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Legal Considerations for Investing in Africa: An Interview with Peter C. Hansen, Esq.

In July 2012, Peter C. Hansen, whose D.C.-based law practice centers on African business investment, shares practical and legal considerations for doing business in Africa with the City Bar’s African Affairs Committee (AAC). Mr. Hansen’s advice to investors: know the local community, and involve it. And for the U.S. Government: facilitate American investment by concluding bilateral investment and tax treaties with Sub-Saharan African States. [See recent briefings by Peter Hansen below.]

AAC: Your website characterizes your law firm as “a boutique firm . . . specializing in African investment law.” What is “African investment law,” and what drew you to this area of practice?

“African investment law” is a new field of legal practice. It draws from several established legal practice areas, such as international investment law, international corporate law, anti-corruption law, and rule-of-law development. What turns this combination into a unique practice is its unifying focus on the particular challenges and capacities of Sub-Saharan economies. Companies that treat Africa as a generic project site expose themselves to a lot of potential problems. Specialist legal services for the region can sometimes make all the difference.

As to what originally drew me to Africa, I would have to give the same answer as most of our private clients: it has huge economic potential, and is finally passing the threshold of serious growth.

AAC: Can you give us some general information about your practice in Africa? Who are your clients, and what type of issues do you help them with?

We help companies and entrepreneurs enter and navigate African markets while managing their risks. Sub-Saharan Africa is still terra incognita for most U.S. companies. For example, the Web provides little information about how to do business there. Specialist legal services can assist by training clients and providing a full complement of legal and advisory services. For example, we train and assist clients in project-planning, risk-management and anti-corruption measures tailored specifically to Africa. Among many other legal tasks, our firm identifies appropriate sites for the holding company, and assists with international contracts, regulatory compliance, asset protection, and dispute-resolution. The firm also can assist a specialized funding search by improving and circulating the pitch to Africa-focused funders.

AAC: Do many other American law firms do this type of work? In your opinion, why or why not?

To my knowledge, only a few U.S. law firms are looking to work specifically in Africa. Of course, many law firms deal with standard sectors (such as mergers and acquisitions, mining, or oil drilling) in which the project or target company just happens to be in Africa. Such sector-focused services can miss signals, risks, and opportunities in Africa that specialized counsel are better placed to catch. I think that few U.S. law firms are working in African investment law partly because it requires an unusual mix of skills, but more so because the U.S. remains largely blind to Africa as a serious new market. As Africa begins to loom larger in the American economic consciousness, and major investments begin to flow there, we will undoubtedly start to see “Africa practices” springing up at big firms. I would be curious to see, however, whether these practices simply give new titles to the same lawyers. For genuine “African investment law” practices to emerge and grow, firms will need to put a lot of time and experience into the continent. Good relationships and a localized perspective cannot be developed overnight.

AAC: What are the most common transactions you see in your work? Are different transaction structures more suitable for different regions or countries?

We work primarily with “direct” investors, meaning those who want to establish an actual business in an African country. They want to put roots down, not just take a portfolio position. The most active sectors these days are waste-to-energy, biofuels, agriculture, and infrastructure. All these fields hold a lot of promise, but each one has its own legal issues and risks. The “regular” sector issues are compounded by legal matters peculiar to the international, regional and local planes. Then there are the day-to-day issues of language, culture and politics, which of course vary greatly across Africa. A smart investor has to be fully aware of the legal, political and social context in which the investment is to be placed. Here, expert assistance can be vital.

AAC: What regions are your clients most active in, and why?

West Africa is a big draw for U.S. investors these days, largely because of its geographical and cultural proximity to the U.S. Investors are particularly interested in Ghana, partly because of Ghana’s new petrochemical industry, but also because of Ghana’s reputation as a very friendly country. Perceptions can make a big difference in this part of the world, where American investors may find that traditional business calculations are often hard to run. As a general matter, investors tend to go where they can speak the language and fit in culturally. For example, South Africa gets far and away the most attention from portfolio and direct U.S. investors, particularly those novices looking to put a toe in African waters. South Africa is familiar to Americans from the successful anti-apartheid struggle, and is generally considered the country in Africa that most closely resembles the West.

The more that Americans come to know different African countries, and to feel safe and comfortable in them, the more they will invest in those places. Among the more promising countries now overlooked by U.S. investors, Kenya, Mauritius and Namibia stand out. Each has business opportunities that U.S. investors would find intriguing.

AAC: A 2010 report by McKinsey Global Institute noted the amazing growth of investment in African economies in the past decade. Nine billion dollars of foreign direct investment in 2000 became $62 billion in 2008. How has this increase in volume changed your practice?

We started in 2008, so the practice was actually created in response to this increase. Many “new wave” Africa-focused firms actually began work in 2007 or 2008. This group got hammered by the Great Recession and the fiscal crisis, but it has largely survived. Today, it exhibits the characteristics of a startup industry – a shared set of assumptions and high degrees of innovation and fruitful interaction. The shared expectation of this cadre is that capital inflows from the long commodities boom will foster independent growth in at least certain stable, prepared markets.

AAC: What are the key differences between your work in African countries and your work in more developed countries? What about the differences between African economies and emerging economies in other geographic regions?

African economies tend to be more dependent on “personalities” than Western economies are. In a developed market, the economic system is to a great extent impersonal. Everything from stock exchanges to local licensing offices is designed to operate according to standard criteria, rules and forms. A developed market also enjoys a broad diffusion of wealth and skills, so that options and choices abound.

An emerging market, by contrast, tends to have a few large economic and political players, who all know each other and in many cases are related. (In this, they resemble Renaissance Italian city-states.) The class of skilled or otherwise highly educated workers and entrepreneurs is far smaller than in the West, so that investors have fewer choices as far as labor and expertise are concerned. This is why building relationships on the ground is necessary to long-term success in an emerging market, and why corruption looms as such a large risk. To succeed in a medium- to long-term investment, you have to join the local club. You do not have to buy your way in, but you do have to be seen as having a common set of interests and perspectives with the local players and the local population, so that everyone benefits in some way from the project.

AAC: Are most of your clients first-time investors in the region, or do they have significant experience in the region? What are some of the entry-points for businesses who haven’t worked in Africa before but would like to? What are some of the key considerations for such a move?

As Africa-focused business conferences regularly show, the U.S. investor cadre in Africa consists essentially of three groups. The first is a small group of large and well-established companies with global reach and deep pockets. The second, somewhat larger group consists of mid-range enterprises or successful entrants that have hit on a timely product, such as cell towers or Internet cable. The third and by far the largest group consists of first-timers who aren’t sure where to begin. Many of these novices are small and medium enterprises (SMEs). The serious ones are often successful U.S. enterprises looking for huge new fields, or companies owned by members of the African diaspora, or both. For non-diaspora investors, entry points vary widely. It could be a news article, a cocktail party conversation, a friend, co-worker or fellow church member. Sometimes it is discovering a product uniquely suited to Africa, or simply traveling to Africa and seeing its potential.

Two key steps for an African investment are equally important. First, a major growth opportunity is identified. Second, risk-management is undertaken, allowing the project a better chance to succeed. Unsuccessful investors in Africa often plunge in to “make the deal” without carefully mapping out the investment. Their planning gaps all too predictably lead to failure. It is then Africa, rather than the impetuous investor, which is blamed for the failure. A prudent investor will study the risks involved in an African investment, and take steps to immunize their projects from such risks.

AAC: Do you believe that business investment in Africa promotes economic development in host countries? Why or why not?

Business investment leads to development insofar as the investment actually involves Africa, as opposed to merely being sited there. For example, if a mining operation imports all of its equipment, food and labor, and runs its operations along a specially made track to a remote dig, then the development benefits are next to nil. On the other hand, if the mining company buys local foodstuffs, opens local machine shops, hires miners and support workers from nearby villages and towns, and trains locals to perform higher-skilled jobs, then the impact of development can be large and positive. This impact can be even more significant where the skills and markets created are not limited to the project, but can be adapted to other fields. For example, if project machinists can transfer their skills to artisanal factories or garages.

Integrating a project as fully as possible into the local economy and society maximizes the goodwill and support that are critical to sustaining the project through inevitable rough patches. A project’s thorough involvement in the local community can also go a long way toward combatting corruption. If a company brings to the table a lot of jobs and a lot of benefits, the project will not only attract average folks and opinion-makers, but also leaders looking to identify themselves with a success. For the project to succeed, however, the investor must do a lot of homework and lay the ground carefully.

AAC: In your recent experience, what sectors and geographic regions tend to have the highest return on investment? Also, what challenges are unique to investing in Africa, and how do you and your clients meet them?

Extractive industries continue to have an outsized influence on the economic profile of many African nations. Fortunately, growth is taking place in other sectors. This trend will accelerate dramatically as local infrastructure improves across the continent. The returns for projects that meet pent-up consumer demands are enormous. This assumes, of course, that such projects are properly planned and implemented.

There is no special challenge to determining the rate of return that is reasonably to be expected from an African investment. Just as in any U.S. business, the key is a realistic assessment of what is possible over a specific period of time. Many would-be investors get carried away by the wide-open prospects in Africa, while ignoring the risks and constraints that the project will face. This is another area in which having expert advice can make or break a project. I have talked to a lot of investors whose projects have failed in Africa. In nearly every case, the risks and realities of their target markets were ignored in the rush to “make a deal.”

One further point deserves mention here. It is sometimes hard for a private investor to get any kind of return from a project in Africa given the prevalence of “free” alternatives. The governments of African nations are often the only customers for large projects such as roads, mass education, and organizational analysis and reform. Unfortunately, the potentially huge markets in such sectors are suppressed by official aid agencies, by publicly backed non-governmental organizations, and by multilateral institutions that contribute “free” products and services. Such contributions are almost always tailored to fit Western agendas, and are often little more than job programs for bureaucrats. As a result, such “free” projects are often immediate failures or otherwise quickly abandoned by the locals. Meanwhile, Africa loses time and opportunities, local governments learn to look for handouts, Western investors go elsewhere, and Western bureaucrats get fatter.

Contrary to popular belief in the West, local governments in Africa can pay for many services and material inputs, and should be left alone to do so. When local authorities are the ones who have to make tough, public decisions about scarce resources and publicly floated bonds, then transparency and accountability will increase, along with innovation. I strongly believe that breaking the stranglehold of aid agencies is a precondition for, and not a consequence of, the emergence of strong private-sector economies throughout Africa. Put another way, the withdrawal of the Western public sector from Africa, and its replacement by private Western investors, is the only practical and effective long-term Western “solution” for African development.

AAC: Have your clients established official policies and procedures for complying with international, host, and home country laws about human rights, labor and environmental standards? To what extent do you advise clients to adhere to a particular set of standards?

The success of an investment in Africa is partly determined by the broader good it does. A project that helps only the investors (and self-interested officials) has no lasting local pull or social support. This defect is not just moral, but practical as well. A lack of local allies renders the project highly vulnerable. Prudent project directors will implement both local rules and broader ethical standards. The best directors will go beyond what the law requires to ensure that the project is socially productive, while the worst directors must be restrained by what the law forbids. Every case is different, but it can be said that every project should do its utmost to increase its public good and minimize its public harm. By this, I don’t mean just tacking on a clinic or digging a well. I mean making appropriate and constructive practices part of the project’s DNA.

This being said, it is often impracticable for businesses to maintain compliance programs that adhere to the latest international standards. This is particularly the case with SMEs, which cannot afford to monitor, let alone conform their operations to, the latest trends and interest-group program proposals. Such programs in any event often reflect more concern for public relations than for ethics, particularly in the case of large multinationals. Ultimately, a good company will act appropriately in any specific situation, regardless of outside codes, and regardless of whether it can later issue a self-congratulatory press release. I do not wish to minimize the value of international standards, but they must be kept in perspective. They are often unnecessary for good companies, and are likely to be paid only lip service by bad companies.

AAC: When your clients are developing a new project, to what extent are local communities involved in the conceptualization of the project?

It depends on the nature of the investment, although local communities will (as in the West) seldom have much input on the development or design of large-scale projects except as affected groups. Geography is usually a major factor in establishing the nature of local participation. A remote mine will usually not impact communities, except perhaps in terms of pollution. Urban road construction will, meanwhile, affect a lot of stakeholders and raise a lot of public concerns. The investor need not second-guess or usurp the government’s role as planner. A sensible investor will, however, design and implement a public-relations campaign that addresses stakeholders in an honest and positive manner, and establishes a way for stakeholders to have their views heard and be given appropriate consideration.

An investor must of course be careful in reaching out to local groups, since every project can attract private rent-seekers or others seeking their own advantage. There are always, and everywhere in the world, folks who are willing to cause trouble simply to extort a benefit for themselves. An investor should find a way to get thoughtful input from reliable persons who can shed light on the bona fide local interests that the project will affect. Whether these persons support the project, oppose it, or fall somewhere in between, their input will help the investor design and implement the project in a socially responsible way, often but not necessarily within the original framework.

AAC: To what extent has the involvement of foreign business investors led to the strengthening of legal institutions in host countries?

Legal institutions vary widely in their structure and strength in Africa’s many States. Unfortunately, foreign direct investment so far has done little to strengthen the rule of law. In the past, Western businesses assumed and even fostered a culture of corruption, to the point of making bribes tax-deductible. Even today, some investors seem ready to embrace corruption as if it were an innate and immutable feature of doing business on the African continent. Fortunately, that attitude is now changing, and things are starting to turn around. The full impact of this positive shift only will be felt, however, when a major wave of Western investment washes over currently neglected African economies, so that local commercial law in those countries has a practical reason to be modernized.

There is of course a chicken-and-egg problem here. Investors from complex modern economies consider advanced legal systems a prerequisite for investment rather than a downstream development. In order to jumpstart serious Western investment across the economic spectrum, African States will need to invest in at least baseline commercial law reforms. (Some have already made impressive strides in this direction.) Thereafter, the legal-reform train is likely to barrel forward of its own accord in response to the needs of increasing Western investment and commensurately growing local economies.

The U.S. Government can best advance Africa’s rule-of-law efforts by encouraging U.S. investors to head to Africa. This is most easily done through the conclusion of helpful investment treaties with Sub-Saharan African countries, which provide legal protection for U.S. nationals. The U.S. currently has a woeful record at concluding investment-promoting treaties in that region. Let us assume, however, that the U.S. Government changes course and seeks for the first time to develop a full-spectrum economic partnership with Africa. As U.S. businesses move en masse into Africa under treaty protection, they will help drive local reform efforts even in countries they do not initially enter. This is because African countries will strive to improve conditions that help them compete for U.S. private investment. For example, if Ghana is seen as better than Nigeria at providing a law-abiding environment, U.S. money will tend to flow to Ghana. Such competition is already taking place, as shown by the efforts which various African countries have already made to rise in the international investment-climate rankings put out by organizations such as the World Bank and the Heritage Foundation.

AAC: When drawing up an investment agreement, do you select American law to govern contracts, or do you rely upon litigation or arbitration venues in the investor’s home country?

Surprisingly, provisions involving choice of law and forum are often overlooked in many investment agreements. In the case of some investors, this oversight may be explained by their mistaken notion that the contract is not enforceable, since “there is no law in Africa.” Such provisions should be considered indispensable to an African investment contract. A solid choice-of-law clause, like an appropriate choice-of-forum clause, can make a contract solidly enforceable, at least on the international plane.

The choice of law is obviously a sensitive one, particularly when a government is one of the parties to the agreement. A wise investor will seek to have a Western body of law govern the contract, and a Western forum (or, more likely, an arbitral institution) serve as the adjudicatory body for disputes arising with respect to the investment. This helps the investor avoid the “home field advantage” problem when dealing with legal disputes. The absence of Western law or some kind of Western forum in the contract need not prove fatal, however, since some countries (such as Ghana, Kenya, and Nigeria) have advanced court systems, and many national legal systems (such as those in the aforementioned countries as well as in the OHADA States of francophone Africa) are quite modern. Nevertheless, investors will need to protect their interests by taking every possible step to ensure that any dispute will be heard in a forum that is fair and easily accessible.

AAC: What are the most common ways that African business transactions end up in litigation or arbitration? In what venues are business disputes most commonly adjudicated?

Nowadays, concerns about expropriation – formerly a major source of disputes – are much reduced for most African projects. A project in Africa can, however, end up in a dispute just like any similar project in the U.S. Doing appropriate legal research when planning the project, and ensuring full legal compliance during implementation, can greatly reduce the risks of such litigation, or of an official enforcement action against the company. When litigation does arise and is not purely local in focus, the question of where to bring the dispute will depend on the circumstances, the contractual choice of forum, and any applicable laws or treaty provisions allowing for international arbitration. In all cases, the investor will want to weigh the costs and risks of the forum in the context of the specific dispute. Investors should not rely on international arbitration as a panacea for any and all disputes. Often it is unavailable, and sometimes local litigation may be preferable. It all depends on the circumstances. The key is to secure all possible options for the investor, to give the investor the greatest room to manoeuver.

AAC: How does corruption affect business interests in Africa?

The biggest rule-of-law issue in Africa today is the suppression of corruption. Its actual occurrence in Africa is probably no greater than in other emerging markets, but it gets a lot more attention because of the historical character of foreign investment in Africa. Unlike economies in other areas of the developing world, those in Africa have tended to be geographically isolated and “low-density.” Since independence, they have been dominated by subsistence agriculture on the one hand, and large-scale extractive industries on the other. These industries involve public assets such as oil, minerals or trees. Given that Africa property rights were historically reposed largely in groups rather than in individuals, and extended over limited geographical ranges, many of these assets have fallen under direct State ownership for lack of an obvious owner. Removal of these assets is therefore a State matter, requiring formal licenses and concessions for their release. Bribes by investors to secure such releases were for a long time not only condoned by Western governments for geopolitical reasons, but were often tax-deductible.

For many Africans, to make real money has often been synonymous with selling one’s consent. This is the most lucrative “product” on the African market, and officials are the sellers. It runs all the way from checkpoint cops agreeing to let one pass for a fee, up to top officials approving shady concessions. Animating the African system of bribes is the view that capital investment is not an economic input, but simply a source of potential personal income for the approving official. In many African countries, such a view has a rational historicalbasis. Most serious capital investment in Africa has been devoted to removing public assets such as minerals and oil. Foreign capital has not often been infused into local economies to build local businesses for local populations. Instead, foreign capital has locally been seen – rightly – as the means for removing the country’s patrimony for the benefit of others. Corruption has been the means by which those lucky few Africans who gain an ability to say “no” to the outsiders can snatch for themselves a piece of the outsiders’ game.

As a result of this market for consent, bona fide investors are often scared or driven away by officials demanding payoffs. A system of corruption which assumes that no foreign capital can be genuinely productive has wound up discouraging the introduction of such useful capital. This vicious cycle starves African economies of productive investment and the ability to grow. To end this self-destructive corruption, African governments must protect capital inflows, not to mention locally developed capital, by enacting thoroughgoing civil-service reforms that raise wages and impose severe penalties for corrupt behavior. Reforms like these will also boost the other component needed to quash corruption, namely a robust private sector that provides legitimate jobs and legitimate opportunities for Africans to build wealth.

Many African officials understand what is needed, and many are working to effect necessary reforms. They are helped by measures like the U.S. Foreign Corrupt Practices Act (“FCPA”), and hindered by investors who have used the policy of “non-interference” to affirm corruption. Foreign direct investors can help the reform process by implementing anti-corruption measures, staunchly refusing to pay bribes, and engaging the authorities whenever necessary to get past a corrupt official. Investors should also do their best to pitch and develop projects that have a positive social impact. Approving a broadly popular project gives officials a legitimate “win,” not least that of being seen as responsible for bringing in a bunch of jobs. That is the sort of thing that burnishes a political CV and raises election prospects.

AAC: How does your investment advice differ in countries in which the rule of law is less established or human rights abuses are widespread?

In post-conflict countries, where the rule of law and respect for human rights are often the most fragile, an investor must take extra care to ensure that the project complies with appropriately high standards of conduct. A dearth of enforceable rules should not be taken as a license to run amok. Rather, it should serve as a charge to act according to sound ethical principles. For example, an absence of environmental regulations does not mean that one is free to pollute. Instead, investors should help the country and garner local goodwill by implementing Western environmental best practices. As the host State recovers and develops, an investor’s past good behavior should redound to the investor’s credit, while past bad acts may well spur official actions or claims. An arbitral tribunal will be unlikely to protect a sanctioned investor that took advantage of a host State when it was in a weak or disadvantaged condition.

AAC: How do national and regional legal structures (including the existence of laws and their enforcement) impact investors’ willingness and ability to invest in Africa?

Part of a lawyer’s task is to apprise investors of the legal framework in which their project will operate. For many investors, particularly SMEs, getting such advice is an eye-opening experience. Whether out of naïve optimism or ill-informed cynicism, many would-be investors have prepared themselves to face a lawless environment. Except in the most corrupt or chaotic environments, this way of thinking is wrong. A good deal of law exists in Africa, and even in difficult markets it is getting ever better suited to complex modern investments.

An investor needs to know not only what investment and tax treaties apply to the proposed project, but also how to protect the project where relevant treaties have not been concluded. (The U.S. Government has been quite lax in this area.) The investor must know the local laws of the home and host countries, and comply strictly with them. A savvy investor will also know how to draw high-level official attention to laws or procedures that threaten a legitimate project, so that an appropriate solution can be found. In all these areas, it is advisable to have specialist legal counsel who know Africa.

A good word is owed here to the investment-climate indices, such as the World Bank Group’s annual Doing Business report and the Heritage Foundation’s Index of Economic Freedom. They have been a great boon to African investment. By shedding light on a number of regulatory and procedural areas of concern to investors, the indices have provided reliable fact in the place of rumor, anecdote and speculation. All sides have been educated, and a transparent grid of ratings has shown countries a clear path to improvement. Rwanda’s particular success at raising its rankings and investment inflows is a perfect example of why the indices are such a good idea. My only concern is that countries will react to the indices without undertaking further, meaningful innovations. I am confident, however, that when African countries start to take such advanced steps on their own, and when their success at attracting full-spectrum investment becomes clear, African growth rates will stun the world.

AAC: How do different legal systems affect your clients’ willingness to invest and the methods chosen?

While some investors may prefer legal systems resembling those of their home country, most are concerned simply to have modern, easily accessible, and enforceable legal rules, whatever their content might be. Investors hate unpredictability. A bad but predictable legal environment is preferable to a good but volatile one.

Many Sub-Saharan African countries have undertaken business-friendly legal reforms. For example, francophone Africa’s OHADA (Organisation pour l’Harmonisation en Afrique du Droit des Affaires) has replaced entire fields of antiquated national law with a fully modern commercial legal system. The OHADA body of laws is founded directly on French civil law. This system is hardly a deterrent for U.S. investors, since its rules and procedures are clear and simple. For investors seeking to found companies, undertake business transactions, or even offer securities in francophone Africa, the OHADA system greatly eases the way.

As a more general matter, many investment disputes could be avoided if investors did not take unfair advantage of low-regulation environments until the State reacts or, rather, over-reacts. A long-term investor who sensibly wants to enmesh a project into a legally underdeveloped State will not only learn, but also help to establish, the rules by which the project will be undertaken. Prudent Western investors will contribute to the legal development of African States by working with local governments to help design rules that fit their complex projects. This kind of cooperation is ideal when it gives the investor legal security and helps the local government to build its own legal institutions.

AAC: How does the difficulty of exit affect investing in Africa? What are the sources of liquidity to finance an exit? Can equity and earnings be easily repatriated to the investor’s country?

Exit policies are a necessary component of any investment plan. Whatever the time horizon for the project, a sensible investor will research the after-market for the investment and the processes required for transfer. The tax implications of the sale must also be considered. As with the repatriation of normal earnings, the sale of an African project may be subject to double-taxation. The U.S. Government has opted to conclude only one double-tax treaty (“DTT” or often “DTA”) in Sub-Saharan Africa, this being with South Africa. As a result, U.S. investors are exposed to double tax hits for projects conducted or sold elsewhere in Africa. This burden may, however, be reduced or avoided by obtaining expert tax advice.

As to the financing of exits, one should not overlook the bourses that have sprung up across the continent. Selling an interest on such an exchange is an increasingly interesting method of sale. Otherwise, the means of exit generally depend on the means of funding the project. African projects are typically funded by official sources, by private equity, or by the entrepreneur or company itself. Self-funders face the most concentrated risk, but they also can have the greatest room to manoeuver if they manage their project correctly. Investors financed by the public sector are usually assured of at least some payment, but often in return for serious constraints on the project. Liquidity for investors funded by private equity will usually come from the next link up the investor chain. For example, a fund that finances startups will sell the project on to a group specializing in growth companies. The downside is that the investor is usually locked into a tight time horizon.

AAC: Are there significant issues concerning intellectual property protection in most African business deals?

Many African projects today involve infrastructure, such as roads and ports, which do not present significant intellectual property issues. As for more technology-sensitive projects, the risk in Africa is reduced because most African companies currently do not have the capacity to replicate and build upon high-technology items.

It bears noting that worries about intellectual property protection are not unique to the West or alien to African societies. African cultural industries are acutely concerned about misappropriation of their products by the West. For example, the distinctive products of certain craft industries, such as kente, are replicated abroad with impunity. Likewise, the movies of Nigeria’s booming film industry, “Nollywood,” are routinely copied without permission in the U.S.

AAC: Is Sub-Saharan Africa the next emerging market for investors?

Sub-Saharan Africa will ultimately develop into a rich market with at least a billion middle-class consumers. The only question is how long this will take. Africa is a continent of entrepreneurs with immense talent waiting for capital and opportunities. A policy shift by the U.S. Government is needed, however, to facilitate U.S. investment in Africa. Taking an economically prominent role in Africa is and must be seen as a strategic necessity for the U.S. At the same time, ambitious African governments must adopt laws, policies and practices that encourage investment from across the geographic and economic spectrums.

AAC: What is the effect of the global economic crisis on Sub-Saharan Africa, and what is its effect on existing portfolio companies and future opportunities?

The global economic crisis had a relatively minor impact on Sub-Saharan African economies, which are not yet enmeshed in the global financial system. African growth rates continued to rise during the global recession, and liquid firms doing business in Africa remained profitable. Unfortunately, the drying up of capital that would otherwise have fueled Western investment did harm to African economic development. Subscriptions of many Africa-focused funds withered, in part due to exit concerns. As a result, many investors missed out on potential business opportunities. They lacked the financial fuel to achieve the “escape velocity” needed to get to high-growth African markets. Thus, while Africa offered itself as a major growth center for Western businesses throughout the Great Recession, the so-called “flight to quality” by Western investors instead resulted in no- to low-growth strategies focused on hoarding sovereign debt, despite far better commercial returns being available across the Atlantic. The irony is an unfortunate one for both sides.

AAC: What legal or policy changes would make investing in Africa more attractive to funding sources? What else should be done to encourage further private equity investment in Sub-Saharan Africa?

The U.S. Government has done too little to help U.S. investors enter Africa. There is a dearth of U.S. bilateral investment treaties (“BITs”) and double taxation treaties (“DTTs” or “DTAs”) with Sub-Saharan African countries. Moreover, the U.S. Government has subjected Sub-Saharan African countries to preconditions for legal and economic engagement that are not imposed with any seriousness on other countries. Despite the U.S. Government’s rhetoric promoting Africa as “open for business,” actual U.S. Government policy remains often hostile to U.S. private investment on the continent, and focused instead on bureaucrat-friendly “aid” programs and on pushing exports to Africa. The failure of the U.S. Government to engage seriously with Africa across the economic spectrum is a continuing and increasingly serious blunder.

To increase U.S. investment in Africa, the U.S. Government needs to engage each African country as an equal sovereign with a shared strategic interest in fostering investment flows and business relations. Put another way, the U.S. Government must see Africa’s poverty not as a reason for disdain or suspicion, but instead as a golden opportunity for the U.S. to do good by having its investors do well. To begin with, the U.S. Government must provide its nationals (particularly SMEs without offices in treaty-rich countries like Germany) with enforceable legal protections for their investments. Concluding BITs and DTTs with African countries would help greatly to spur American investment, especially by the large cadre of SMEs which have a great deal to offer Africa. Once U.S. investors have entered, they can work with host countries to achieve further economic and legal reforms, including additional measures against corruption. At this stage, the U.S. Government’s best role would be to recuse itself from the “aid” business and let African officials turn their attention to spurring on a vibrant market economy. Then we can watch Africa boom, and prosper along with it.

Recent briefings by Peter Hansen

“Increasing U.S. Exports to Africa: Why U.S. Investment Is First Necessary” - Testimony Before U.S. House of Representatives, Subcommittee on Africa (May 7, 2013) (PDF)
See also: Video of hearing

Briefing for Ex-Im Bank on AGOA, Investment and Tax Treaties, and an Investment-Led Export Strategy  (2013) (PDF)

Briefing for U.S. State Department on Project Finance and Investment and Tax Treaties (2013) (PDF)

Editor and Contributor, Compendium of the Working Group on U.S. Investment in Africa (2012) (PDF)

“Unleashing the U.S. Investor in Africa” – Heritage Foundation Lecture (2011, published 2013)