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Mitigating risk

Published: 28-JUL-06

While there are many risks involved in new ventures, careful due diligence and good local knowledge can minimise problems caused by currency fluctuations, corruption, legal problems and language barriers.

Construction can be an uncertain business and working in Sub-Saharan Africa presents its own set of unique business challenges. Political instability has been a common concern for many of these countries, which has in turn affected the economic well-being of the region. Globalisation and the discovery of large mineral deposits have led to in an increase in interest in the area however, enhancing the development of infrastructure.

For many companies, access to Sub-Saharan Africa will be gained through South Africa, placing South African construction companies in an ideal position to expand into the region. These contractors will need to conduct thorough risk analyses of the environment as many of the projects are located in remote and inaccessible areas.

As interest and investment in Africa grows, the factors affecting risk will be political, economic, social, technological, environmental and legal (PESTEL) ones. In 2005, the World Bank’s ‘Ease of Doing Business Index’ listed Sub-Saharan African countries as the most difficult places to do business in the world, with the bottom 14 places being devoted to Sub-Saharan Africa countries. South Africa was ranked 28th on the list of 155 countries.

A lack of political transparency is considered to be one of the greatest risks of doing business in Africa, as this engenders corruption and volatility. Years of isolation is one of the factors which has affected successful transitions to democracy, and has also impacted on Sub-Saharan African economies. Renewed investment and attraction of capital through bilateral trade agreements are now beginning to filter into these countries, with a steady increase in gross domestic product (GDP) growth in Sub-Saharan African countries over the last 20 years.

As investment improves, new markets form, enticing MNCs to expand into these emerging markets in order to capture new customers. Communication channels are also improving, giving organisations access to information about opportunities and developments both domestically and internationally. Similarly, the introduction of electronic banking has led to some deregulation and faster transfers of capital.

Socially, disease and a risk of landmines are two major concerns for companies sending employees to Sub-Saharan Africa. Poor sanitation and a lack of access to clean water incur considerable costs, as on-site medical and water purification facilities need to be installed. Poor literacy is also considered a risk to incoming construction companies, as according to research by ‘Reading Today’, a nation’s literacy rate is strongly linked to their ability to sustain economic development.

Technologically, the ability of companies to move goods in and out of Sub-Saharan Africa is greatly hampered by a lack of road and rail infrastructure. Many companies have had to build their own roads and railways in order to operate effectively. Until recently, a lack of communication facilities also hampered progress; however developments by telecommunications companies have facilitated easier connections. Power is another factor, which is vital in ensuring that companies can function efficiently, and if power sources are unreliable, the number of potential risks rise dramatically.

Caring for the environment is factored into most South African companies’ Corporate Social Responsibility programmes, with many MNC’s following BHP Billiton’s lead in Sub-Saharan Africa. BHP’s sustainability report outlines the factors which need to be adhered to in order to achieve sustainability, including striving to achieve leading industry practice, meeting or exceeding applicable legal and other requirements, setting and achieving targets that include promoting the efficient use of resources and the prevention of pollution, and enhancing biodiversity protection and considering ecological values and land-use aspects in decision-making.

Knowledge of the rule of law is essential when entering into any binding contract. Four legal elements set out by the World Bank in 2005 are the enforcement of contracts, registration of property rights, protection offered to investors, and dealing with licenses. Companies must ensure that contracts are enforceable before entering into them, and factors to take into account are whether or not there are legal mechanisms present in the country, and if there is a separation of state and judiciary. Should a company be concerned about this issue, the International Federation of Consulting Engineers (FIDIC) has produced standard forms of contracts that allow for the rule of law of an external country to be used as the basis for binding resolutions.

Research done by Stuart Hoy, an MBA student at the University of Pretoria’s Gordon Institute of Business Science, has shown that the stability of a country’s government is considered to be the most critical factor when mitigating financial risk in Sub-Saharan Africa. Currency stability was found to be the second most important factor, with the third being the use of the FIDIC form of contract, as this is thought to be more enforceable than other forms of contracts. Road infrastructure, language barriers and the availability of basic healthcare are also vital for financial risk mitigation.

The most crucial factor for South African construction companies who are venturing into Sub-Saharan Africa to take into account, however, is the acquisition of local knowledge. Armed with these cultural, legal and ethical insights, South African organisations can enter the region with a valuable competitive edge. This is the second installment by the Gordon Institute of Business Science (GIBS). The article is taken from ‘Contracting in Sub-Saharan Africa: Critical Factors Impacting Financial Risk in the Construction Industry, a research report by Stuart Hoy, MBA, GIBS.



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