Due diligence is not just about ticking boxes. It needs to be integrated in the commercial side of investments from the very start in order to avoid pitfalls all along the process.
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 $160bn 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.