Cross-border trade in Africa: risk management
There are two primary ways in which logistics service providers, and logistics users, can manage their risk. The first is to contract out of risks, and the second, is to obtain insurance for any risks that cannot be contracted out of. If these two mechanisms are used in conjunction with each other, there is little room for disputes developing into litigious matters.
When it comes to cross-border trade in Africa, risk management becomes more complex. When developing a risk matrix, no matter where one is in the supply chain the risks should be considered from each angle, for example from the angle of the seller, the buyer, the bank and the insurer.
There are four main issues for you to consider in risk management: the contract of sale; the logistics contract; the banking and financial arrangements; and the insurance policies.
When considering your contract of sale, you need to understand and focus on when the risk passes from the seller and the insured. Whenever anyone talks about risk, they need to have a theoretical and practical understanding of the Incoterms. More often than not, the passing of risk and the passing of ownership happen at different times. It is important to identify who will suffer a loss if an event occurs at any stage in the sale and delivery of the goods.
Each party in the logistic chain should be governed by a contractual relationship. Understanding who has what obligations, what the risks are, and who bears them, is necessary. All parties need to understand who makes payment if someone is using a letter of credit, and whether or not the payment is linked to the logistics arrangements.
Companies also need to pay attention to the choice of law clauses, the arbitration and jurisdiction clauses in their respective contracts. Many African states are imposing their own conditions on traders, such as having to insure goods locally with local insurers and brokers. Different international conventions also work differently in different African jurisdictions. Some international conventions have not been ratified, while some states have made local amendments to these conventions.
Companies looking to do business in Africa should furthermore familiarise themselves with the continent’s unique geography – they should plan ahead and know the route. They should also consider the nature of the cargo, be it containerised, bulk or breakbulk, dangerous goods, abnormal perishables or frozen goods.
Risk management in logistics is becoming more important with the increased trade, competition and new technologies. Logistics service providers and their customers must know the form of the logistics contracts, the obligations thereunder and how the risks are allocated and insured. Do not leave the risk management matrix to your logistics service provider. This is a major task, as there are so many role players in the logistics chain. Always have a comprehensive risk management matrix before embarking on cross-border trade, particularly in Africa.