Local partners in Africa

Opportunities and challenges for foreign investors
June 01, 2015

A look at the use of local partners In African jurisdictions. First published in February, 2014.

Recent years have seen unprecedented growth in many african countries. The commodities boom, resource discoveries such as oil off the coasts of Angola and Ghana and gas reserves in Mozambique, and increased flows of foreign direct investment in the years following the financial crisis, have all contributed to this. From a local policy perspective, the reasons for requiring local partners are thus easy to understand.

While this has the potential to provide opportunities to the people of Africa, it can present challenges to foreign investors.

Local content

Policy interventions, which can broadly be described as ‘local content requirements’, are becoming common in African jurisdictions. 

Countries such as Angola, Ghana, Nigeria and Zambia have rules in place which require a certain level of local employment, depending on categories of jobs (usually designated on the basis of skill and scarcity). Often the level of local employment required increases over time, which is intended to incentivise the transfer of skills to locals.

Additionally, some African jurisdictions have requirements for local representation in the management of companies, with an emphasis on the transfer of skills.

The supply chain is another common focus. Companies are required to procure their supplies through locally owned entities in an attempt to broaden the impact that particularly investment projects have on the local economy. Jurisdictions such as South Africa, Mozambique and Angola have rules which regulate procurement.

There are often local requirements relating to ownership. This aspect is discussed in more detail below.

Industries affected

The approach taken to local partners and local content varies greatly across jurisdictions and industries. In some instances the policies, rules or legislation applicable to local ownership may be limited in application and relate only to a specific industry – for example the oil industry in Angola. Other countries, such as South Africa, have broader and more comprehensive legislation, which applies to all government procurement and which impacts on all sectors of the economy.1

Typically, local ownership requirements apply directly to industries focussed on the exploitation of natural resources of a particular country or indirectly to the industries which supply them.

Risks

The requirement to involve a local partner in a particular business presents potential risks to investors which need to be appropriately managed and mitigated. The industries to which local partnership rules apply usually require some degree of interaction with or reliance on local governments or regulators. Extractive industries, for example, usually require operational licences. The telecommunications industry, which is relatively well developed in Africa, is another example of a tightly regulated industry where regulatory approvals are essential for entry into the market.

In high risk jurisdictions, the sometimes blurred lines between government and business and the need for regulatory or government approvals often lead investors to seek out influential partners. The latent and associated risk is that the partner may engage in unlawful or corrupt activities in order to obtain a benefit perceived to be of mutual interest.

Adverse consequences

In addition to the contravention of local legislation, the investor could also be placed in violation of foreign legislation with extra-territorial reach, such as the US Foreign Corrupt Practices Act, the UK Bribery Act or the South African Prevention and Combatting of Corrupt Activities Act.  

The risk that a licence could later be revoked on the basis of unlawful behaviour will hang heavily over projects that require large, long-term investment. Though historically there has been a lack of political will to prosecute and enforce bribery in the local jurisdiction, politicians and political views may well change over time.  

A further risk is the possibility of tainting what would otherwise be a valuable asset. With anti-bribery and corruption due diligence investigations becoming an increasingly common feature of modern transactions, future attempts to sell the asset may be compromised. There is also the risk that revenue considered to be the proceeds of unlawful activity – including dividends paid through the shareholding structure – could violate anti-money laundering legislation in the foreign investor’s home country.

Mitigating risk

Investors should conduct appropriate risk assessments when choosing a local partner and agreeing to the details of their contractual relationship. There are a number of steps that the prudent investor ought to take in order to manage its exposure to risk:  

  • Care should be taken as to the identity of the local partner. Investors should conduct as thorough a due diligence investigation as possible and satisfy themselves that the partner shares their ethics and values. The most valuable social licence can often be obtained by allocating local ownership to broad based community or development structures.  
  • Contracts with local partners should be transparent and have clear anti-bribery and corruption provisions. This should include an undertaking by the local partner that it will not do anything which would constitute a contravention of international best practice standards on anti-bribery and corruption regulation.  
  • In many African jurisdictions lobbying is not regulated, but often operates in grey areas, so is best avoided. Where lobbying is necessary, it is imperative to ensure that the lobbyist is independent of the local partner and that its scope and role is clearly defined and controlled. Remuneration should be commensurate with the services required and rendered.  
  • When obtaining regulatory approvals are included as conditions precedent to the transaction, any payment made to the local partner should only occur after these conditions have been fulfilled. Payments of large sums of money prior to required regulatory approval could create unnecessary risks.  

Conclusion

Africa’s developing economies hold the potential for high returns on investment, while at the same time providing the investor with the opportunity to contribute positively to socio-economic change. There is no failsafe way to eliminate all risks associated with investing or conducting business in these jurisdictions. Investors should ensure that they adopt appropriate and effective measures to mitigate these risks.

The effective course of action is for investors themselves to adhere to the standard of international best practice in business ethics and corporate governance, to apply these standards in all the jurisdictions in which they operate and to require their local partners to do the same.


Footnote
  1. South African legislation, similarly to Namibian regulation, is applicable to individuals historically disadvantaged by race based discrimination and does not apply purely on the basis of nationality. It is a relevant distinction but not the focus of this article.