Despite its rich natural resources and vast landmass, Africa remains the world’s poorest inhabited continent in terms of Gross Domestic Product (GDP), according to the International Monetary Fund (IMF). Additionally, the continent’s economies have been hampered by conflict, political instability, and poor infrastructure, which have also discouraged many prospective investors. While other "third world" countries have seen significant economic growth and foreign investment in recent times, Africa has lagged behind...until recently, at least.
In 2018, foreign direct investment (FDI) in “The Hopeless Continent”, as The Economist named Africa in 2000, rose 11% from the previous year. FDI primarily increased in North, Southern, and Sub-Saharan Africa, with East African investments leveling at $9 billion and West African inputs declining by 15%. Moreover, a 2013 CNN article projected that Africa’s GDP, which is currently $2.2 trillion, will rise to $29 trillion by 2050. As such, emerging African markets pose potentially promising growth opportunities to investors.
This is especially true for Kenya, where foreign direct investment rose by an impressive 27% up to $1.6 billion in 2018 across a variety of sectors. In the first three quarters of 2019, according to fDi Markets, Kenya has attracted 54 projects worth $2.9bn, in investments – many of them new physical facilities for foreign companies. Kenya has succeeded in attracting IT investments following the arrival of fiber optics in 2009-2010. This includes a new Africa development center opened by Microsoft, and an innovation hub set up by Cisco. Despite this wave of investments, Kenya lags behind in the World Bank’s Ranking of Doing Business from neighboring Rwanda and Mauritius. Kenya has the potential for being an investment destination, which was highlighted by Unctad, noting the country’s strategic geographic position, and its growing middle class and expanding services sector. However, investors should be wary of political and governance risks (highlighted below), and an informed investment approach is essential prior to a future engagement.
The Arrest of Rotich
In July 2019, Noordin Haji, the Kenyan Director of Public Prosecutions, ordered Henry Rotich, the Finance Minister, be arrested on counts of corruption. Rotich was charged with over ten financial crimes running the gamut from accepting bribes, to abuse of his official power, to fraud. The Cabinet Secretary's activities were flagged in relation to a $450 million construction contract for two dams, which he awarded to CMC di Ravenna, an Italian construction company.
Kenya is no stranger to corruption; rather, it is a regular occurrence there. Trackcorruption.org estimates that the country has lost a whopping $66 billion to corruption since 1964. The Kenyan government in particular reportedly loses over half of its annual budget—as much as $5 billion according to its Office of the Auditor General—to corruption. Thus, while the arrest of Rotich made headlines as the first corruption bust of a major senior official since President Kenyatta's term starting in 2013, it is clear that Rotich's alleged actions constituted no radical exception to frequent crime and rule-bending. As such, investors do well to recognize the ubiquity of corruption in markets they prospect, which demand the necessity for due diligence and investigations ahead of any major investment.
Additionally, as is evident from the Rotich incident, investors do not need to be directly committed to international markets to be affected by such events. It is noted that, although the company denied any wrongdoing in the bribery and criminal charges levied against Rotich with respect to the dams contract, Paolo Porcelli, the CEO of CMC di Ravenna, was charged alongside Rotich with the same allegations. Investigative services can expose a company like CMC di Ravenna's propensity to risky business dealings based on its legal record, corporate history, and media profile. They can also analyze the risk associated with various markets the company has worked in.
The Value of Due Diligence
For example, in 2018, CMC di Ravenna was the subject of an investigation by South African transportation giant Transnet after Forensics for Justice flagged the company’s work on Transnet’s $2.43 billion Durban port project. Transnet cancelled the project after Forensics for Justice personnel found evidence suggesting that some members of the project would benefit from the work undertaken by CMC and its subcontractors without doing any actual work. Media also reported that, although it denied allegations that the Durban project acted as a lifeboat for the company, which was in dire financial straits. CMC di Ravenna filed insolvency papers in the Ravenna Court in December 2018, suggesting the company was in a very dire situation indeed.
Due diligence investigations into CMC di Ravenna and Porcelli would reveal their involvement in the shady Durban port project as reported by media and regulatory bodies as a major red flag. Furthermore, Gryphon Strategies recently conducted an international investigation of Transnet, the South African public entity that contracted the Durban port project. Our research disclosed that Transnet has a rich history of corruption, even though it is fully owned by the South African government. Though the company has replaced its management and board of directors in an attempt to rectify its corrupt past, the situation demonstrates the importance of diligently examining all people and entities with scrutiny regardless of their government or official affiliation.
Given Kenya’s growing economy and its first crude oil export in August 2019, adventurous investors may be interested in this developing market. When considering an investment, due diligence is imperative in highlighting very serious risks that can be associated with connected entities and individuals.