Obtaining Foreign Direct Investment

By Gregory Simpkins

Investors, especially American investors, are overly cautious in terms of foreign direct investment (FDI) in Africa. They require extra assurance of the viability and safety of their investments because of a general lack of positive commercial information on Africa and the perilous situations most often mentioned concerning the continent.

When I worked for the Corporate Council on Africa back in the 1990s, a common statement was: “Capital is a coward; it only goes where it feels comfortable.” When I attended a South African investment forum recently, the saying was tweaked to: “Capital goes where it is wanted and respected.”

Investors in large operations usually have significant guarantees for return on investment, which is not the case for smaller investments. One doesn’t have to think long and hard about the viability of a major oil, gas or diamond mining project. Potentially billions of dollars are on the table, and government and institutional guarantees are readily available to ensure that such major projects materialize.

The same is not always true for smaller projects, especially manufacturing projects. Even though they may be well justified, too often the project owners don’t put themselves in the place of the potential investors. It is not just what the project wants or needs; it is also about what the investor wants from the investment. If you cannot consider that, you will fail to achieve your goal more often than not.

Attracting FDI

Consequently, in order to initially interest investors and effectively attain investment for a project, especially in mining or manufacturing that requires large outlays of funding, the following issues must be addressed. Although not necessarily mandated or openly stated, failure or refusal to address these issues could negatively affect investment pitches.

Given Environmental, Social and Governance (ESG) and Corporate Social Responsibility (CSR) standards in play, development plans help investors achieve their own goals in this regard.

• Determination of secure title to the mine or land housing the factory, including any tribal land complications and government licensing and regulatory requirements. The failure to address this issue is perhaps the top reason investors shy away from a project because insurers also need to know this to avoid potentially lengthy litigation and time-consuming and money-wasting project delays.
• Full explanation of the company structure and non-mine, non-factory assets (projected operational plans and assets if the mining or manufacturing operation is a startup). Just because a project is a start-up doesn’t mean it can’t bring something to the table. Expertise of management and resources beyond a mine or field of land is helpful in assuring investors that they are investing in a solid project that has a reasonable chance of success and return on investment. This also would include the name of the ultimate decision-maker and signatory on documents.
• Under what regulatory and/or legislative regime must the company operate? Understanding the laws and regulations governing company operations is vital for investors who have to know what the circumstances are under which the company will have to function.
• Geological survey confirming a mine’s contents – both initial target elements and secondary elements to be extracted. Likely, you have seen articles stating the other resources among oil or minerals available in an excavation. Investors need to understand the potential for such an investment. Additionally, when you extract one thing, you might also get a secondary benefit. For example, oil extraction often produces natural gas. Lithium mining is often tied to gemstone production. Such secondary products only boosts the attractiveness of such an investment.
• Environmental assessment of the impact of mining or manufacturing in the area where the mine or factory is operating or to begin operating, such as any land, air or water contamination from the mining or factory operation that could lead to lawsuits or government action. When I worked in Congress, I looked into an American-operated mine in Peru that experienced significant environmental problems. The metal refining company called Doe Run Peru (part of the US-owned Renco Group) purchased a lead smelter in the small mountain town of La Oroya, Peru, in 1997 and agreed to improve the facility to make it less harmful for the environment. Instead, the company allowed toxic elements used in the smelting process to contaminate La Oroya’s air, water, and soil. Actually, this pollution had existed prior to the purchase, even when the government operated the facility. In this case, better due diligence could have avoided a very costly investment that ultimately led to insolvency.
• Assessment of the current state of readiness to begin or expand mining or manufacturing operations. If investment is being sought, the investors need to know how long it will take to commence operations and what the startup costs will be. Complications must be identified beforehand by the project owner before investors discover them during due diligence. The inability to present a complete picture of the investment is a killer for investment solicitations because it portrays project owners as not understanding the circumstances in which they find themselves nor how challenges can be overcome. That would be an unforced error if challenges have solutions that can be presented when making the investment solicitation in the first place. Investors need to know what the necessary steps are to sign a Project Development Agreement.
• Listing any current or past investors or partners in the mine or factory and the status of their investment or partnership. Chances are projects have sought investment over a period of time, and there may have been previous investors or partners, including government, who either hung in but didn’t provide sufficient funding for the project to commence or operate or who withdrew for various reasons. It would be an unwelcome surprise for an investor to find that there are partners about whom they were not informed at the outset. It could be a deal killer and complication for management of the project, especially if the investment is an equity stake and not a loan. Additionally, is there a public-private partnership involved in company operations, or is one envisioned?
• Investor payback plan and projected timetable for return on investment. Both project owners and investors need to understand how return on investment is being predicted. Investors have various plans for their funds and need to know how long before they experience a return on investment and how long before they can redeploy their funds in another project if they choose. Project owners need to factor in the cost of investment in terms of what interest must be paid back for loans as part of expense calculations or what share of profits goes to equity investors rather than the original project owners.
• Risk mitigation plans to ensure against loss in the event of natural disasters, accidents, government seizure of assets or other circumstance in which mine or factory operations would be threatened. Earthquakes, floods, volcano eruptions, hurricanes/tornadoes, tsunamis, droughts and other natural occurrences can close mines or shutter manufacturing operations. For example, the persistent drought in Ghana surrounding the Akosombo textile facility some years ago severely hampered operations by limiting power from the nearby hydroelectric facility, cutting into profits and making production less dependable. Perception of consistency is critical in retail products and can turn not only investors but also buyers away.
• Determination of labor needs, availability and costs, as well as the safety plan for employees. Labor is a variable cost, and depending on the output envisioned, there must be a plan for the required number of workers. In countries on the continent experiencing rampant HIV-AIDS outbreaks some years ago, what would be considered “extra” employees were hired to prevent slowdowns in the event of workers either succumbing to illness or having to leave work to care for family members. Also, eventually salaries increase with the growing experience of the workers and profitability of the company. This must be factored into budgets over the long term. Cheap labor will not always be so cheap.
• Development plans for the area surrounding a mine or factory if any. Any on-the-ground project will have an impact on the surrounding area – from helping to create family wealth to facilitating infrastructure repair or construction. Taking this into consideration enhances a project’s attractiveness. Given Environmental, Social and Governance (ESG) and Corporate Social Responsibility (CSR) standards in play, Such development plans help investors achieve their own goals in this regard. Former Ambassador Andrew Young, when he created his company Goodworks International, had the motto: “Doing well by doing good.” That has never been more appropriate than today.

Even though there is tremendous wealth within Africa on the part of African businesspeople, they are too often not the first movers in terms of investing in their own countries or elsewhere on the continent. There are firms and institutions that are putting skin in the game, fortunately, and they are attracting FDI by their example. Hopefully, this trend will continue and expand to include Diaspora investors. That is a potential pool of trillions of dollars in investment for African projects. There are those working on such efforts even now, and their success will change Africa for the better moving forward.

Gregory Simpkins, a longtime specialist in African policy development, is the Principal of 21st Century Solutions. He consults with organizations on African policy issues generally, especially in relating to the U.S. Government. He further acts as a consultant to the African Merchants Association, where he advises the Association in its efforts to stimulate an increase in trade between several hundred African Diaspora small and medium enterprises and their African partners.