COVID-19 in Africa: Considerations for investors
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COVID-19 in Africa: Considerations for investors
African governments reacted faster than their European counterparts to COVID-19, imposing sweeping lockdowns and stay-at-home orders. Although some countries are now moving to ease restrictions, most remain cautious in the face of so many unknowns about the pandemic. This uncertainty has forced investors and financiers to re-strategise, reprioritise and react to a new and evolving environment. Many deals have been postponed or cancelled, but there are signs that transactions that were mature before the pandemic are progressing, and that investors are learning to navigate new logistical, compliance and regulatory challenges.
The practical and political considerations of COVID-19 are forcing investors to adapt their normal investment behaviours in the short-term and to re-evaluate their longer-term strategies. This article considers some of the challenges that investors in Africa are facing, and some of the steps they can take to address them.
Short-term impact: Adapt to delays in diligence, negotiations and approvals
Access to documentary information
Accessing reliable and up-to-date information is a critical component of pre-investment due diligence. The full or partial shutdown of many government agencies, as well as the logistical challenges presented by remote working, mean that investors and their advisers are having to adapt their requirements and alter expectations.
Corporate filings are crucial in identifying and assessing the ultimate beneficial owners of a target company or potential partner, and confirming that the entity is duly registered, legally able to operate and in good standing. In those African jurisdictions where corporate filings are publicly accessible, many require manual, onsite retrieval of documents. Since lockdown measures were put in place, some company registries have completely closed, while many of those that remain open are operating with skeleton staff, causing significant delays to requests.
Investors are also facing challenges when trying to obtain information from counterparties that were not adequately prepared for remote working and may no longer have access to – or the means to copy and share – documents critical to the due diligence progress. This can include personal information required for Know Your Customer (KYC) policies, copies of permits or licensing agreements, correspondence with governments or regulators, or declarations and filings that need to be notarised.
Reductions in face-to-face meetings
Many deals in sub-Saharan Africa are the result of a series of face-to-face meetings over a prolonged period of time. These meetings allow investors and their counsel to build a rapport with counterparties and to gain an understanding of local customs and culture.
In turn, project operators are reliant on face-to-face meetings to negotiate permits and purchase agreements, and to secure regulatory and licensing approvals. With some sub-Saharan African government agencies and parastatals struggling to adjust to remote working, and ministers and officials known to prefer face-to-face discussions, bureaucratic delays have increased. Numerous physical signatures are still required for certain aspects of a project to progress and many agencies remain unable to delegate signatory authority.
Limitations on site visits
Site visits are critical, giving investors the opportunity to conduct an in-person examination of a target’s business. These visits are also needed to complete environmental and social impact assessments, a non-negotiable element of due diligence for responsible investors and development finance institutions.
Adaptations and workarounds
Travel restrictions and lockdown measures mean that delays to deals are inevitable. However, as all parties adapt to the new normal, investors can consider certain workarounds.
In several countries, such as Côte d’Ivoire and Kenya, the corporate registries are undergoing a gradual process of digitisation and some company filings are now accessible via an online database. In Angola and Mozambique, digital copies of official government gazettes can be searched to identify and extract company registration information. While these records may be incomplete and not all are readily available, they are a useful stopgap until normal service resumes.
Investors can engage in other methods to gather information on counterparties, including soliciting market feedback and speaking to former commercial partners. In the interim, detailed research on licence award processes and procurement regulations could allow for the identification of any discrepancies or potential ”red flags”. On-the-ground human source networks can also play a critical role, and an ability to tap into such networks – directly or indirectly – means savvy investors can still obtain reliable and timely insights on projects or counterparties.
While these strategies do not negate the eventual need for formal documentation -- which must be collated and verified before deals are signed off -- investors can obtain enough information to gain a degree of reassurance as a transaction progresses. This proactive intelligence gathering can also contribute to the development of detailed follow-up plans to ensure the retrospective filling of any procedural gaps.
In lieu of face-to face discussions, virtual meetings can be used to ensure lines of communication remain open and relationships can continue to develop. Certain institutions, such as South Africa’s state-owned asset manager the Public Investment Corporation, are adapting to remote working challenges and have introduced a mechanism to allow for some sign-offs to be done electronically. Nevertheless, these adaptations are not yet widespread and bureaucratic delays will continue to have a tangible impact on investment timelines.
Longer-term considerations: Re-evaluate the targets’ viability and the broader risk environment
In the post-COVID 19 environment, investors will need to prepare to conduct a detailed reassessment of their proposed transaction. This should include establishing whether it is still an attractive and financially viable proposition, evaluating any new integrity and governance concerns, and mapping policy shifts and the possible risk of contract review.
The target’s commercial and financial position
- COVID-19 will have a significant financial impact on many key sectors in sub-Saharan Africa, heightened by the continent’s exposure to China and falling commodity prices. Re-evaluating the viability of a transaction and planning any risk mitigation methods, given the changed political and economic conditions, will force investors to consider difficult questions:
- What was the impact of the pandemic on the target’s financial performance? Does it now hold any distressed assets? What is its level of exposure to countries or regions that have been significantly disrupted by COVID-19?
- What is the target’s level of exposure to clients that have been significantly impacted by COVID-19? Does the company have a local or national government as a buyer of goods and services? If so, has the risk of non-payment increased given the financial implications of COVID-19 for national budgets?
- What impact has COVID-19 had on the counterparty’s liquidity? Has COVID-19 affected its ability to raise finance from local or international institutions? Have its creditors been impacted by COVID-19?
- What impact did the pandemic have on its supply chains both during and afterwards? How did it mitigate this impact? Are any alternatives available and are there barriers to accessing these alternatives, such as exclusivity restrictions?
New integrity and governance concerns
Evaluating how a target company responded to the integrity, compliance, social and governance risks posed by the pandemic should become part of an investor’s due diligence process. This could include questions such as:
- Did it maintain anti-bribery and corruption (ABC) and financial controls during the crisis? How is this evidenced? If any issues arose, what steps have been taken to redress and mitigate any future risk?
- How did it treat its workers? How did it protect employment rights and safety? Did it provide adequate financial support, in line with government guidelines and local benchmarks?
- Did it effectively follow a business continuity plan? If not, has it now drafted a plan and is this fit for purpose?
- Are there any indications that it engaged in any unethical or illegal business practices to circumnavigate restrictions, secure government support, or pursue commercial opportunities during the pandemic?
Both these sets of questions could be addressed through a combination of financial analysis (dependent on access to data), interviews with management, open source and human intelligence gathering, market research and benchmarking with peers, governance audits and scenario modelling.
Policy shifts and risk of contract review
Most countries in the region are likely to see adjustments in policy and regulation due to COVID-19. As economic drivers change and attitudes towards foreign investment shift (for better and worse depending on the context), the risk of contract or concession reviews will increase in many countries. Regulatory changes motivated by governments’ attempts to manage the crisis are an inevitability. Investors will need to monitor macroeconomic and political developments closely and ensure they have access to timely analysis on specific sectors.
Several governments have already reacted. On 27 April, Equatorial Guinea announced measures to increase flexibility around exploration and drilling activities, with the aim of reducing COVID-19-related contract risks in the oil and gas and any supporting sectors. However, it simultaneously announced stricter regulations promoting local content and limitations on the amount of time expatriates can spend in the country, with Minister of Mines and Hydrocarbons Gabriel Mbaga Obiang Lima framing COVID-19 as an opportunity for local companies to “take charge” of the industry.
In Ghana, there has been speculation that President Nana Akufo-Addo will postpone some non-critical infrastructure projects as he prioritises the country’s largest ever healthcare infrastructure drive. This includes a commitment to build 94 medical centres across the country -- Akufo-Addo is yet to confirm how the government will fund these developments. Public-private partnerships (PPPs), which are found most frequently in the energy and infrastructure sectors across sub-Saharan Africa, may also be affected as governments find themselves unable to fulfil their obligations. For example, countries such as Rwanda, Ethiopia and Ghana were pursuing PPP opportunities to support the modernisation, expansion or construction of strategic airports – deals that will likely have to be revisited given COVID-19’s catastrophic impact on the aviation industry. To mitigate PPP risks, the World Bank recommends near-term discussions between all PPP stakeholders and that restructuring, renegotiation of terms or bridge financing are considered if needed. While unlikely, it cautions that there is a risk that either side could initiate termination or buy-back clauses1.
Despite the uncertainty, some sectors will weather the storm, and indeed look set to become a priority. These include telecommunications, which has become increasingly important as people and businesses focus on remote collaboration. Africa is expected to account for 14% of the world’s medical business opportunities by 2030, just behind the US, and Kenya and Nigeria have already seen new telemedicine initiatives in response to COVID-192. There may be opportunities in social and healthcare infrastructure, as governments seek new private sector partners to help fulfil development commitments. The high price of gold has seen some mining companies return to production after a brief pause, despite logistic complexities3. Finally, there is likely to be a focus on increasing domestic capacity as international supply chains remain disrupted, particularly in the FMCG, manufacturing and agriculture industries. The impact of COVID-19 will be specific to the target, its sector and its geographical exposure, but investors can retain some optimism.
- COVID-19 has created challenges for investors in obtaining the information and documentation needed to fulfil pre-investment diligence. Although practical workarounds are possible in some cases, delays are inevitable, and it is likely fewer will reach financial close in the coming months.
- Technology is allowing relationship and rapport building, and broader diligence, to continue. However, a preference for face-to-face meetings and the inability of many government agencies to delegate signatory authority means that bureaucratic delays are having a tangible impact on investment timelines.
- Investors should tailor their diligence and risk assessments to consider the consequences of COVID-19.
- This includes a reassessment of the target’s financial performance and evaluating any new integrity or governance concerns. These questions should be added to all pre-investment due diligence evaluations.
- Investors should evaluate macroeconomic and political developments on a country- and sector-specific basis. There is a risk of contract or concession review, and broader changes in regulation and policy, as governments reprioritise and adapt to new fiscal challenges.