Dr Robert Besseling is the Executive Director of Exx Africa, a specialised political and economic risk consultancy focused on Africa. In this article he analyses new trends in corrupt practices in African trade and project finance and assesses the impact on foreign investors.
In 2016, there will be significant shifts in African project and trade finance that will increasingly favour the blending of institutionalised lending and private finance, as cash-strapped governments seek to cut public expenditure.
For many European and other governments the public-private partnership model will replace direct development financing in Africa. This trend will open up significant opportunities for international commercial banks, multilateral development institutions and national development banks, as well as private equity, pension and sovereign wealth funds. Blended financing, including PPPs, will not be limited to funding of commodity trade and infrastructure projects, but will also include greater support for Africa’s banking sector to expand lending and other credit facilities for local industries.
This shifting trend in international finance of African trade, infrastructure, and local banking comes in the background to another evolution in the implementation of localisation. African governments are seeking to gain improved local beneficiation or value creation from foreign investments by encouraging or requiring increased local ownership or participation, by imposing more stringent local content regulations, and enforcing local processing or manufacturing requirements.
Foreign investors will increasingly have to partner with local African entities to extract raw materials, for manufacturing, processing, and service provision, as well as in terms of local banking and financing of projects and trade flows. The blended finance model will therefore include greater participation from local African partners and expanded local content requirements.
This shift in localisation will mostly be reliant on foreign investors and financiers partnering with politically affiliated or exposed individuals and entities. The severe constraints imposed by international anti-corruption legislation, such as the FCPA and UK Anti-Bribery Act, have limited the scope for the payment of bribes or kickbacks, and the application of other corrupt practices. International financiers will therefore have to be wary of African governments increasingly encouraging or requiring foreign investors to partner with local entities, as localisation evolves into a new form that facilitates corruption.
In countries such as Angola, Kenya, Mozambique and Tanzania, for example, international project and trade finance, especially for natural resources and infrastructure development, is increasingly applied in partnership with local entities, including politically affiliated holding companies or local banks.
Localisation, therefore, exposes foreign investors to corruption and subsequent scrutiny by investors’ domestic regulatory authorities. Investors will face greater reputational damage and risks of financial penalties in their home countries, if found guilty of violating probity laws by forming such joint ventures with local African banks and other corporate entities.
In November 2015, a UK court ratified a deferred prosecution agreement between the UK Serious Fraud Office and Standard Bank’s London unit (now known as ICBC Standard Bank) and ordered the bank to pay US$32.6mn in fines and repayments of bribes and profits in relation to a corruption scandal in Tanzania. The UK court said Standard Bank was punished as it failed to carry out appropriate due diligence and know-your-customer checks on a local Tanzanian politically exposed entity that was involved in the bank’s 2012-2013 US$600mn private placement of sovereign debt to fund power and water infrastructure in Tanzania.
Exx Africa is strongly positioned to support international banks and other financial institutions to carry out due diligence and know-your-customer checks on African entities.
The brand new Insight Banking Risk service provides a specialised intelligence stream forecasting political, reputational, and contract risks in the African banking sector to support international investors’ decision-making and mitigate their risk to such perils.
Exx Africa also delivers bespoke counter-party political and reputational risk assessments on African individuals and corporate entities to support international banks’ know-your-customer applications. In 2016, Exx Africa will be proud to work together with a growing number of financial sector clients to support their business operations in Africa.
- Insight Banking Risk provides the following features:
At least six weekly articles providing political analysis on African financial
Banking sector summaries for 54 African countries
Banking sector-specific quantitative risk
scores for each country
Access to the Insight online platform
covering political and economic risk
Option to purchase pre-paid credits for fast-turnaround due diligence reports and counterparty risk assessments on African banks and other local partners.
To arrange a complimentary trial of the Insight Banking Risk online service, please contact firstname.lastname@example.org