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Aug 10, 2012

Barriers to intra-African trade

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Development Bank|Gas|Africa|Nigeria|South Africa|Zimbabwe|Finance|Quate Infrastructure|Trade Finance|Pamela Wadi
development-bank|gas-company|africa|nigeria|south-africa|zimbabwe|finance|quate-infrastructure|trade-finance|pamela-wadi
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By: Pamela Wadi

Africa’s economic outlook has positively transformed in recent years. Interna- tional organisations such as the African Development Bank are expecting the continent’s average rate of growth to exceed 5.8% in 2012 alone.

However, trade between countries in Africa has not seen a corresponding increase. As a result, there have been various calls by governments, trade organisations and international finance houses to address this issue, which is key to boosting and sustaining economic growth in the region.

A company looking to expand into the rest of Africa needs to adapt its business model to effectively mange the nuances that exist between the 54 differing markets. Some of the challenges to intracontinental trade are well known and include the complex bureaucratic processes in each jurisdiction, a lack of ade- quate infrastructure, regulatory issues and difficulty in accessing trade finance.

However, it is also critical that decision- makers consider important issues such as choos- ing the right route to market, ensuring security of tenure and the social licence to operate, as well as adhering to local-content requirements.

Accessing the right route to market in another African country often exposes companies to political risk issues that are unique to the host country. In many jurisdictions, governments and political actors maintain significant influence over the private business sector. This means that foreign companies often interact with and enter into joint venture partnerships with State-owned entities. At times, these joint venture partnerships are used as vehicles by members of the ruling elite for personal benefit. This can expose foreign companies to allegations of corruption and influence peddling and conflict of interest, which can have serious reputational and legal implications.

Understanding the political climate of the jurisdiction a company chooses to enter is important when a local company forms its strategy to do business in the rest of Africa. Changes in the political scene of the host country can have a dramatic impact on the operating environment for foreign companies. Laws and regulations can change suddenly in the more volatile jurisdictions, which can affect the security of assets on the ground. Concerns around security of tenure serve as a deterrent to investing in neighbouring companies by local companies, particularly in capital- intensive sectors like mining and oil and gas.

Calls for nationali- sation across the continent speak to the depth and breadth of African economic transformation. Increasing indigenisation across the continent, seen, for example, by South Africa’s broad-based black economic-empowerment initiatives, Zimbabwe’s empowerment policies, as well as Nigeria’s local-content requirements, means that foreign companies are increasingly obligated to take on local partners, and choosing the right one represents a further challenge to local companies keen to conduct business in other African jurisdictions.

In this increasingly complex and competitive investment climate, sustainable economic growth across Africa hinges on developing trade between countries in the region. Hence, a full understanding of new markets and the contexts of unfamiliar territories by companies looking to do business in the rest of Africa is invaluable if this is to come to fruition.

Wadi is a senior consultant for global risk consultancy Control Risks.

Edited by: Creamer Media Reporter
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