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Indicators of country risk in Sub-Saharan Africa 03 Sep 2015

Although God didn't give us the future, He did give us the past and the wisdom to use history to plan ahead. Country Risk Analysis is a discipline which seeks to use the wisdom of history to plan for the vagaries which the future can bring. It is designed to help investors to navigate the terrain in a jurisdiction other than their own, given that a foreign country brings with it potentially unfamiliar idiosyncrasies and, indeed, risks.
    
The benefit of placing a country through the filter of a country risk model is that it allows for comparisons to be made across jurisdictions, with the aim of being able to categorise a country's risk profile as low, medium or high risk. The more elaborate and nuanced the model, the better its ability to paint an accurate picture of how an investment may be affected by changes to the political, economic, legal, operational and security risk environments. This article seeks to identify some of the key indicators of political and legal/regulatory risks through the prism of developments in Sub Saharan Africa.

Political Risk

The purpose of Political Risk is to understand the extent to which investments would be affected by political decision-making. In order to fully understand this probability, there is the need to assess what the underlying triggers of political change, and therefore risk, are. There is an Akan (and also Persian!) saying: “not all the fingers are the same.” As far as political systems go, this is also true. The granular process of measuring the permanence of the institutional framework is the first step in the investor's assessment of the viability of a particular transaction. This is informed by a critical assessment of several factors, including the electoral process, the capacity and competence of institutions, the strength of the state organs, the extent to which the leadership is representative of the populace, the levels of domestic and external legitimacy.

Let the People Decide

If true democracy really is for the people and by the people, then the fairness of the process by which the people cast their votes for the ideology that best represents their needs is a critical – although not a singular – indicator of democracy. In 2015 alone, more than ten countries were scheduled to hold elections in Sub Saharan Africa, indicative of the fact that on the whole, countries on the continent are taking steps towards 'democratising'. But to hold elections is not enough on its own for a country to qualify as a fully-fledged democracy: regimes which hide behind the veneer of elections and make no attempt to allow for political pluralism (i.e. where only one party is the de-facto winner because the opposition has been co-opted or coerced), would risk falling into the category of a 'nominal democracy'.

Equatorial Guinea's leader, Teodoro Obiang Nguema Mbasogo, is now Africa's longest-serving president, slightly longer than Angola's Jose Eduardo Dos Sanotos. Both have been in power for 36 years and neither shows any sign of letting go. Equatorial Guinea's last elections saw the incumbent ruling party come away with 99% of the vote. In Angola, while the ruling MPLA (People's Movement for the Liberation of Angola) won with a typical landslide majority, the major opposition party, UNITA (National Union for the Total Independence of Angola), gained close to 19% of the vote. That said, even though support for UNITA is creeping up slightly, and indeed, the aftermath of the Arab Spring sent social media chattering about how civil society could launch a similar offensive against the Dos Santos regime, typically, political dissent is suppressed.

By contrast, Nigeria, Africa's largest economy and most populous nation, went to the ballots peacefully in March/April 2015. The elections were seen as a landmark event in Nigeria's young democracy because for the first time since multiparty democracy was introduced in 1999, the ruling party was ousted by the opposition. All this happened peacefully to the extent that supporters of the People's Democratic Party (PDP) yielded to the victory of the All Progressives Congress (APC) peacefully, demonstrating the maturing nature of Nigeria's democracy.

Capacity of Institutions

Another indicator of political risk assessments is institutional capacity – or precisely how well resourced the state institutions are to ensure that they are able to carry out their functions properly. This will include a consideration of a myriad of factors, such as the competence of the workforce, the ability for operations to be carried out seamlessly, the extent to which procedures are clearly laid down and followed, the ability and willingness of the civil service to implement government policy.

In Ghana, the efficient-running of government bureaucracies is challenged by incoherence, which ultimately means that end-users become overly reliant upon civil servants to guide them through various processes. For instance, conducting a company search at the corporate registry can be cumbersome and lengthier than the stipulated time. Forming relationships with designated officials becomes de rigueur to ensure that your request is not forgotten; otherwise precious time gets wasted from going back and forth and being tossed from one official to another. The Passport Application Centre, more commonly referred to as the 'Passport Office', is another government agency where bureaucracy impedes efficiency, resulting in end-users inducing or coercing officials in some way in order to ensure that application requests are fulfilled on time. A human-rights lawyer mentioned to us that:

“The issue of corruption centres on the fact that there is too much human intervention in the public service value chain. Whereas in the West, with the click of a button, information would pass from one department to the next, here in Ghana, it's a physical movement. What happens when one person in that chain doesn't want to pass something on? Or wants to receive a bribe for what they're already meant to do? This human element needs to be eliminated to get rid of this level of corruption.”

Legal & Regulatory Risk

Intimately tied to the investor's assessment of the risks associated with the political dispensation in a country, is the way in which the body of laws and regulations in a jurisdiction provide the investor with confidence. There may be situations where the body of laws is inadequate in keeping with international best practice and as such, the investors would need to weigh up just how inimical the absence of certain legal provisions would be to their operations. Conversely, the situation could be that on paper, legal safeguards and guarantees are extensive, yet in practice, the judiciary is opaque; there is a lack of independence of the judiciary or legal practitioners or that the judicial process is inefficient and cumbersome.

Rule of Law: Mining and Its Discontents

The West African nation of Guinea is the world's largest producer of bauxite and the fourth-largest producer of iron ore – the mineral used for the production of aluminium. But unfortunately, its mining sector has been synonymous with opaque contracts. Back in 2008, the prices of iron ore and bauxite on the world market were high. Not surprisingly, the competitiveness of the sector attracted keen interest from the world's largest mining companies, not least of all Australia's Rio Tinto, who was ahead of the curve in gaining four concessions to the infamous Simandou iron ore mine eleven years earlier in 1997. But ostensibly because of not enough sign of activity for the Guinean government's liking, the then president Lansana Conte, decided to take away half of Rio's concession, leaving Rio only in possession of half of its concession. Allegations have been made subsequently, to the effect that those close to Conte – including his wife – were bribed heavily by the Israeli company, BSG Resources, the company to whom Rio's northern concession was given, in 2008. That same year, BSGR then sold 51% of its stake to Brazilian firm, Vale, for US$2.5 billion.

Fast-forward two years, and Guinea provides an example of how a contract, considered to be opaque, is uncertain and will come unstuck as soon as the rule of law is applied. The election of Alpha Conde in 2010 ushered in a mining contract review and the new government concluded that the BSGR contract was improperly awarded and the company was later stripped of its concession.

The saga is also an example of the wide-reaching consequences of the absence of the rule of law and clearly identifies the need for companies to conduct thorough pre-transactional due diligence. Rio is filing a lawsuit against BSGR and Vale for effectively 'stealing' its concession; while Vale is bringing a suit against BSGR for losses of up to US$1billion, claiming that BSGR misrepresented the fact that the concession was awarded to BSGR illegally.

Judicial Independence

Article 181 (5) of Ghana's Constitution, requires that any "international business or economic transaction to which the Government is a party" must be subject to parliamentary approval. Falling short of this provision will render the contract null and void. This provision was upheld by the Supreme Court in the “Woyome saga”. In this case, the defendant, Albert Woyome, was ordered to refund GHC51.2million to the state on the grounds that he was given that money unconstitutionally. Even though the case involved several actors, some of whom were political figures, the court did not succumb to pressure but rather, displayed independence in its ruling.

That said, according to a lawyer at Ghana's Commission for Human Rights and Administrative Justice (CHRAJ), the judiciary is challenged by corruption:

“There are times that you have to pay for a docket in order to release your client on bail. But this isn't normal but you're made to believe that it is. Until we get to the stage of having a payless system, corruption will still be present”.

Conclusion

Country Risk is an evolving discipline which is transitioning from a nice-to-have piece of pre-investment analysis to a must-have component of any investment decision-making process. The indicators which make up the various components of Country Risk may vary across markets to take into account the idiosyncratic nature of each country. But essentially, the purpose is to inform the investor of the level of risk that they are likely to experience when carrying out their operations and, importantly, how to mitigate against such risk.