Foreign direct investment (FDI) in Africa includes significant contributions from multiple global companies, each providing significant economic support as they navigate challenges. For example, the US invested US$7 billion in 2022 with a focus on telecommunications, business services, and technology in South Africa, Egypt, and Kenya.
In addition, the United States has committed $55 billion over the next three years to areas such as sustainable energy, health systems, and infrastructure. The Gulf Cooperation Council (GCC), led by Saudi Arabia and the United Arab Emirates (UAE), has committed US$60 billion to infrastructure, green hydrogen and solar energy projects. With cumulative investments of $74 billion, India aims to increase its investments in Africa to $150 billion by 2030. Although China remains a major donor, it has reduced its focus on large infrastructure projects, reflecting a broader shift towards more risk-averse opportunities.
African governments are turning to public-private partnerships (PPPs) to address the continent’s estimated US$100 billion annual infrastructure funding gap. As sovereign debt levels rise, private market investors are playing an increasing role in PPP consortia. These large-scale projects pose integrity risks due to their complexity and large capital requirements. Political instability, regulatory uncertainty, and policy changes pose challenges and can cause project delays, renegotiations, and financial setbacks. Effectively managing these risks is critical to ensuring project viability and maintaining strong investment relationships with governments across Africa.
Political exposure within infrastructure projects
Globally, it is common for large corporations to maintain close ties with political power. However, this phenomenon is particularly pronounced in Africa, where politicians are often deeply involved in corporate activities. As a result, companies participating in infrastructure projects often have relationships with politicians and “politically exposed persons” (PEPs). This highlights the importance of private investors in PPP infrastructure projects understanding the integrity risks associated with political exposure when working with local partners. These partnerships are often aimed at complying with local content regulations, strengthening local expertise, or securing political support, but in some cases they can increase the risk of corruption or pose other integrity-related challenges.
Historically in Africa, stakeholders have tended to adopt a dualistic approach to managing political risks. Risk-averse investors often choose to avoid such investments altogether. Meanwhile, more risk-tolerant investors have approached these opportunities without properly implementing robust risk management strategies to identify, mitigate and address integrity and reputational risks, which can result in significant losses. For example, in 2022, infrastructure projects in Africa lost important funding from multilateral banks as PEP took ownership of the project company.
Evolution of risk attitudes towards political exposure
Investors are moving away from this binary approach to more nuanced strategies when evaluating investments involving PEPs. They now employ customized and flexible investment strategies. More risk-tolerant organizations, such as traditional investment banks and mining companies, are conducting more detailed analysis of potential political exposure, recognizing that inadequate risk assessments can limit access to capital or increase the cost of capital.
Conversely, more risk-averse investors, such as private equity firms, sovereign wealth funds, and sustainability funds, are increasingly considering investment opportunities involving PEPs. Their interest is driven by the potential for significant socio-economic impacts, particularly in a context where impact investing is becoming increasingly important. The African Union (AU) Program for Infrastructure Development in Africa (PIDA) 10-year Priority Action Plan (2021-2030) highlights the importance of mitigating both real and perceived risks to strengthen private sector participation in infrastructure projects across the continent.
Control Risks conducted a due diligence investigation to determine whether the subjects had political connections. We assisted a global equity fund seeking to invest in a port operator with a due diligence investigation. Its key players are politically connected, and we assessed whether these connections were improperly used to further their personal commercial objectives, including through corruption, bribery, and conflicts of interest in commercial activities. From an investor perspective, such governance failures can hinder the ability to raise capital or increase project costs due to perceived risk.
Strengthening domestic regulations regarding integrity risk assessment
From a public sector perspective, the growing need for private sector capital is driving a more rigorous approach to assessing potential integrity and reputational risks. For example, Kenya’s PPP Act 2021 requires a due diligence assessment of private proposals (PIPs) for infrastructure projects, explicitly assessing potential integrity and reputational risks. This reflects a broader trend towards tightening domestic anti-bribery and anti-corruption regulations. A thorough review of integrity and reputational risk has become an important element of the due diligence process. Understanding the risks associated with consortia in PPP infrastructure projects is essential not only to prevent bankability of these projects. Below, we briefly discuss scenarios in which it is important to understand the integrity risks of political exposure.
Associating the ultimate beneficiary (UBO) and primary principal to the PEP
To fully understand the ultimate beneficial owner of an investment (UBO), investors may seek to identify the connections and networks that the UBO and key principals maintain with the PEP and how these relationships may be exploited for unfair financial gain. We have supported our clients in exploring these aspects, even if investors are already aware that their future investments are subject to political risk but want a more detailed analysis of these relationships.
More broadly, investors aim to assess whether these political connections may have influenced or are likely to influence the project during the procurement stage, potentially impairing the project’s viability. During the implementation phase, investors may want to assess the risk that the PEP may interfere with the project, such as attempting to influence the involvement of subcontractors, which could lead to conflicts of interest.
Political exposure in relation to international partners
There is a common misconception that political exposure and integrity risks only arise from the project host country. While this is an important factor, risks can also arise from the actions of prominent infrastructure organizations involved in global procurement. These companies are frequently involved in high-value transactions with governments and public officials, and their regular interactions with public officials can expose them to corruption risks. In this regard, Control Risks has assisted development financial institutions, private market investors, and state government departments by conducting due diligence studies to assess the performance of these companies in global procurement transactions. This includes bid probability analysis to assess reputation on previous infrastructure projects. In some cases, these investigations have uncovered instances in which companies leveraged their proximity to state officials to secure PPP contracts or awarded contracts directly due to a lack of transparency, raising significant governance concerns.
Business outlook
According to the International Monetary Fund (IMF), Africa is the second fastest growing economy in the world after Asia, with an expected average annual growth rate of 4%. Given the political nature of PPP infrastructure projects and the prevailing market dynamics in sub-Saharan Africa, political exposure is often inevitable.
However, organizations can increase their ability to take advantage of these opportunities in a more compliant and resilient manner. Understanding the integrity risks associated with political exposure requires a comprehensive approach to risk management and due diligence, and high-quality, actionable intelligence is key. This requires developing deep insight into the political relationships maintained by companies and key players and understanding the nature of these relationships. Investors and developers should take a proactive approach to critically assess how these relationships affect project delivery, impact the ability and cost of financing, and impact the project’s public reputation.
