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Navigating corruption in Africa’s power sector

Navigating corruption in Africa’s power sector

While anti-corruption due diligence is sometimes seen as purely a cost burden and a regulatory box to be ticked, it is becoming increasingly important for energy investments in Africa.

Across sub-Saharan Africa in particular, governments are facing growing domestic pressure to increase power capacity to meet the needs of their populations. The World Bank has estimated that an annual expenditure of $120bn to $16obn is needed to meet requirements across the region by 2030. Increasing sums of money are being committed to address this energy gap, and there is no shortage of companies competing to play their part in bringing these projects to fruition.

However, potential investors in the power sector in Africa face myriad risks. The perception that the region presents a difficult investment environment due to corruption is certainly a barrier. Indeed, in Transparency International’s 2014 Corruption Perception Index, 60% of African countries fell outside the top 100, suggesting that corruption across the continent is inescapable.

The reach and increasing enforcement of international anti-bribery legislation is a particular challenge for investors. The US Foreign Corrupt Practices Act (FCPA) was passed in 1977, and over the past 15 years it has been enforced to prevent the bribery of foreign officials, with corporate penalties totalling $1.6bn in 2014. Many of these fines have been given out to investors in African markets.

The emergence of a strict international compliance regime, coupled with a seemingly all-pervading level of corruption, presents a significant challenge to companies investing in Africa. As a consequence, it would be short-sighted to view compliance as merely a tick-box exercise. Moreover, if businesses make the effort to understand the forces behind corruption risk, they will be able to develop a deeper understanding of the commercial context, as well as fulfil their regulatory obligation.

Complexity in the power sector

The African power sector is a particularly complex investment proposition for companies. As well as competition and interaction between a variety of state and non-state stakeholders, decision making can be heavily influenced by domestic politics and geopolitical considerations when significant public funds are being spent.

Where government is involved, the mandate of bodies such as the executive, ministries, government agencies and state companies that are involved in the project is often unclear. This lack of clarity often translates into limited transparency in the allocation of contracts, with companies potentially feeling pressure to bend the rules in order to compete.

Aside from this, there is also likely to be a range of stakeholders in the private sector involved in any project, including agents, consultants, contractors, intermediaries and joint venture partners. Combined with the intricacies in government interaction, this can create a complex environment from both a compliance and broader business risk perspective.

The public tender process is often a meeting point for all of the drivers of business risk, and specifically corruption.

From project conception to project execution, this high-value, high-stakes process, involving a range of government and private sector stakeholders, is where a multitude of potential issues can combine to leave a business exposed to corruption.

The potential for a company to be drawn into a difficult situation can begin at the initial conception stage. If a project is started for the wrong reasons, the risk is likely to be extended throughout the investment cycle, and the likelihood of the project being reviewed following a change in government is also increased.

Bias regarding contractor selection can be introduced before the tender process even begins. Inequity can be built in to the preparation of technical specifications, or selective disclosure of tender information. Transparency in the selection process is important to mitigate risk, but businesses should still be wary. Processes, which on the surface are open, may still have been pre-determined, such as through collusion by bidding parties.

If these risks are not adequately addressed, they will most likely continue into the project execution stage. Intense competition and financial pressures might lead to improper conduct, and public scrutiny and the pressure for transparency may also have faded by the time the project is under way.

How should companies look to manage these risks?

An effective, compliance-driven approach should include: well-developed internal anti-corruption policies, appropriate due diligence checks on third parties, and anti-bribery training and continued monitoring of partners. However, without broader research into the commercial, political and regulatory environment, this approach may be too narrow. By developing a broader perspective, and gaining insight into aspects such as the competitive landscape, the unclear remit of different government actors, and the diversity of private sector stakeholders, it is possible for companies to avoid falling into regulatory pitfalls before they even appear.

Intelligence on these issues will help businesses understand their government and private sector counterparts, giving them the benefit of a competitive edge that will hopefully help them make the correct commercial decisions.

Anti-corruption due diligence is too often viewed as separate from the commercial side of an investment, as purely a requirement and additional cost burden. However, if it is properly integrated into the process of investment in the African power sector, the potential commercial benefits are undeniable.

Jonathan Bray is Head of Business Intelligence Africa at The Risk Advisory Group.

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Written by African Business Magazine

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