Distribution of capital in Africa

There is no question that a significant amount of money is geared towards investment in Africa, but this money rarely reaches its full potential.

There are investors, such as angel investors, venture capitalists, and private equity funds, who are eager to make investments in Africa and are searching in vain for projects to finance with loans, equity, asset finance, or other models. Notwithstanding, there exist auspicious ventures and commercial prospects in African nations that are in dire need of funding and are amenable to arrangements that permit capital infusion for growth and augmentation of productivity beyond conventional bank and financial institution loans. To ensure that the capital deployed for the African market is utilised effectively and efficiently, one has to consider the key setbacks in attaining the intended outcomes to close the gap between financiers and project owners. 

Ticket Sizes

There are substantial differences between African and foreign currencies e.g. US dollar, Euro, GBP, etc. The investors assess the ticket size for investment in their high-valued currencies while few projects in Africa can utilise such large investments following conversion into African local currencies. For example: private equity funds would want to invest in a project in Africa at a minimum ticket size of USD 10 million.  Similar projects in Europe may be considered medium-sized projects but converting USD 10 million into Tanzanian Shillings, it’s such a substantial amount that only a handful of projects in the entire country can need and utilise such capital all at once. Accordingly, this leads to most investors shopping for potential projects and eventually failing to deploy capital for years on end. It will be more efficient if such ticket sizes are assessed based on the local currencies of the respective African jurisdiction and such ticket sizes are disbursed in tranches to the promising projects in Africa with growth potential. 

Hands-on support

There is a lack of knowledge of the availability of such capital and/or how to access such capital. The persons required to identify investment opportunities for capital deployment are not actively in the field to identify such business opportunities and organize sensitisation workshops in the respective African jurisdictions. Such sensitisation workshops will bring awareness to potential businesses on the availability of capital, how to access such capital, and train them on preparing the respective project documents for accessing such capital. Also, a continuous investment inquiries desk should be established and an individual should be available to address questions from projects that require financial support because in most African jurisdictions human interaction and discussions is still prevalent compared to AI automated machines and responses.  

Poor compliance and record keeping

Most businesses in African jurisdictions are not in full compliance with their local laws and do not meet international standards. There could be a lack of strict enforcement by the local authorities on compliance which prevents investors bound by international standards from investing in such projects. Through the hands-on support proposed above, the investment persons can assist project owners and developers to ensure that their projects comply by educating them on the internationally acceptable standards that they should comply with to make their projects more attractive to investors. 

Real vs perceived risks

Whilst every business has risks, it is important to assess each project based on real risks and how to cater to them rather than adding perceived risks which are not or are unlikely to occur at the perceived magnitude. There is a lot of negativity in the media about Africa and its risks but not each risk is prevalent across all African countries and at the same magnitude. Whilst some challenges may be cutting across several African jurisdictions, it doesn’t mean that it is the “Wild West” that warrants imposition of stringent and restrictive investment conditions. Investors need to make individual assessments in each African jurisdiction to identify real and critical risks and to establish mechanisms to overcome such risks and challenges with keenness to proceed with investment rather than looking for perceived risk to find reasons not to invest. Retention of advisers who are conversant with the on-the-ground situation in the respective African jurisdiction is the best way to obtain first-hand information rather than relying on persons who have no real on-the-ground knowledge of the relevant African jurisdiction. 

Tax holidays, taxes and revenue loss

Over the years, African Governments have increased efficiency in tax collections to increase revenue and reduce dependency on grants and donations from developed countries. This has led to fewer tax holidays, increased tax rates specifically on businesses and at the same time diversify the tax brackets and constant/regular changes in domestic laws. However, investors require tax breaks during the initial investment period to deploy capital, support project expansion, and require stable domestic laws to allow long-term planning of projects and assessment of returns. Some African governments have realised that the tax holidays granted may have been abused and in retaliation, stringent and tough tax laws aimed to collect more revenue are imposed closing the gap between tax evasion and avoidance. It is necessary to balance the need to increase revenue and allow investors to recover capital before taxes are imposed i.e. governments should not insist on feasting immediately and drain the future. 

Sanctity of contracts and dispute resolution

Contracts have to be respected and domestic tribunals must observe the sanctity of contracts.  If the respective tribunals in the African country are not efficient or the adjudicators fail to enforce contracts as initially agreed between the parties, it leaves investors with no protection. Some tribunals tend to focus on ensuring their nationals are favoured in judgments even when they are in the wrong, the courts re-wording the contract contrary to the intention of the parties, commercial disputes are not resolved within a reasonable time, unwarranted injunctive orders against investors, etc. are few of the reasons why investors have no faith in local tribunals and opt for foreign dispute settlement mechanisms. When awards/decrees/judgments are issued by the foreign courts, African courts will find grounds not to enforce which proves to investors that such local tribunals are not impartial. Whilst it is not the intention of the parties to end up in court over a dispute, if it comes to that investors need assurance that their interests will be equally protected like any other citizen and that such tribunals will be impartial, efficient, and expeditious for the best interests of the project.  

Regulatory hurdles, bureaucracy, and unresponsiveness

Over the years most African countries have initiated efforts to reduce bureaucracy and streamline regulatory requirements to make doing business in their jurisdictions easy. There are attempts to establish one-stop centres that can provide organised support to investors seeking to invest in the respective African jurisdiction. However, there is still bureaucracy in undertaking day-to-day business operations, and with constant changes in the regulatory framework, it makes it difficult for investors to focus on production and business operations only. Investors (and local small businesses) are still required to invest considerable time, effort, and funds in regulatory compliance which attracts various fees and punitive penalties for non-compliance. A substantial part of capital is directed to regulatory compliance and fees to various government authorities whilst the main focus should be on investing every dime in the actual operations of the business. Investors are keen to identify projects to invest in and deploy capital for the business operations not dedicate capital for settling regulatory fees across multiple regulatory bodies, some of which are not deductible. More efforts are needed in African jurisdictions to reduce regulatory hurdles, promote compliance through knowledge, and establish a streamlined compliance system as opposed to penal and multiple payments to various regulatory bodies. Unresponsiveness by government officials is another roadblock that foreign investors have to overcome when dealing with government authorities in most African countries. Letters and emails addressed to such officials will either not receive a response or there will be a considerable delay in responding. This is prevalent in new and ongoing projects even when the decision is critical for the business operations to continue. Government authorities should educate their personnel on business etiquette, and the necessity to observe appointments, and each serious investor should be attended to expeditiously and satisfactorily.  There has to be accountability and time restrictions imposed on government authorities for actions which are required to be implemented by them. 

Localisation and capital interference

Localisation is intended to benefit African nationals and allow participation of African governments in projects that are of national importance but localisation should not interfere with capital flow. Support to local service providers and suppliers is critical and prioritising the use of local goods and services should be applauded but requiring a foreign investor to mandatorily enter into joint venture arrangements at the equity level with a national restricts the flow of capital and deter foreign investment. Any investor, African or otherwise needs to know his/her business partner well before agreeing to enter into a joint venture together. Requiring an investor who is at the initial stages of investment in any jurisdiction to issue a specified equity to a national of that country puts such an investor in a stressful position because they do not know the market well, are not sure how the business will perform, and not conversant with the business partner they are required to retain. The investor is forced to spend months if not years to identify a suitable local partner, eventually settle for ownership structures that are one-sided and allow a small group of persons to be shareholders across various businesses, and such policy doesn’t yield the intended results because such persons are not integrated into the businesses but they are silent partners to achieve the legal requirements. Efforts should be directed towards empowering local suppliers and service providers to support such projects and leave equity and capital flow to the business owners regardless of their nationalities. 

These, to name a few, highlight the main reasons why there is a great deal of interest in and money available for investment in Africa; however, to overcome these obstacles, governments, the private sector, and international organisations must work together and develop comprehensive strategies to achieve the intended outcomes for all parties.

If you have any questions about the distribution of capital in Africa please contact us.