation are weak
► Still on his way, or finally on the way out?
Zimbabwe’s
Mugabe
I’m still standing!
Equatorial
Guinea’s
Obiang
DRC’s Kabila
Corporate investigations in Africa: the country risk perspective

Page 14
The fundamentals of transformation are weak
► Still on his way, or finally on the way out?
A little help from my friends?
Libya’s Gadhafi & Cote
d’Ivoire’s Gbagbo
Guinee’s
Camara
Senegal’s
Wade
Corporate investigations in Africa: the country risk perspective

Page 15
The fundamentals of transformation are weak
► Unsurprisingly, Africa still performs poorly in most key indicators of state
performance:
►
►
It does poorly in Doing Business, the Competitiveness Index, the different human rights
indexes, World Health indexes.
All of Africa’s states are considered weak states, many are fragile, a few are failed or
collapsed:
►
►
►
Weak states are defined by the Brookings Institution “as countries lacking the capacity and/or will to
foster an environment conducive to sustainable and equitable economic growth; to establish and
maintain legitimate, transparent, and accountable political institutions; to secure their populations
from violent conflict and to control their territory; and to meet the basic human needs of their
population.” (Brookings Institution, 2008)
The failed state’s degree of degradation is greater than the weak state’s: “Failure for a nation-state
looms when violence cascades into all-out internal war, when standards of living massively deteriorate,
when the infrastructure of ordinary life decays, and when the greed of rulers overwhelms their
responsibilities to better their people and their surroundings.” (Rotberg, 2002)
The collapsed state is the final stage of decay: “A collapsed state is a political black hole. The
government, if it exists at all, provides no political goods of any kind, and to get by there requires either
exposing oneself to all the risks of daily life or obtaining such goods privately from some nongovernmental
entity such as a warlord.” (Rotberg 2003)
Corporate investigations in Africa: the country risk perspective

What does it mean for business?
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► Despite clear improvements, risks are ever present, arising from:
► a higher incidence of military conflicts and civil strife
► a weaker political governance and rule of law
► a fragile economic growth and poor infrastructure
► and higher levels of poverty and inequality
► African countries are inherently more vulnerable to upheavals. This is
principally because of their lower capacity to:
► keep conflicts under control and resolve them before they turn violent
► ensure fair and sustainable political and economic participation and
outcomes
► provide broadly accessible and effective public services
► and ensure opportunity for the vast majority
Corporate investigations in Africa: the country risk perspective

What does it mean for business?
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► Upheavals occur frequently. Since 2000, twenty countries have
experienced serious security and political crises. Some of these
countries were reputed stable – like Mali. Past stability is no
guaranty of future stability.
► Even in stable countries conditions for investing, operating and
repatriating profits are challenging:
► contracts and property rights are difficult to enforce
► critical inputs, including skills and capital, are scarce
► essential production and transport infrastructures are in short supply
► administrative efficiency is low, and corruption is high
► policy changes occur frequently and are often drastic
► Costs are higher. Projects require more time to develop. Assets are less
productive. Economic returns face greater uncertainty.
Corporate investigations in Africa: the country risk perspective

And for corporate investigations?
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► Conducting investigations in Africa is challenging:
► In some countries, private investigations are illegal
► Different legal systems: Common (English-based), Roman/civil
(Belgian-,Dutch-, French- and Portuguese-based), bijudirical, Islamic
► Industry regulation is arcane or non-existing – abuse and be abused
► Labour laws are cumbersome and pro-labour
► Criminal and civil legal systems are under-funded, under-equipped, lack
independence, and are often corrupt – police, prosecution, courts
► No effective public records systems, let alone accessible ones
► Privacy laws, if they exist, are not enforced, or are selectively enforced
► Confidential information can be obtained through bribery and collusion
► Protection against investigation and prosecution can be bought
► Good, independent, investigators are scarce
Corporate investigations in Africa: the country risk perspective

And for corporate investigations?
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► Given this, investigations need to be conducted with this in mind:
► Know the country laws – criminal, civil, privacy, IT, etc.
► Regularly consult a local competent, reputable lawyer for advice and
support – do a through due diligence!
► Understand the capabilities of the police and prosecution – carefully
consider whether reaching out or avoiding
► Use highly reputable local forensic firm – go for the established
accounting firms (big names like KPMG, E&Y, BDO, etc.). – do a through
due diligence!
► Use investigative firms that are experienced in Africa and have their
well established sources network – do a through due diligence!
► Advise embassy and consulate of presence and mission
► Most African countries are small, with small business communities.
Everyone knows everyone else. Be very discrete!
Corporate investigations in Africa: the country risk perspective

About Eunomix
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Corporate investigations in Africa: the country risk perspective

www.eunomix.com
claude@eunomix.com
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