10 mistakes investors make in Africa, and how to avoid them

Thu, 12 Apr 2012 11:59

Every year, African governments and big companies issue lucrative international tenders for major projects. Abel Myburgh, Africa Desk Coordinator for auditing firm BDO, offers advice on what companies should consider before and after winning that coveted tender.

Lack of knowledge and planning

Many investors regard the African continent as a single business regime and ignore the fact that there are over 55 countries, which include the surrounding islands. Each nation has its own rules and regulations. Some regions have tried to introduce uniform regulations but on the ground, the applications are different. We have experienced instances where companies tender and win contracts in Africa, only to realise that conducting business is difficult than they expected. We recommend that you start planning early – before the tender documents are filed. There are issues that can influence pricing, deliverability of the terms of the contract, and extracting profits from the specific country.

Lack of knowledge of the business culture in the host country

It is not unusual to find total disrespect for local culture. To avoid this, an in-depth study of the business norms and culture of the specific country should be undertaken. A lot of problems and misunderstandings can be avoided if a new entrant understands the perceptions and actions of their partners in Africa. The language barrier also forms part of this problem – it is important to acknowledge that English is not always the only or the main business language.

Unrealistic expectations

This is one of the most common mistakes made by new investors, and it can have a major impact on operations. The World Bank’s ‘ Doing Business’ guide can be used as an indicator, but country-specific information on regulations and business environment must be obtained in order to be informed on the exact procedures to follow.

Type of business entity to set up

Many companies may be under the impression that they can just begin operating in a country. However, the reality is that in most countries it is mandatory to register an entity. Another important consideration is the duration of the operation as some countries apply Permanent Establishment (PE) regime, which can result to a company paying tax locally on its worldwide profits.

Minimum share capital

Companies need to take into account any statutory minimum share capital requirements, which can vary from US$500 to US$1 000 000.

Local participation

In many countries, it is mandatory to introduce local shareholders and directors to a newly established company. A company then has to source indigenous shareholders, and the risks are numerous here. Proper planning is crucial in order to find reputable local shareholders or to opt for a different entity, for instance, a company branch.

Foreign exchange regulations

BDO has found that a number of companies stumble over this specific hurdle in that they cannot repatriate all of their profits and investments during or after the project has come to an end.

Direct and indirect taxation

Taxation is one of the biggest cost factors that companies have to take into account when operating in Africa. Many African countries have some of the highest tax rates in the world and in some cases, very aggressive tax authorities. Therefore, companies must do their homework when it comes to indirect taxes particularly import duties.

Taxation of employees

This is often a major area of concern, which tendering companies must plan for. Foreign employees’ presence in a country beyond 183 days will most likely trigger residency tax issues.

Work permits

It is important for a company to understand the latest requirements and regulations concerning foreign workers. BDO has encountered occasions where foreign employees have unknowingly operated in a country illegally due to obtaining incorrect visas.
What foreign investors look for in potential partners in AfricaFor African companies looking for foreign equity partners or financing, there are six key points to remember: western investors value time, honesty, direct communication, competition, planning and action – and they look for entrepreneurs who can execute ideas.

According to US-based investment consulting firm, RENEW LLC, this checklist will provide African companies with invaluable advice on how to deal with foreign investors.

Posted on April 12, 2012