Commercial Risk Africa

Commercial Risk AFRICA

AFRICAN RISK & INSURANCE MANAGEMENT NEWS

NOVEMBER 2014

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COUNTRY REPORT—South Africa: Key stakeholders urged to ‘stick to their knitting’ to revitalise South Africa’s faltering economy............................ 15-18

INDUSTRY FOCUS—Transport: Africa often leapfrogs existing ‘developed economies’ with novel solutions. Here we look at cargo drones replacing the traditional donkeys ...... 12-14

Perfect storm of risk factors beset Kenya’s tourism sector Speaking to Commercial Risk Africa, Jacinta Nzioka Mbithi, Director of Marketing at the Kenya Tourism Board, said the sector had been facing a perfect storm of risks in the past year but was determined it would recover in 2015.

She stressed how important risk management was in the operation of the sector, saying from government to the private sector, tourism firms were having to try and reduce the risks to boost business.

Liz Booth news@commercialriskafrica.com

[ NAIROBI ]—KENYA’S TOURISM leaders are determined the sector will bounce back in 2015 after a year of unforeseen challenges.

A recent report from analysts Axco suggested the total contribution of the service sector to GDP is estimated at nearly 57%, of which tourism forms a significant part. Tourism directly provided 5% of GDP in 2013 and supported 232,500 jobs.

BY THE NUMBERS Arrivals in the first 10 months of 2011 equalled 1.03 million, while total sectoral revenues for that year reached KES 98m ($1.1m). Revenues were expected to remain stable in 2012. Arrivals, however, were projected to decrease in response to the euro crisis and increasing terrorist activity in east Africa, notably by the Al Shabaab network.

More figures from Maplecroft highlight the problem. It said: “President Uhuru

Al Shabaab’s attack on the Westgate Mall and illegal elephant hunting are two examples of the problems that have hit Kenya’s trade in tourism Kenyatta vowed to lift tourist numbers to five million annually within five years of taking office during the 2013 election campaign. The tourism sector is also identified as a priority sector by Kenya’s national development plans, Vision 2030 and the Medium Term Plan.�

However, numbers of tourists have dropped for two years in a row from 1.8 million in 2011 to 1.5 million in 2013.

Maplecroft said stricter travel advisories issued by the UK, the US, Australia and France in May 2014 led to some British tour operators cancelling flights and evacuating tourists from Kenya. The advisories are likely to lead to a reduction in tourist numbers. In particular, numbers of European tourists—who make up more than half of the country’s visitors—are likely to sharply decline.

According to Maplecroft, in July 2014 the Kenya Tourism Board claimed that arrivals in the first four months of 2014 were down by only 4% from the previous year. However, this figure was disputed by a major hotel chain, which claimed that in the first half of 2014 tourism on the coastal circuit had fallen by 30%50% from the previous year, while demand for inland trips had dropped by 20%.

MIXED PICTURE However, she said they had been facing some tough challenges. Ms Mbithi put the figures at 15% down in the first half of the year. “Looking at individual hotels and tour operators, some are still doing quite well,� she said. “But then you look at some of the mass market operators who were flying their own charter planes to Mombasa and they have pulled out entirely so effectively their numbers are down 100%.�

Where the UK leads, she said, other KENYA: Turn to page 2

Africa facing up to skills and education challenge Liz Booth news@commercialriskafrica.com

[GENEVA]—EDUCATION AND SKILLS TOP THE LIST of challenges facing Africa as a whole in 2015, according to the World Economic Forum’s Outlook on the Global Agenda.

The Forum said: “Tellingly, this year’s survey on the global agenda revealed education and skills development as the biggest challenge facing Africa in 2015, followed by building sustainable governance systems and the delivery of hard infrastructure. Almost every stakeholder group ranked education as the most important issue; respondents also suggested that business is the stakeholder that will be

most affected by Africa’s educational challenges.�

Forty-one per cent of African respondents said the business sector is the most likely to be impacted by the education and skills development challenges.

The three key challenges facing Africa are: â– Education and skills development â– Building sustainable governance systems â– Delivering hard infrastructure.

The report warned: “African governments must remain focused on investing in education and skills improvement.�

LITERACY GROWTH While UNESCO predicts Africa will soon be home to 50% of the world’s illiterate population, Maria Ramos, Chief Executive of Barclays Africa Group, points to

the focus of governments and businesses on creating real improvements through training programmes and scholarships. “We must make sure that governments remain focused on funding and investing in education and skills improvement, and that they encourage partnerships with donors, business and local communities,� she said.

But given Africa’s rapid increase in mobile phone users—a 40-fold increase since 2000—it is clear that technology will play a fundamental role. Ms Ramos points to Ghana’s Open Learning Exchange—which looks at innovative teaching and learning models—as well as South African experiments with digitising the curricula and making it available on tablets. “Apart from the fact that you take away a lot of

logistics costs associated with it, mobile technology makes education accessible to young learners in remote parts of the country. It also addresses concerns about the quality of educators because you can upskill teachers quickly and provide them with ongoing support through a range of online platforms.�

The report warned, however, that education is not the only area where African leaders must engage with their people. Ms Ramos highlighted the significant improvements in ‘governance, fiscal management, macroeconomic management and greater accountability’ made in countries like Rwanda.

She said accountability remains the biggest obstacle

SKILLS: Turn to page 2

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11/11/14 08:09:30

Continued from Page One

2

NEWS

Risk managers can benefit from growing relationship with insurers Liz Booth news@commercialriskafrica.com

[ LO N D O N ] —R I S K M A N AG E R S need to provide more data to underwriters if they are to drive premium costs down and should not be surprised that African risks are more costly, just because they are African.

In an exclusive talk with Commercial Risk Africa, Amy Gibbs, Associate in the Credit, Political and Security Risk team at JLT, admitted the property casualty market may well see Africa in a different light to that of her own team “probably because that market has always focused on insuring property in developed markets, particularly the US�.

She added: “It is very comfortable with the western economies. These are

the sort of risks they got a lot.�

In what may seem surprising to many in Africa, Ms Gibbs believes that the market sees cities like Singapore as an emerging market.

However, “looking at other emerging markets we know there is more and more insurance penetration in terms of property casualty with more businesses in Africa choosing to insure their property,� she said.

NEW VIEW Ms Gibbs suggested: “The market probably has to catch up in terms of how they rate risks. It is not surprising to hear that they view anywhere outside of South Africa as high risk.�

It is difficult though for the market without adequate data as it is so difficult to model accurately, she said. “Suddenly you get a market recognising the value of insurance, you

have a growing middle class choosing to insure and corporates looking for more cover—all understandable in terms of risk management. “But it is also understandable that the default position for many insurers is to rate high as a buffer against anything.�

Another issue for local businesses is that the overall pool of business coming out of Africa remains relatively small in global terms so it is more difficult for insurers to spread the risk evenly.

It will come right in the future, according to Ms Gibbs, for other insurance classes as insurers work out how to accurately model the risks.

Key to that will be improving data coming from individual governments and more information on the likelihood of natural catastrophes. As this information bank grows, so will

the ability of insurers to rate individual risks, she said.

The position is very different in terms of credit and political risk, however, according to Ms Gibbs, because there has always been such an emphasis on emerging markets. Much of that has been driven by the banks wishing to support infrastructure development but also wanting the backstop of insurance running throughout the projects.

SOPHISTICATION “The market is very sophisticated in terms of assessing countries and valuing the insurance risks for companies operating in those territories,� she said.

However, she added: “Even in our market large new players coming into the market need to spend time with individual underwriters to show them

how they manage risks and how they think about risk.�

Ms Gibbs stressed: “We have always recommended that clients take a proactive approach in dealing with insurers and not to see them purely as a risk transfer tool but as risk partners.� For example, she said, if a company is considering an acquisition or operating in a new country, brokers and insurers can provide advice on those new ventures, she believed. “Those risk managers who see insurers as partners fare much better, not just in terms of useful information but also in finding cover when they bring new risks to the table.�

Ms Gibbs added: “The relationship is incredibly important and my advice to risk managers is to get to know your insurer and make sure your brokers are introducing you to the underwriting team.�

KENYA: Tourism threat

Risk from natural resource failure grows

CONTINUED FROM PAGE ONE

Liz Booth

countries have followed. “It has been a huge, huge risk for the sector,� she said, The Ebola outbreak in west Africa has also affected figures in the second half of the year, she said, as tourists had chosen to stay away because of a general misunderstanding of how close the risk was.

Adding to the problems for the sector, Ms Mbithi said tour operators have been reporting problems with finding the necessary insurance. “Most of the risks we have faced have been outside our control and it is hard to know how to plan for them.�

Another risk the country has faced in the past year was the national elections, with people fearful there might be a repeat of the violence that dogged events in 2008. Ms Mbithi said the tourism board was making a big effort to meet with ambassadors based in Nairobi to try to assure them it was still safe to holiday in the country.

The Kenya Tourism Board also had a large stand at the recent World Travel Market event in London, where tourism businesses could meet and, again, reassure customers about the destination.

The government, too, was making a concerted effort to end the terrorism threats, she said, which would help rebuild confidence. The key, however, was for word-of-mouth messaging that Kenya is safe and also that it is far from the Ebola outbreak.

Also at World Travel Market, Gambia and Senegal were the only two west African countries to have a stand at the event. Staff said business was good and they were able

to reassure visitors that their countries were free of the Ebola virus.

Many of the concerns voiced by the Kenya Tourism Board have been echoed in the recent report from Maplecroft. It said concerns still remain around political violence after a spike in ethno-political violence in June and July 2014, which Maplecroft said “underscores continued risks of violence destabilising the political environment.� It added: “Similar violence is likely to occur in the future, distracting politicians from governance processes and policy reform.�

It also warned companies will continue to face significant corruption risks for the foreseeable future. Maplecroft warned: “Corruption is widespread in all levels of government, and companies are likely to be exposed to demands for bribes or facilitation payments. The devolution of power to 47 county governments following the March 2013 elections has further increased corruption risks by requiring companies to negotiate with a further layer of government bureaucracy.�

The firm also pointed out that shortterm growth would remain constrained by security challenges. According to the Kenya National Bureau of Statistics, growth slowed to 4.1% in the first quarter of 2014, compared to 5.2% in the same period in 2013.

Maplecroft believed the growth slowdown could be attributed to the impact of erratic weather patterns on agriculture and the contraction of the hospitality sector. “The hospitality sector has been particularly affected by rising security threats and corresponding travel advisories by several western countries,� it said.

SKILLS: Economic impact CONTINUED FROM PAGE ONE to developing appropriate governance. “When you limit democracy and you have a lack of accountability to citizens, you undermine the basic principles that facilitate economic development and ensure broad political stability.�

While investment in human capital is critical, the need to address the infrastructure deficit is equally important.

Africa is facing infrastructural challenges— not least with regards to the provision of

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energy—that have an impact on economic development. Countries including Kenya, Tanzania, Nigeria, Ghana, South Africa and Ethiopia have made significant progress in both the renewable and non-renewable energy sectors, but growth and development can only be sustainable with additional targeted investments.

Yet the results of this year’s survey show pessimism around this issue. Almost 40% of

[GENEVA & NAIROBI]—A NEW REPORT from the World Economic Forum (WEF) has suggested perspectives on future resource availability, including food, water, energy and minerals, are highly contested, mostly because supply and demand are hard to predict and complex in nature.

The Future Availability of Natural Resources—A New Paradigm reveals stakeholders across different sectors, industries, countries and disciplines often disagree on the relative urgency to act on different perceived resource risks and the appropriate responses.

The survey, conducted over two years with more than 300 experts and decision-makers, proposed a new paradigm for global resource availability and WEF hopes a more integrated, future-oriented view can shift the debate beyond a simplistic and polarised scarcity-abundance issue.

It said “Concerns over the future availability of natural resources has grown particularly acute in the early 21st century, largely because of rapid growth in demand, especially in Asia, and resulting price increases that wiped out reductions in average commodity prices from the past 100 years. “In parallel, the risk of reaching a point of no return in environmental degradation has not only created concern that a depleted ecosystem could threaten the availability of

natural resources, but also given rise to worries that newfound abundance in certain stocks (eg shale gas) could further damage the environment’s long-term sustainability.�

The future availability of natural resources, it said, is: ■Critically important to stakeholders: The world’s current economic systems require reliable access to natural resources to deliver populations with even a minimal quality of life. Shortages could cause significant damage to economic and social systems, leading to geopolitical conflict, political instability and social unrest. ■Contested due to polarisation: A flurry of academic papers, statements from civil society, advice from investors and alarming media reports have resulted in an increasing polasization of viewpoints. The result has been a muddled picture favouring antagonism and reasons linked to personal opinion, rather than a common understanding and collaborative solutions. ■Complex to understand: Natural resource availability is the function of the supply and demand of resources that are discovered, developed, processed, distributed and consumed in intricate value chains. These value chains all suffer from distortions at different points, thanks to monopolistic structures, constrained supply routes and government intervention (subsidies, taxation).

Further, while nearly all naturalresource value chains are subject to physical interference from weather, climate and political instability,

pricing on global markets is sensitive to the actions of traders and investors uninterested in physical delivery and thus exposed to the prevailing views on global economic growth. â– Meanwhile, a new report on the energy sector in east Africa from IHS suggests the region is undergoing a major transformation to become a world-class player. By 2025, east Africa is expected to experience an incremental production growth of nearly 1 million barrels equivalent per day, led by Mozambique and Tanzania.

IHS believed: “With the highest number of gas discoveries between 2010-2013 in east Africa, accounting for more than 25 per cent of added reserves worldwide—and as the largest contributor, with more than 50 per cent of total regional mergers and acquisitions value in 2013—the region comes to the fore of international openness to investment, boosting its attractiveness and competitiveness.�

Despite the high potential for further growth, however, IHS warned east Africa has suffered major setbacks with lack of local infrastructure in place, institutional capacities, regulatory framework and an adverse geo-political situation overall. “East Africa is the new hot spot�, said Stanislas Drochon, Director Africa Oil & Gas at IHS Energy. “The region is going through a major transformation and it has huge potential to play a crucial role in driving the region’s future growth, while still operating in a risky business environment where the regulatory framework and infrastructure are not in place.�

respondents doubted that Africa’s infrastructural problems would be dealt with in a meaningful way in the near to mid-term future.

More optimistic observers point to the fact that the build-up of infrastructure is supported through foreign direct investments and trade with other emerging economies—such as the record $200bn China-Africa trade flows—and agencies such as the African Development Bank and the World Bank. But for Ms Ramos, a significant development is that regional and local investors are starting to chip in. This also helps to shift from traditional investments based on the extraction of natural resources to more

“strategic investments focused on a broader set of development opportunities and long-term sustainability.�

Globally, the report reveals deepening income inequality and jobless growth head the Top 10 trends for 2015. These long-standing economic challenges are joined in this year’s survey by growing political and environmental concerns.

The trends are based on a survey of almost 1,800 experts from the Forum’s Network of Global Agenda Councils, as well as other communities within the World Economic Forum, on what they believe will preoccupy leaders

over the coming 12-18 months.

The top 10 trends for 2015 are: 1) Deepening income inequality 2) Persistent jobless growth 3) Lack of leadership 4) Rising geostrategic competition 5) Weakening of representative democracy 6) Rising pollution in the developing world 7) Increasing occurrence of severe weather events 8) Intensifying nationalism 9) Increasing water stress 10) Growing importance of health in the economy

news@commercialriskafrica.com

11/11/14 08:09:37

NEWS Ebola | Africa Re | Seychelles | News in Brief

3

Ebola crisis exacerbated by misinformation Liz Booth news@commercialriskafrica.com

[LAGOS]—THE CHALLENGES FOR risk managers in keeping abreast of the Ebola virus outbreak continue as conflicting advice and information continues to appear worldwide.

The World Health Organization (WHO) last month declared Nigeria was officially free from the Ebola virus after 42 days without any new cases of transmission or manifestation of the virus (two consecutive incubation periods of 21 days each). Three days earlier, on 17 October, Senegal was officially declared Ebola-free.

However, the situation is worsening in the three worst-hit countries in west Africa—Guinea, Liberia and Sierra Leone. Liberian president Ellen JohnsonSirleaf declared the beginning of a curfew and quarantined West Point in the capital Monrovia to contain the spread of disease.

Consultant IHS said it hoped the containment of Ebola in Nigeria and Senegal would temper global concerns

about the spread of the disease. However it added, in a three-month outlook, that the worst-hit countries face a heightened risk of government collapse, severe economic decline and civil unrest.

Rates of infection are gathering pace in these countries, with cases now being identified in all regions of Sierra Leone for the first time this month.

The WHO has also put forward a new forecast, suggesting new cases could top 10,000 by December if current trends are extrapolated.

Media reports on the rate of infection have varied enormously. Maplecroft reports: “Projections for the future spread of Ebola cases vary widely. In the worst case scenario, the US Centers for Disease Control and Prevention projects as many as 1.4 million cases may emerge

by January 2015.�

Figures such as these are adding to the concerns that US businesses say they are facing—as well as risks and expenses—related to the spread of Ebola. In response, law firm Arent Fox has formed a multi-disciplinary team to counsel clients on legal issues stemming from the virus’s appearance in the US.

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The group seeks to share information and establish a set of best practices for companies, institutions and government agencies in responding to a growing set of workplace challenges. “Attorneys are addressing questions involving employment, workplace safety, business interruption, public health and insurance liabilities surrounding a disease that places caregivers in a situation where

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a minor error can be lethal,� Arent Fox stated.

Meanwhile, UK-based insurance broker Miller Insurance Services and William Gallagher Associates, a US retail insurance broker, jointly announced the availability of pandemic disease business interruption insurance, provided by the Ark Syndicate at Lloyd’s. Coverage responds to loss of income arising directly

Risk management key to Seychelles’ new emergency finance programme Liz Booth

news@commercialriskafrica.com

[WASHINGTON]—SEYCHELLES HAS BECOME the first African nation to gain access to World Bank Group (WBG) contingency financing to help the country build resilience to catastrophic events.

Funded through the International Bank for Reconstruction and Development, the development policy loan with a catastrophic deferred draw down option (DPL with Cat DDO) will serve as the ultimate rainy day fund, with a reserve of $7m to help foster a more stable macroeconomic environment in the country.

The DPL with Cat DDO is a contingent line of credit enabling Seychelles to ‘draw down’ funds in the immediate aftermath of any natural disaster declared a national emergency by the government, such as a cyclone or landslide.

Pierre Laporte, Minister of Finance, Trade

and Investment for Seychelles, explained: “The reason the DPL with Cat DDO is so significant is because it provides immediate liquidity when medium-sized or cumulative disasters hit Seychelles. As a result, we can avoid diverting funds originally set aside for development projects and attend to the needs of our country’s poorest.�

The DPL with Cat DDO is available for three years, and can be renewed for up to 15 years. Seychelles is often impacted by cyclones, flooding and mudslides. The most recent event occurred in January 2013 when Tropical Cyclone Felleng hit the country.

While no deaths were reported, the cyclone caused $8.4m in damages (equivalent to 0.77% of the country’s 2012 GDP) and losses in key sectors, such as transport and tourism.

For countries to be eligible for the loan, they must already have a functioning hazard risk management programme in place. The DPL with Cat DDO, therefore, goes beyond

financing. It includes post-disaster recovery to further support the strengthening of the legal framework for disaster risk management and the integration of disaster risk reduction into development planning and decision-making. “The government has shown its commitment to strengthening disaster risk management, which is illustrated by recently approving a Disaster Risk Management Act, a disaster risk management policy and by establishing a risk information database,� said Doekle Wielinga, WBG’s task team leader. “By efficiently responding to disasters and strengthening its disaster risk management plan, we hope there will be significant improvements in the lives of Seychelles’ most vulnerable citizens,� said Ede IjjaszVasquez, the Bank’s Senior Director for the Social, Urban, Rural and Resilience Global Practice. “The DPL with Cat DDO adds yet another vital component to the country’s risk reduction policies.�

out of shutdowns of healthcare facilities as well as diminished revenues in the aftermath of a quarantine. “The need for this coverage is acute at a time where Ebola and the Enterovirus threaten the operating capacity of global healthcare facilities,� pointed out Mark Sleet, professional risks broker at Miller.

Maplecroft remains concerned: “There is a serious risk the disease could spread more widely into other vulnerable countries. Nigeria and Senegal both appear to have contained small-scale outbreaks of Ebola introduced during the current outbreak by travellers from Liberia and Guinea respectively.

Maplecroft is also concerned about the long-term financial impact. It said: “Border closures have resulted in significant disruption to trade networks, while the worsening scale of the outbreak in some of Liberia and Sierra Leone’s most productive agricultural regions has prevented many farmers from harvesting crops. Food insecurity is likely to reach emergency levels by early 2015, suggesting that a major international aid effort will be required to avert a humanitarian disaster.�

NEW AWARDS PLANNED FOR AFRICAN INSURERS

[LAGOS]—THE AFRICAN REINSURANCE CORPORATION (Africa Re) has established a Corporate Social Responsibility Fund and the African Insurance Awards as part of its mission to foster the development of insurance and reinsurance in Africa.

The African Insurance Awards reward the most innovative and sustainable development in the African insurance market, as well as the best corporate management, leadership and governance.

The three categories in the Awards are as follows: 1. Insurance Company of the Year: this prize is open to all insurance and reinsurance companies registered in Africa and focuses on performance during the past two years.

2. CEO of the Year: this special award will be given to the CEO of a company who has made an outstanding contribution in the past 12 months or more, either through the advancement of his company or the insurance industry in Africa.

3. Innovation of the Year: this prize will be given to an insurance or reinsurance company to reward the best technology use, launching of a breakthrough product/service or a new and innovative distribution channel or method.

Cash prizes, plaques and certificates will be awarded to the winners.

The winners will be chosen by an independent and highly regarded panel of judges. Nomination entries will be received as from January 2015 and the first award winners will be announced in June 2015. —Liz Booth

NEWS IN BRIEF Kenya appoints new board member to ATI

[NAIROBI]—THE GOVERNMENT OF KENYA NOMINATED Dr Kamau Thugge, the Principal Secretary to the National Treasury, as its new board representative on the African Trade Insurance Agency’s (ATI) board of directors. Dr Thugge will support the board in managing ATI’s business and general operations. In his current role for the government, Dr Thugge has oversight responsibility for the National Treasury. Dr Thugge’s appointment is effective immediately.

His three-year term will include a one-year overlap with his predecessor, Eng. Abdulrazaq Adan Ali, whose term finishes in May 2015. Isaac Awuondo retains his seat as Kenya’s Alternate Director.

Broker renamed [JOHANNESBURG]—PRICE FORBES & PARTNERS, THE independent, specialist insurance broker, has announced that as part of its ongoing expansion in South Africa, it has renamed its subsidiary PFP Insurance Brokers (Pty) Ltd to Price Forbes

03_CRA_2014_#19_News.indd 3

(Pty) Ltd. Since its relaunch two years ago, the South African business continues to expand following investment in new staff and systems to provide clients with independent, specialist advice and access to Lloyd’s and other global insurance markets.

Warren Bolttler, Chief Executive Officer, Price Forbes (Pty) Ltd said: “This signifies not only the return of the historic Price Forbes name to South Africa, but also our commitment to the South African market and our plans for further development and is good news for both us and our clients.�

Business travel app launched [LONDON]—CRISIS MANAGEMENT COMPANY RED24 HAS launched the red24Global app to protect business travellers. It provides essential and potentially life-saving travel, security and safety information for businesses, organisations and individuals.

Clients with access to a red24 co-branded web portal will be able to download the app to access red24’s services while on the go to ensure the best business travel experience. The app provides vital country and city information updated live, keeping users up to date with the latest travel and security-related developments from any region in the world prior to and during their trip.

New political violence expert [AMSTERDAM]—ANV HOLDINGS BV, THE DUTCH headquartered specialty insurance business, has announced the appointment of Julian Barker as a new underwriter within its ANV Syndicate 1861 political risk & violence team. His specific focus within ANV is political violence in emerging markets but he will add additional support across the wider political risks portfolio.

Understand clients’ business models [LONDON]—INSURERS THAT ADAPT TO THE CHANGING needs of their business clients will succeed in future over those who stick to traditional insurance approaches, Airmic has told underwriters. Paul Hopkin, Airmic’s technical director, challenged the market to innovate to restore relevance—but stressed new products must address the needs of 21st century business models. Speaking at the International Underwriting Association (IUA), Mr Hopkin said insurance continues to be a critical source of protection, but traditional types of cover are ‘losing their strategic value’ as companies’ physical assets become less important to business models.

11/11/14 08:15:41

COMMENT

4

It never rains but it pours

Liz Booth

EPUTATION AND CONFIDENCE ARE funny things. When things are going well, you can do no wrong, but when times get tough, it is hard to do anything right.

So it must seem to many of those involved in Kenya’s tourism sector at the moment. First, they have had to contend with the piracy risk spreading south from Somalia. Last year there was an election and memories of the violence of 2008. Then there was the Westgate attack, commemorated on TV screens across the world one year on. This was followed by various governments imposing travel restrictions and finally, as if this wasn’t enough, the Ebola virus outbreak in west Africa has reduced travel confidence in east Africa.

No wonder then that the tourism board says it has faced a perfect storm of risk. It also feels that so many of the events were beyond its control. However, it also says that the government is putting risk management at the heart of all it does and that every department now has a mandate to introduce good risk management principles wherever possible.

The hope from the government is that the idea of risk management will filter from government across the private sector, including to those areas where underinsurance is rife.

The idea of education and spreading the word was also top of the agenda when the World Economic Forum asked some 1,800 business leaders globally what they perceived as the risks for 2015.

Interestingly, the responses from Africa were very different to other parts of the world and, in some areas, Africa was actually low on the list of at-risk regions— all good news. However, in Sub Saharan Africa, the number one risk for the next year was seen to be a lack of education and skills. This was followed by building sustainable governance systems and delivering hard infrastructure.

Risk managers are hardly likely to get out there and physically start building bridges but, as a

community, there is a very real role to play in keeping boards alive to the risks of not encouraging better training and better governance. Risk managers will also play vital roles when infrastructure projects are put forward.

Education and training, as well as information exchanges between risk managers themselves, were key issues earlier this year when Commercial Risk Africa surveyed a selection of risk managers from across the region. Next week, we shall host our first event on African soil in Nairobi and I really hope those able to attend will enjoy the full programme planned and also make the most of the networking opportunity.

The human touch is essential—as evidence from the newly created African Cyber Risk Institute shows, with its analysis of the risk of not factoring in the human element when considering cyber risks. Such risks are not just to do with machines but also the people who use and abuse them. And they are not just about the damage someone can do to businesses but also about the risks of terrorists using new technology to keep one step ahead of the authorities.

Terrorism and political violence remain among the top risks facing Africa as a whole, sadly the attempts for peace in Nigeria between the government and Boko Haram seem to have failed as the terrorists strike again at a school.

There is, however, other better news this month— Nigeria and Senegal have been declared Ebola-free, while there are signs the spread of the disease is slowing in Liberia. Hopefully, there will be better news from Sierra Leone and Guinea in the weeks ahead.

I look forward to meeting some of you in Nairobi shortly but, in the meantime, enjoy this month’s magazine.

EDITOR Liz Booth

LIZ BOOTH Editor Commercial Risk Africa

+44 [0] 1263 861 676 [W]

BUSINESS DEVELOPMENT DIRECTOR Christine Chalopet-Pirzl +353 [0] 872 853 485 [M]

lizbooth@commercialriskafrica.com

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GROUP PUBLISHING DIRECTOR Hugo Foster

SENIOR REPORTER EAST AFRICA Steve Mbogo Tel.:+254 [0] 722 214 261

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INVEST IN AFRICA (IIA), AN ORGANIsation focused on tackling shared private sector challenges, has launched the African Partner Pool (APP), Ghana’s first cross-sector online business platform for small and medium-sized enterprises (SMEs).

The platform was created to simplify the local sourcing process by connecting independently validated Ghanaian SMEs with international and domestic companies. The platform aims to increase the visibility and credibility of Ghanaian SMEs and support international and domestic companies that want to maximise local supply chains quicker and more cost-effectively.

Local businesses registered on the APP will have a profile page to promote their business on, while international and domestic companies are able to use a search tool to help them find suppliers with the qualifications, experience and standards they need. A tender noticeboard will also feature buyers’ tenders from across sectors, giving local businesses greater visibility of opportunities.

The APP was developed in response to a survey—David and Goliath: Creating a level playing field for Ghanaian SMEs—commissioned by the IIA in early 2014. The aim of the study was to understand the obstacles faced by local and international companies and subsequently develop solutions to create and support local market growth.

According to the research, international companies seeking local partners faced difficulty identifying validated local SMEs from which to procure goods and services. Whereas, according to the survey, nearly eight in ten SME managers reported facing obstacles when trying to win contracts from international companies, due to a

Liz Booth news@commerialriskafrica.com

[ LONDON ]—INSURER ZURICH HAS announced an additional product to its supply chain risk proposition. Essential Supply Chain Insurance builds on the existing supply chain offering by launching an extra simplified product.

According to the company, this will help many customers better understand and mitigate their supply chain risk through a thorough evaluation of their outsourced key suppliers. Zurich said, increasingly, many companies have turned to outsourcing as a means to reduce costs, get access to specialised knowledge and specialist skills.

This reliance on outsourcing inevitably leads to an environment where supply

lack of access to information about the international companies’ procurement activities.

“The African Partner Pool is the core of IIA’s work in Ghana. This directory will assist local suppliers promote their businesses and increase their ability to tender more competitively. It will also help them access training and support from Invest in Africa’s partners and the African Development Bank to build capacity and grow their businesses,” said Sam Brandful, Invest In Africa’s Ghana Country Manager.

In all, 200 Ghanaian businesses— ranging from light industry and manufacturing to procurement and logistics—are registered to operate on the platform, while 240 others are in the process of completing the registration formalities.

Manji Cheto, a Risk Analyst and Vice President of global advisory firms, Teneo Intelligence, said: “The APP is potentially a game-changer, given that access to information on credible and reputable local SMEs has been one of the key obstacles for companies wanting to use local businesses. The APP is a clear demonstration of how access to basic information can transform business practices across Africa in such a way that win-win solutions are created.”

Albert Essien, Group CEO of Ecobank, Africa’s largest pan-African banking group and one of Invest in Africa’s global partners, added: “Companies that are serious about investing in Africa and supporting Africa’s economic growth and development need to create shared value by supporting local suppliers registered with the APP.” About 92% of companies registered with Ghana’s Registrar-General’s Department are SMEs, estimated to provide about 85% of manufacturing employment, contributing about 70% to Ghana’s GDP and therefore have catalytic impacts on economic growth, income and employment.

Liz Booth news@commerialriskafrica.com

[LONDON]—AS SECURITY SERVICES AROUND THE WORLD wake up to the new ways terrorists are using social media and other technologies, Daniel Carr, Cyber Security Specialist with AEGIS London, has warned businesses will soon face some tough decisions about security and the risks they are taking.

He said: “The use of technology by terrorists is not a new issue, as all technologies are inherently dual use. A smartphone being used by a criminal is still a smartphone; however the conversations it enables may not be those desired or imagined when it was designed. The argument today focuses on the ‘ease of interception’ rather than its actual feasibility.

“In the wake of the Snowden revelations, firms are being forced to choose between their customers and the objectives of government.

Ultimately, as a business, the need to attract and retain customers will present a greater incentive than going beyond simple compliance

companies take these steps: 1) Identify all critical suppliers—not just direct suppliers; 2) Focus on the relationship and management of critical suppliers, ensuring they have their own business continuity plans in place; 3) Ensure that availability of key products for the entire supply chain, from raw materials to end-users, can be tracked effectively; 4) Analyse the impact of failure on profits and output; 5) Ensure the board takes responsibility for supply chain risk management; 6) Take a holistic approach to supply chain risk management. Threats to supplies of key raw materials and components can come from both physical and non-physical causes.

with enforced legislation and regulation. As a result of this dichotomy, businesses are likely to be faced with some tough choices.”

Mr Carr warned: “In the future, the sustained use of technology by terrorists is unlikely to change. Terrorist organisations are not bound by policy or business cases, and will take on technology trends more quickly than governments.”

He stressed: “Organisations must ensure products are both secure and private by design, while balancing their responsibilities to countries or governments alike. The balancing act of usability versus security will continue, with governments facing an immediate need to rebuild trust with society and align their incentives with those of businesses.”

It is a truly global problem, Mr Carr believed. He emphasised: “What is clear is that this is no longer an issue that can be addressed by nations in isolation. Security and privacy have a truly global remit: governments and multinational businesses must closer align both their expectations and approaches to ensure they continue to meet the needs of their citizens and their customers, or such conflicts will inevitably endure.”

2014 10-16 NOVEMBER, GABORONE, BOTSWANA: ■ The Botswana insurance industry is set to host the 37th Edition of the Organisation of Eastern and Southern Africa Insurance annual conference at the Gaborone International Conference Centre.

For details, contact: secretarygeneral@oesai.org 17 NOVEMBER, NAIROBI, KENYA: ■ New Horizons in Managing Risk. Commercial Risk Africa will host its first event in Africa aimed at east African risk managers.

For registration: www.commercialriskafrica.com/ RFNairobi

smbogo@commercialriskafrica.com

GROUP MANAGING EDITOR: Adrian Ladbury, +44 [0] 7818 451 882 [M], aladbury@commercialriskeurope.com DESIGN SERVICES: Alan Booth, +44 [0] 20 8123 3271 [W], alan.booth@calixa.biz, www.calixa.biz

21 NOVEMBER, JOHANNESBURG, SOUTH AFRICA: ■ Institute of Risk Management South Africa will hold its annual dinner and awards.

For more details: http://www.irmsa.sa 24-28 NOVEMBER, JOHANNESBURG, SOUTH AFRICA: ■ Strategic Communications, Crisis Management & Public Relations Workshop, will consider the role of communication in the sustainability of an organisation’s reputation. To register call: +27(011) 794 2151 or email : info@hundfold.co.za

26-27 NOVEMBER, JOHANNESBURG, SOUTH AFRICA: ■ The Future of Life Insurance in Africa considers how to build a stronger and more efficient insurance business. For details: http://thefutureoflifeinsuranceina frica.com/ 1-2 DECEMBER, JOHANNESBURG, SOUTH AFRICA: ■ Pension and Social Grant Funds Summit looks at employing preventative measures for fund management and abuse.

For details, contact: priscilla@ melrosetraining.co.za

3-5 DECEMBER, DURBAN, SOUTH AFRICA: ■ Risk Management—A Practical Perspective, ISO 31000 The course is focused on the practical application of risk management principles and techniques, so as to build competence to perform risk management-related duties. For info: http://www.riskza.co.za 9-10 DECEMBER, NAIROBI, KENYA: ■ The 2nd Annual Africa Middle East Investment Forum will be the second edition of AMEIF— a regionally-focused conference aimed at fostering investments between Middle East & Africa.

Contact hellen@aidembs.com

2015

For commercial opportunities email hfoster@commercialriskafrica.com

MARCH, JOHANNESBURG, SOUTH AFRICA: ■ Equity evaluation training course. This course will equip delegates with skills required to effectively evaluate companies and assets. For more email: johnk@trueventus.com

To subscribe email subs@commercialriskafrica.com Commercial Risk Africa is published monthly, except August and December,

by Rubicon Media Ltd.—Registered office 7 Granard Business Centre, Bunns Lane, Mill Hill, London NW7 2DQ

While every care has been taken in publishing Commercial Risk Africa, neither the publisher nor any of the contributors accept responsibility for any errors it may contain or for any losses howsoever arising from or in reliance upon its contents. Editeur Responsable: Adrian Ladbury.

04_CRA_2014_#19_Comment.indd 4

they suffer a supply chain disruption.

Nick Wildgoose, Global Supply Chain Product Leader at Zurich, commented: “Non-damage supply chain interruption events have a major impact on companies, especially as these aren’t covered under standard insurance policies.

“Ongoing threats such as risk from cyber-attack, extreme weather caused by climate change and political risk are examples which have a knock-on effect on companies, no matter where you are located in the world and irrespective of their size. The loss of even a single key supply can precipitate a sales shortfall, having a dramatic impact on cashflow.”

To help customers small and large reduce the severity of disruptions— and ultimately the impact on their bottom line—Zurich suggested

AGENDA

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chain disruptions are one of the most important and complex risks they face.

As this outsourcing dependence increases so does the risk around revenue shortfall when the supply chain breakdown from a physical or non-physical event takes place (eg strikes, political events, IT failure, border issues or fire).

Essential Supply Chain Insurance has capacity up to $100m and is aimed at middle market companies across a number of sectors including manufacturing and energy. The offering is also designed to cover risks arising from direct named suppliers and supplies with the option to buy broader supply chain insurance coverage.

It offers an attractive option for the middle-market companies as they may have limited funds to protect themselves when

Risk managers warned on terrorist cyber risk

Antony Ireland, Billie McTernan, Gareth Stokes, Ben Norris, Stuart Collins, Tony Dowding, Nicholas Pratt, Rodrigo Amaral

All rights reserved. Reproduction or transmission of any content is prohibited without prior written agreement from the publisher

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Zurich gives its top tips on supply chain risk

Africa’s first crosssector online platform for SMEs launches news@commercialriskafrica.com

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NEWS Supply chain | Terrorism | Agenda

NEWS

11/11/14 08:14:59

05_CRA_2014_#19_News-Diary.indd 5

26-29 JULY, SUN CITY, SOUTH AFRICA: ■ The Insurance Institute of South Africa will hold its annual conference with the theme ‘Risky business—the insurance solution’.

For early bird registrations: http:// www.redballoon.biz/ticsa2015/ delegate

■ If you want to promote your insurance event in COMMERCIAL RISK AFRICA, please email details to news@ commercialriskafrica.com

16/11/14 11:04:27

Global banks

6

BEHIND THE NEWS

Banking on Africa S

In the past month both the International Monetary Fund and the World Bank have agreed Africa will continue to grow strongly in the coming years. LIZ BOOTH takes a look at the latest report from the banks

resilience since then with that of other countries that have not made progress or have even regressed. The analysis performed on data from 26 Sub Saharan African countries and on four case studies from the region highlights that overcoming fragility is a slow and complex process.

“Succeeding in these efforts requires an appropriate combination of well prioritised actions, including a political arrangement that deters violence, strong leadership and selected policies geared at fostering good governance, transparency and economic stability. In particular, strengthening fiscal institutions is critical, both to create the fiscal space needed to deliver key public services and urgent investments, and to establish trust between the citizens and the state,” stresses the report.

The second study reviews the progress achieved in recent years by countries in Sub Saharan Africa in fulfilling their need to expand their infrastructure, highlighting the current trends in financing these operations and the challenges that lie ahead. The study finds many countries in the region have sustained a high level of public investment, but only some of them have managed to improve their infrastructure significantly.

The major obstacle to addressing the continent’s infrastructure deficit does not generally appear to be a lack of financing, but rather capacity constraints in developing and implementing projects. The study concludes countries should seek to make the most of new financing instruments by removing remaining regulatory constraints, while controlling fiscal risks and maintaining debt sustainability.

WORLD BANK FUNDING

Meanwhile, the World Bank Group (WBG) has been spelling out its support across Africa. In fiscal year 2014 (FY14), the WBG’s financial commitment to Sub Saharan Africa, a major priority for the institution, was $15.3bn and included: ■ $10.2bn in International Development Association credits, grants and guarantees, up from $8bn from the previous year.

■ $4.2bn from the International Finance Corporation (IFC) for private sector development projects.

■ $420m in International Bank for Reconstruction and Development (IBRD) lending.

■ $516m in Multilateral Investment Guarantee Agency (MIGA) guarantees for projects.

With the recent outbreak of Ebola in Guinea, Liberia and Sierra Leone, the WBG has mobilised a $400m financing package for those countries hardest hit by the crisis, including $230m toward the emergency response and $170m for

7

A new report on Africa examines how organisations can capitalise on Africa’s immense potential and contribute to its growth. And, as Commercial Risk Africa discovers, it starts at the top…

Leading from

the front A

TRONG GROWTH IN THE MAJORITY

of Sub Saharan Africa’s economies should underpin a robust regional expansion in 2014 and 2015, the International Monetary Fund (IMF) says in its regional outlook.

This news follows confident forecasts from the World Bank in which it said regional GDP growth is projected to strengthen to an average annual pace of 5.2% in 2015-2016 from 4.6% in 2014, and rise to 5.3% in 2017.

GDP per capita is set to rise steadily from an estimated 2.1% in 2014 to 2.6% in 2015, reaching 2.8% in 2017.

The World Bank predicted: “Overall, Sub Saharan Africa is forecast to remain one of the fastest-growing regions.”

Now, the IMF states: “In most countries, growth benefits from a combination of infrastructure investment, expanding services and robust agricultural production.

Growth momentum remains particularly strong in Nigeria, the region’s largest economy and in the region’s low income countries. Recent revisions of national accounts data, notably in Nigeria, have also revealed the economies of the region are more diversified than previously thought.” Like the World Bank, the IMF’s latest Regional Economic Outlook for SubSaharan Africa projects regional GDP growth to pick up from about 5% in 2013-2014 to 5.75% in 2015.

And also like the World Bank, the IMF is not underestimating the financial impact of the Ebola virus outbreak in west Africa. It says: “This overall positive outlook is, however, overshadowed by pockets of acute difficulty in a few countries. In Guinea, Liberia and Sierra Leone, the Ebola outbreak is exacting a heavy human and economic toll.”

However, the IMF has other concerns. “In addition, the security situation continues to be difficult in some countries, including the Central African Republic and South Sudan,” it warns.

“In a few other countries activity is facing headwinds from domestic policies,” the report continues. “In South Africa growth remains lacklustre under the drag of difficult labour relations, low confidence and inadequate electricity supply.

More worrisome, in a few countries, including Ghana and, until recently, Zambia, large macroeconomic imbalances have resulted in pressures on the exchange rate and inflation.”

Increasing success in forging links may have its downsides, warns the IMF. “During the past decade, growing links with emerging markets have supported the region’s expansion and economic diversification but have also increased its vulnerability to external shocks.

“Although global growth is projected to gradually strengthen, an expected deceleration in emerging markets and a rebalancing of Chinese demand toward private consumption will make the external environment less supportive for the region. In particular, these trends could soften global demand for key Sub Saharan African exports, including commodities.”

However, the IMF says, for the vast majority of the countries, the overriding policy objective remains sustaining high growth to facilitate employment creation and inclusive growth, while preserving macroeconomic stability.

It states: “Countries should continue to prioritise growthenhancing measures, including by directing public spending toward investment in infrastructure and other development spending and safeguarding social safety nets.

“Boosting fiscal revenue mobilisation and improving the business climate also remain important policy priorities.

Monetary policies should continue to focus on consolidating the gains achieved in recent years in reducing inflation.”

The IMF also cautions about overreaction in countries where large fiscal deficits and sharply risen current spending have become a cause of concern. It suggests: “These imbalances should be addressed but fiscal consolidation should avoid overly adverse consequences on the poor and other vulnerable groups.”

The Regional Economic Outlook also discusses, in two background studies, how fragile states can become more resilient and how countries in the region can cover their remaining infrastructure deficit.

The first study compares the experience of countries that were deemed fragile in the 1990s and have managed to build

06_CRA_2014_#19_News.indd 6

BEHIND THE NEWS PwC Business Report

N EFFECTIVE RISK management approach requires organisations to think differently and by setting the tone from the top, boards and management can prioritise risk management and grow stronger, more resilient organisations, according to a new report on Africa from PricewaterhouseCoopers (PwC).

In The Africa Business Agenda 2014, Suresh Kana, Territory Senior Partner for PwC’s east, west and south Market regions in Africa says: “Investors worldwide recognise Africa’s vast growth potential, in particular its demographic edge. Africa is the world’s youngest continent and is expected to have the biggest labour force by 2040.”

PwC has been producing these reports for four years and Mr Kana says that, five years ago, many of Africa’s economies were under significant pressure in the wake of the global financial crisis. “Today, Africa has undergone a far-reaching transformation,” he believes.

“Robust growth is set to accelerate in Africa in 2014, with the International Monetary Fund projecting GDP growth to accelerate to 4.4% from 3.9% in 2013. Telecommunications, consumer-facing industries, financial services, resources, agribusiness and infrastructure are some of the sectors that will drive growth and attract international trade and investment.”

Mr Kana believes policymakers, regulators and governments will have much to contend with—with a number of short- and long-term challenges, as well as many opportunities. But he says: “The greatest potential for Africa lies in its people. Considering the findings of our CEO interviews over the past four years, we are more convinced than ever that despite the numerous challenges, such as inadequate infrastructure and policy uncertainty, the African story is a positive one. Multinationals that already have a presence on the continent are extremely positive about the prospects for future growth.”

Edouard Messou, Territory Senior Partner for PwC’s francophone Africa Market region, adds: “Indeed, 90% of African CEOs interviewed told us they were confident of mid-term prospects for their businesses, with just more than half (51%) saying they are ‘very confident’.”

He remarks: “Interestingly, CEOs are slightly more anxious about short-term prospects for their companies and industries.

Although 84% remain confident overall, only 40% say they are ‘very confident’. CEOs are aware a lot still needs to be done to convert the continent’s potential for exponential growth into tangible business opportunities, at a country as well as a company level. For many, the key will be to manage growth effectively to create sustainable, stable and more equal countries and companies. This will not be an easy job.”

Noël Albertus, Francophone Africa Advisory and Market Leader, comments: “Innovation and growth are top of mind for African CEOs. More than 30% of them see product and service innovation as the key driver of short-term growth, ahead of increasing market share in new and existing markets and M&A initiatives.”

Mr Albertus says the lack of infrastructure

medium- and long-term projects.

In response to the crisis in Central African Republic, the bank delivered emergency development funds of more than $70m to help restore key government services and to support food distribution and health services. Major regional initiatives focused on the challenges of fragility and conflict.

In May 2013, the WBG announced a $1bn development pledge to help countries in the Great Lakes region provide better health and education services, generate more crossborder trade, and fund hydroelectricity projects in support of the Great Lakes peace agreement.

Signalling a renewed focus on boosting economic growth and lifting people out of devastating poverty in Africa’s hard-hit Sahel region, the WBG pledged $1.5bn to the Sahel in November 2013, which is additional to its ongoing development of multi-country and national programmes in the region. The funding will create more hydropower and other sources of clean energy to greatly expand irrigation and transform agriculture; protect and expand pastoralism for more than 80 million people living in the Sahel, who rely on it as a major source of food and livelihoods; expand health services for women and girls; and improve regional communications and connectivity between countries.

Sub Saharan Africa is blessed with large hydropower resources that can create electricity, yet only 10% of its potential has been harnessed. Boosting access to affordable, reliable, and sustainable energy is a primary objective of the bank’s work in Africa. During the fiscal year projects focused on developing hydropower potential and providing new forms of sustainable power to increase energy production and benefit millions of Africans.

In a major push, IBRD, IFC and MIGA combined forces under a joint Energy Business Plan for Nigeria. The plan will support Nigeria’s energy reform programme and help increase installed generation capacity by about 1,000 MW while mobilising nearly $1.7bn of private sector financing for Africa’s largest economy.

In FY14, the bank also supported the 80-megawatt Regional Rusumo Falls Hydroelectric Project in Burundi, Rwanda and Tanzania, and provided a $100m grant to Burundi for the Jiji-Mulembwe hydropower project.

The bank supports country-led efforts to improve agricultural productivity by linking farmers to markets and reducing risk and vulnerability; increasing rural employment; and making agriculture more environmentally sustainable.

Projects during FY14 included support for improving pastoralism through community development and livelihoods in Ethiopia, boosting agribusiness in Senegal and pushing the envelope on landscape management, notably in the Sahel.

11/11/14 08:11:31

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and the difficulties faced by the population in accessing services, even the most basic ones, have led to the emergence of disruptive innovations at the local level.

“What could have been perceived as weaknesses at first glance have, in many cases, been transformed by local entrepreneurs into business opportunities, opening new markets and developing unrivalled innovation capacity.

Africa has become a hub for innovation,” he concludes.

Avendth Tilakdari, Industries Leader for PwC’s east, west and south Market regions in Africa, identified the opportunities by sector:

OIL AND GAS

Opportunities include strong growth in output and rising global demand for hydrocarbons, particularly in China and India. These countries are also making significant investments to secure access to natural resources in Africa.

With many African economies growing at 5% or more, an increasing population of middleclass consumers and industries is fuelling demand for petrochemicals and energy.

Oil and gas players are also focused on cost containment. In Africa, this is particularly challenging due to inadequate infrastructure, rising costs related to acreage/licence acquisition, regulatory uncertainty and high energy costs. Many governments are looking at strengthening industry regulations, specifically with regard to resource management and revenue stewardship and local content requirements for specific goods and services.

GOVERNMENT & PUBLIC SECTOR Major areas of focus for Africa’s government and public sector organisations include ICT adoption, security, public finance management, government reforms and capital projects and infrastructure investment. Many are also focused on attracting investment and improving the environment for investors.

MINING

More recently, the focus has shifted towards integrating

SEVEN KEY CHALLENGES FACING AFRICA ■ Building hard infrastructure such as transport, energy and telecoms; ■ Building soft infrastructure like education ■ ■ ■ ■ ■

and financial systems; Making the business environment more investor-friendly; Improving transparency at all levels; Facilitating pan-African operations; Providing the required regulation to enable a fair and competitive environment; and Reducing complexity—there is no such thing as one Africa, but numerous market niches.

SOURCE: PwC report The Africa Business Agenda 2014

mineral policy with development policy, but there is wide divergence among countries in Africa with regard to mineral extraction policies, conditions and stakeholders. Greater alignment of policymaking at a regional level would provide a more conducive investment environment and ensure mineral wealth is shared more equitably and accountably.

TECHNOLOGY & MEDIA

This sector includes infocomms, entertainment and media, hospitality, gaming and leisure within its industry group have a number of factors in common. First, they are all experiencing very high levels of growth in Africa. Consumers want more choice and better access to information and services, increasingly through digital channels. Second, these sectors are all impacted by faster and cheaper internet connectivity. Third, there is more competition within these sectors and, in some cases between them, as they vie for a share of consumer spending. Finally, there is wide variation with regard to the regulatory policies impacting these sectors, which can make regional expansion, mergers and acquisitions more challenging and expensive.

FINANCIAL SERVICES

Advancements in technology, a changing competitive landscape and evolving stakeholder attitudes and expectations are transforming financial services in Africa. While branch-based bricks-and-mortar retail service delivery is growing, digital mobile services and agency or satellite service providers increasingly account for a greater share of service delivery.

Among consumers, these service delivery channels have contributed to greater financial inclusion and security. However, the challenge for many service providers is to maintain distinctive brands, profitability and deep relationships with customers, particularly corporate customers.

MANUFACTURING

Africa’s manufacturing sector is large and diverse, with most sector players facing similar opportunities and challenges. A growing middle class increasingly demands a greater variety of products, at relatively low cost and good quality. Successful manufacturers in Africa have tended to find ways of fulfilling existing consumer needs previously met by importers.

However, the cost of inputs like oil, natural gas, steel and copper squeezes margins, unless offset by pricing and surcharge increases. Weak infrastructure and access to reliable, affordable energy thwarts effective production and distribution channel management. Supply chain management can also be a challenge.

FOCUS:

RISK MANAGEMENT The PwC report also dedicates a chapter to the evolving risk management landscape across Africa. Edward Kerich, Director of the Risk Assurance Services practice for PwC Kenya, says: “Most companies in Africa have some modicum of risk management in place.”

However, he also believes: “Growth opportunities may make other boardroom priorities like customers, talent and technology much more prominent on the agenda.

“In Kenya, for example, certain risks like weather, the price of inputs, price volatility and exchange rate fluctuations will impact the agriculture sector. These are not new risks for the sector and even companies without a formal enterprise risk management framework will still have a long history of managing them. In Kenya’s relatively nascent services sector, we are seeing many organisations that started out small now getting more organised about risk management,” he says.

Many companies start by prioritising regulatory compliance among areas of risk management. The survey shows 80% of CEOs in Africa are concerned that overregulation will impact growth prospects for their business, compared to 69% last year. At the same time, 65% say relationships with governments and regulators have stayed the same or improved this year.

Mr Kerich stresses: “Whatever a company’s starting point, it is important to remember people manage risks. A CEO may not document his approach to risk management, but if there is a problem then he must deal with it. There may not be a formal process per se or risk management may be very silo-driven.”

He believes a more comprehensive and value-driven risk management approach should evolve out of frameworks and control environments that already exist. In the survey, 29% of CEOs have concrete plans to change their approach to managing risk and 31% say change is already underway. Only 13% believe there is no need to make any change to their risk management approach.

Mr Kerich says: “Experience shows formal risk management should begin with the systems already in place. At PwC, our approach is to start at board level, working with the audit committee and extending to the risk committee, and agree upon a mandate. That mandate then drives what happens at the management and operational levels.”

He is a strong believer that boardroom priorities set the tone from the top and influence company culture. “We see this clearly in the Africa CEO Survey; customer growth and retention, talent and technology investment are the top-ranked areas where CEOs are planning to implement change and where change programmes are underway. Risk management ranks second among areas where they anticipate change, but tenth among areas where concrete plans are in place.”

In answering why companies in Africa would experience this disconnect with regard to risk management, Mr Kerich says: “Effective risk management requires information but the methods of information collection can vary. Good information can identify risk areas but effective risk management will also drive the imperative to act. Again, this comes down to the tone from the top. Leadership must be seen to do something about it, once a problem has been identified.”

He points to the fire at Jomo Kenyatta International Airport in Nairobi, Kenya as illustrating the catastrophic impact of poor information stuck in silos and a total lack of tone from the top.

However, the reaction to this significant risk event has led to improvements in terms of expediting the international terminal and parking facility projects and improving accountability among people and departments.

“We hope that a more comprehensive approach to risk management is now in place, including resources dedicated to predicting—and forestalling—risk events like fires,” he adds.

Risk management may not feature among the top three boardroom priorities at every company in Africa.

Nonetheless, an effective risk management approach requires organisations to think differently and the main challenge is good communication. By setting the tone from the top, boards and management can prioritise risk management and grow stronger, more resilient organisations, concludes Mr Kerich.

11/11/14 18:33:43

Peter Todd

8

IN FOCUS

Peter not blue

A

PPEALING TO A BROAD SPECTRUM OF insurance industry players is key to the success of the Insurance Institute of South Africa (IISA) annual conference.

With registrations already open for the 2015 event next July in Sun City, IISA president Peter Todd is hopeful the programme will appeal to that broad church of players. He says networking opportunities have become a major part of the event, while ‘people expect a certain calibre of speakers for the formal sessions’.

However, Mr Todd worries that some of the smaller independent players are not making the journey to Sun City, largely as a result of changing legislation. He explains that, historically, larger insurers were able to invite smaller brokers as their guests. This allowed the small operators to attend without affecting their travel budgets.

Now, however, changing regulation, and limits on incentives and trips, make it much harder for those larger firms to effectively ‘sponsor’ smaller broker clients. Mr Todd has appealed to South Africa’s Financial Services Board (FSB) for an exemption, because he believes the educational benefit is so great.

The regulator always has an opportunity to speak to delegates and Mr Todd is convinced the conference is the perfect platform from which the FSB can spread its message but, without the smaller brokers, the picture would not be complete.

Thinking ahead and looking at the wider picture is all part of his role as IISA president, he believes. Mr Todd is also passionately concerned with the long-term viability and success of the trade body.

EDUCATION KEY Education and qualification is key for the future, according to Mr Todd, who sees the regulator pushing for ever-greater professionalism. However, he explains: “A lot has been happening on the educational side and that has been our main focus. I want to shape the focus to broader human capital elements.�

Education and skills upgrading is all part of the recent transformation of the IISA itself as it works to stay relevant in today’s insurance market, says Mr Todd. “Education is a critical part of that transformation,� he says. “We have to provide education that will allow people to develop their skills.�

IISA has made good progress in that direction, he says, but Mr Todd wants to ensure it continues to develop further. For example, the board itself is changing to include a broader spread of colour and gender.

Going one step further, IISA has signed the so-called Hyde Park Accord with the South African Insurance Association and broker body the Financial Intermediaries Association of Southern Africa, to encourage better use of the human capital within the insurance sector. Key to that, believes Mr Todd, is that insurance will continue to attract new blood, particularly younger people. “Most people in insurance say they find it fulfilling but most also admit it was not a first choice as a career. This is not just a South African problem but a global one. It is hard to attract the right talent to the sector,� he admits.

Mr Todd sees an opportunity to develop more links across Africa.

The UK-based Chartered Insurance Institute has signalled its intent to develop first in Asia rather than in Africa and Mr Todd says the old relationship between the two bodies has been dissipating. “There is a massive opportunity for us in neighbouring countries,� Mr Todd believes. “Our neighbours do look to us for knowledge and experience. South Africa is a mature insurance market. “We have so many students across borders writing our exams and South African qualifications are seen as credible in their countries. I think there is a nice opportunity for us to play that role in Africa.�

He continues by saying the move would reflect the increasing spread of South African insurance interests across the continent. “South African companies are expanding and that cross-pollination is inevitable,� he predicts. “We can provide consistency in terms of knowledge and training. It is also useful for employers to be able to look at common qualifications because it allows them to judge prospective employees on a like-for-like basis. They know what they are getting.�

Regulators like it too, he believes. And spreading African qualifications has another advantage too. “If people take US qualifications, for example, they will be studying a very different

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legal environment and a different regulatory outlook. By maintaining studies in Africa, they will end up with better knowledge of the local markets and it is something the regulators are encouraging.�

The new approach is working, if membership numbers are anything to go by. Mr Todd says those numbers have been growing with a large number participating in IISA’s new continuing professional development (CPD) programme. “The CPD points are available online so members can see what they have done in the past year and what they still need to do. Training opportunities are also highlighted online, with CPD points. “It all makes it accessible and easy for the members,� he adds.

With a country as large as South Africa, IISA is also aware that it needs to have that geographical spread and it is looking to hold training days in Cape Town and Durban as well as in Johannesburg. “I think people see IISA as playing a more proactive role in this.

This is great as it was not that long ago that IISA nearly collapsed.�

He gives great credit to chief executive officer David Harpur for changing the fortunes of IISA around. “He has done a phenomenal job in making the institution relevant once again,� he stresses. “But there is only so much more growth that we can achieve locally. The next stage has to be to grow in other countries.�

Looking at the insurance sector itself, Mr Todd says it has only seen ‘fairly tepid’ growth of late and remains a fiercely competitive market as more players come in to fight for existing market share, while the pool of business has not grown substantially.

There could be growth opportunities but some come with political challenges. For example, Mr Todd says South Africa is the only African country not to have compulsory third-party motor insurance, however that is a ‘political hot potato’ and so unlikely to happen any time soon. “I don’t even see that happening in the medium term,� he adds.

So with such a competitive market in South Africa, it is no wonder that so many South African firms are looking north for growth. Mr Todd says the rest of the continent is becoming ever more attractive, presenting some real opportunities for South Africans to bring experience and skills to emerging markets.

That is not to say Mr Todd does not believe there are some good opportunities within South Africa too. New distribution models and greater adoption of technology-led solutions are all increasing the reach of insurance in South Africa, he believes. “There were a lot of naysayers when telematics was launched, for example,� he explains, adding: “However it is a concept that has taken off and is now being adopted by many more firms. There was a section of the industry who were almost in denial—much as there were when direct marketing began.�

INNOVATION SUCCESSES Mr Todd says: “There have been some great examples of innovation and there will be more in the future, particularly from nontraditional players. They don’t have legacies to deal with. That is where we need to open our eyes as an industry. “The classic example is in east Africa,� he says, “where they are doing something that is leading in a global sense.�

He suggests that if you had proposed selling insurance linked to a weather vane and a farmer far from the city, it would have been laughed out of town a few years ago but now such insurance programmes are reaching thousands of previously uninsured farmers.

That kind of competition is challenging for the traditional players, he warns. “It is difficult to mobilise these big organisations to respond to these disruptive smaller players.�

Looking ahead, he wonders whether peer-to-peer lending will have an influence on the sector; he also questions whether smaller African countries will become test beds for other innovations that could leapfrog the status quo.

While he believes complex commercial risks will continue to need much more personal attention from underwriters, Mr Todd says personal lines business and SME business are already changing massively and that is something that is likely to continue, particularly as insurers look to develop new African markets.

The better news, Mr Todd says, is that there will always be a place for insurers and brokers who can provide the right information to consumers and explain how insurance works and exactly what they are buying.

He is looking forward to the challenges of a second year as IISA president and in seeing how the market develops, not just in South Africa but across Sub Saharan Africa too.

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Peter Todd IISA president IISA president Peter Todd is feeling positive as the organisation looks to place education, skills and appealing to new talent at the heart of its vision for the future of the South African insurance market

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24/01/2014 09:50 11/11/14 08:11:12

Climate change

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BEHIND THE NEWS

Evidence is increasing of the political unrest risk linked to climate change, with African countries among the most vulnerable. Commercial Risk Africa looks at a new report from Maplecroft

Climate change & food insecurity multiplying risks of conflict & civil unrest

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COMBINATION OF

climate change vulnerability and food insecurity is amplifying the risk of conflict and civil unrest in 32 countries, including the emerging markets of Ethiopia and Nigeria, according to the seventh annual Climate Change and Environmental Risk Atlas (CCERA) released by global risk analytics company Maplecroft.

The Atlas, which provides comparable risk data for 198 countries across 26 separate issues, including climate change vulnerability and food security, echoes the findings of recent reports released by the Pentagon that identified climate change as a ‘threat multiplier,’ which escalates the risk of conflicts and unrest.

Maplecroft identifies 32 ‘extreme risk’ countries in its Climate Change Vulnerability Index (CCVI), which evaluates the sensitivity of populations, the physical exposure of countries and governmental capacity to adapt to climate change in the next 30 years. Sierra Leone, South Sudan, Nigeria, Chad, Ethiopia, Central African Republic and Eritrea are among the ten countries facing the highest levels of risk, while the growth economy of Mozambique also features in the ‘extreme risk’ category.

The Maplecroft report suggests one of the unifying characteristics of these economies identified by the CCERA is that they depend heavily on agriculture, with 65% of their combined working population employed in the sector, while 28% of their overall economic output relies on agricultural revenues. Maplecroft states changing weather patterns are already impacting food production, poverty, migration and social stability—factors that significantly increase the risk of conflicts and instability in fragile and emerging states alike.

It says that UN IPCC figures estimate declines of up to 50% for staples such as rice, wheat and maize in some locations in the next 35 years due to the impact of climate change. This scenario is particularly significant for the 32 most vulnerable countries in the CCVI. Eleven of these are also classified at ‘extreme risk’ in Maplecroft’s Food Security Risk Index, including: South Sudan, Chad, Ethiopia, Central African Republic, Eritrea, DR Congo, Sudan and Burundi—countries where high levels of poverty, displacement, political violence and conflict already exist.

According to Maplecroft, the conflation and worsening of these risks in a country have the potential to destabilise regional security, hurt national economies and impact the operations and supply chains of businesses. In addition, military resources, which have traditionally focused on security-based missions, are increasingly being drawn into disaster relief efforts.

Subsequent outcomes also include increased poverty and migration and reduced levels of education, which in turn can lead to disenfranchisement and drive support for radical groups.

Nigeria, ranked fourth-most at risk in the CCVI, is cited as a prime example

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of a country where this has occurred.

Widespread drought and food insecurity helped create the socio-economic conditions that led to the emergence of Boko Haram and the violent insurgency in the north-east of the country. With one in four people still undernourished in Sub Saharan Africa, climate change impacts make it even more difficult for governments across the region to improve food security and help reduce tensions.

“Unlike policymakers, who often ignore or politicise the science in seeking short-term objectives, global business and the military now view climate change as an important risk management imperative,” states Dr James Allan, Head of Environment at Maplecroft. “Identifying future flashpoints will help proactive organisations and governments make strategic decisions.”

An improved understanding of the science and consequences of climate change highlighted by the recent IPCC Fifth Assessment Report offers hope that adaptation strategies can be developed to avoid the worst impacts. These include drought-resistant crops, more resilient infrastructure, economic diversification and poverty reduction.

THE AFRICAN PICTURE Seven of the ten most vulnerable nations globally located in the continent: Sierra Leone (2), South Sudan (3), Nigeria (4), Chad (5), Ethiopia (7), Central African Republic (9) and Eritrea (10).

Maplecroft believes the vulnerability of these countries is, in part, due to their exposure to extreme climate-related events: many major river systems prone to severe flooding events; extreme susceptibility to local storms, particularly in central Africa; severe drought risk in much of Sub Saharan Africa; widespread wildfire risk and extensive landslide risk areas in mountainous regions. However, it is the extreme sensitivity of much of the population and the poor adaptive capacity across the continent that makes many countries particularly vulnerable.

These dimensions of vulnerability relate to, for example, weak economies,

inadequate education and healthcare, poor infrastructure and ineffective or corrupt governance.

Growing insecurity in western Africa is a significant driver of vulnerability to climate change. Eight of the 16 countries in western Africa are categorised as ‘extreme risk’ in the CCVI 2015, up from five in the 2012 edition. Indeed, both Sierra Leone and Nigeria now rank in the top five nations most at risk globally. The increasingly volatile security situation has contributed to the region’s high climate change vulnerability, according to Maplecroft.

The deterioration is reflected by western Africa’s regional score in the CCVI worsening from 4.10/10 in 2013 to 2.87/10 in 2015. In addition to high levels of poverty, significant displacement associated with the intensifying violence is placing greater pressure on natural resources and increasing competition for land in this region.

Adaptive capacity in western Africa is also limited due to inequalities in income, poor governance and insufficient technical and financial resources. Any worsening of the security situation is likely to compound these factors and result in increasing vulnerability to climate change.

The oil-rich Niger delta is especially exposed to climate change, with rising sea levels already resulting in erosion and the loss of some oil wells in Nigeria.

Potential disruption to Nigeria’s oil production resulting from extreme events has led the government to incorporate climate resiliency in its development plans, incorporating water management strategies to mitigate the impacts of future flooding.

Chad is also ranked in the top five most at risk countries and the Maplecroft report says it demonstrates the greatest deterioration, driven by weakening govern-ance factors. In the short term, growing concern over food security and increasing cross-border raids by Boko Haram will increase Chad’s sensitivity to climate change. The projected decline in the country’s oil revenue in the medium term may further weaken the government’s institutional capacity to adapt to climate change The Maplecroft report also assesses

the way in which climate change can multiply a risk. It states: “Changes in regional climate can increase pressure on natural resources, affecting food security and ultimately the livelihoods of local populations. Diminishing natural resources can lead to greater competition for food, water and land and result in tensions between communities that may escalate into conflict. In addition to short- and longterm changes in climate, these factors are also related to socioeconomic and political factors.”

Eastern Africa is the region most at risk of food insecurity, while west Africa and central Africa are also categorised as ‘high risk’. The UN’s Food and Agriculture Organisation estimates that Sub Saharan Africa had the highest proportion of the population (26.8%) undernourished in 2010-2012. Long-term prospects for food security will be further hampered by regional shifts in climate, with all three regions considered ‘high risk’ in the Exposure Index 2015.

Shifting climate patterns in western Africa are already posing water and food security challenges, with future changes likely to escalate conflict in the region.

Research suggests climate change has contributed to roughly half of the 90% reduction in the size of Lake Chad since the 1960s. This has contributed to water and food insecurity, migration and conflict challenges currently faced by the bordering countries of Niger, Nigeria, Chad and Cameroon.

Future climate change in this region is expected to yield a more variable west African monsoon system, affecting rainfall patterns and resulting in more prolonged drought conditions in many areas. As a result, crop yields are expected to decrease across the region, likely leading to greater food insecurity. The availability of a reliable water supply for the region’s increasing number of livestock will also be negatively affected by climate change.

Despite improvements in food security and the conflict intensity in Chad, the country is likely to become increasingly vulnerable to climate change. Chad has experienced a year-on-year increase in the rankings of the CPVI, from 8th to 30th between 2011 and 2014. Reflecting this is the more recent upward trend in Chad’s Food Security Index score from 1.91 to 2.15 between 2013 and 2015. However, recent drought and increasing Boko Haram cross-border raids are threatening to halt both trends.

Long-term stability in the country could be tested as the climate change manifests. Increases in the country’s risk in both the Sensitivity Index and Adaptive Capacity Index between 2014 and 2015 have resulted in Chad’s rise in ranking from 13th in 2014 to fifth in the CCVI 2015.

Meanwhile, insecurity in neighbouring countries and large numbers of displaced people pose threats to the security situation in Chad. Current levels of extreme poverty and scarce resources mean that a large influx of people can cause competition for land and potential outbreaks in violence, heightening its vulnerability to climate change.

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11/11/14 08:10:58

Transport

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INDUSTRY SECTOR

Africa has already produced world-leading solutions to age-old problems by using the latest technology, often leapfrogging existing ‘developed economy’ systems. Here, Commercial Risk Africa explores another innovation—drones as cargo carriers, replacing the donkeys of old

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The way ahead?

FRICA’S INFRASTRUCTURE DEFICIT is well documented at some $90bn, much of that in road, rail and air links. Anyone who has tried to fly across the continent easily and affordably can attest to just how hard that can be.

It is something that constantly surprises those who have yet to travel to the region—firstly, the sheer enormity of the continent and, secondly, the complexity of what would be a simple journey from A to B in almost any other part of the world.

At the same time, many African countries are booming.

Economies are growing, a middle-class emerging, trade is developing fast—all of which requires transport, not just for people but for the goods and services to support the new communities.

J M Ledgard, Director of a Future Africa initiative (Afrotech) at Switzerland-based EPFL, believes: “Since Africa is growing too fast to build out its road network, some transportation will have to be supplemented from the sky.”

More than that, Afrotech believes Africa will be the first continent to build out unmanned air cargo on a massive scale. Not the stuff of fantasy, the ‘Red/Blue’ flying robot consortium is a spin-off of Afrotech and aims to set up the first cargo robot route in Africa by 2016. It will be about 80kms long, connecting several towns and villages.

At launch it will fly units of blood from a blood bank to health clinics. Mr Ledgard says: “By bringing blood to severely anaemic young children and mothers, as well as to trauma patients, the route will prove that autonomous flight can save lives and improve outcomes.”

However, he adds: “This is just the start. Before 2020 the flying robot technology will evolve into larger and heavier craft capable of lifting 20 kilos or more over distances of several hundred kilometres.

“Red/Blue has the support of leading research institutions and robotics and logistics companies.

The longer-term aim of Red/Blue is to operate Red Line medical emergency and humanitarian routes to outlying areas and Blue Express commercial routes around major cities.”

Mr Ledgard explains Afrotech has a clear objective in pioneering advanced technologies in Africa on a massive scale: “It takes the mobile phone as proof that advanced technology can be transformative in even the poorest African communities—and that only imagination stands in the way of other leaps into the future.”

Afrotech’s flagship programme is flying cargo robots in Africa and beyond. Mr Ledgard says the first route in Samburu, Kenya is a ‘spectral version of the Liverpool and Manchester railway’.

Having worked in Africa for many years, Mr Ledgard clearly believes: “The mobile phone contributed more to antipoverty efforts than any single development intervention.

Some were slow to see the technology’s possibilities in Africa.

They argued handsets always would be too expensive for the poor and besides, how could a village incapable of taking care of a grain silo ever look after a mobile phone tower? But the price of handsets came down and investments in towers showed that a system valuable enough will protect itself.”

He continues: “Even telecoms underestimated the market. The business plan for the Kenyan telecom Safaricom in 2003 was to have 500,000 mobile phone subscribers by 2013: traders, priests, taxi drivers, prostitutes—people willing to pay a premium to stay in touch. Safaricom now has 21 million users. To emphasise: The uptake of advanced technology was 42 times greater than Safaricom expected.”

Mr Ledgard admits that acceptance of drones for cargo is likely to be difficult at first. “For many people, drone is an ugly word. It evokes a whining sound, something insectile. The general dislike of drones is understandable. It is a new technology, used largely for killing or peeping. But these early negative feelings will shift as we embrace more constructive, positive uses for the technology.”

He predicts: “Within eight years, drones will take over search operations at sea. Never again will a coastguard helicopter go blindly into the night in search of a sinking ship. Instead, it will be guided by a drone sent ahead. Drones will monitor the wellbeing of crops and animals. They will be used in mapping, counting, policing and sports. And they will lift things.”

12_CRA_2014_#19_Industry.indd 12

Convincing local people has required going back to basics. Mr Ledgard explains: “We were trying to explain to a Samburu elder the concept of a flying robot programmed to deliver whatever you wanted. The Samburu was straining to understand the term robot. A mechanical creature, I said, not a beast, not a camel. It was slow going. At last he leaned back and laughed. ‘I see! You want to put my donkey in the sky!’ I knew instantly he was right. We really did want to put his donkey in the sky.”

WHY WE NEED CARGO DONKEYS Mr Ledgard said: “The continent’s sparse road network reflects the newness of place and the utter failure of colonial and post-colonial rule, which was conceived to export treasure to richer markets, hardly considering of a community to trade over the next hill. Africa is vast.

“There is still no road spanning the continent east to west. Existing roads have deteriorated so much that, by some estimates, an hour’s travel in Congo at independence in 1960 is the equivalent of a day’s travel today. The continent cannot speak to itself economically: only 15% of trade is interAfrican. Drones will call the bluff of governments committed

to regional free trade by overflying borders,” he says.

“The continent’s shortfall on annual public infrastructure spending is $50bn and rising. There is no money for tunnels and not enough for bridges and bypasses, let alone simple road maintenance. Paving secondary roads is more expensive per kilometre than paving longer arterials and costs have risen sharply in the last decade, with frequent budget overruns of 100% or more. Economists have estimated that $1 spent on roads in Africa returns $4 in productivity.

How much better value would $1 spent on cargo drone routes be?”

Although Mr Ledgard acknowledges there will be contraband and thieving, he says the tracking of drone cargo will be more transparent and the tax revenues more certain than road transport.

Another risk removed, he says, will be the high rate of accidents, injuries and deaths on roads across the continent. “Deaths from transporting the goods by drone will be a fraction of those occurring on the roads. Death by motor vehicle is the third highest cause of death in Africa after malaria and HIV-Aids. The continent has 2% of the world’s motor vehicles, but 16% of the world’s traffic deaths,” he says.

It is all about reducing risk, says Mr Ledgard, and not

just the physical risks. “The next decade will be among the most decisive in Africa’s history. With present fertility rates, the continent will have 2.7 billion people by 2050. To have a chance, African economies must quickly turn that growth into manufacturing jobs. The problem is that though these economies are growing (albeit too slowly), they are not transforming.

“In key economies like Nigeria, Kenya and Senegal, manufacturing is dominated by small, informal firms.

The poorest countries seem to be de-industrialising. New factories, as in Ethiopia, will not offset the dumping on Africa of cheap finished goods. There never has been an African automaker of any size. Almost every motor vehicle on the continent was built elsewhere,” he says.

Worryingly, he concludes: “Simply put, Africa is not catching up.”

In terms of where cargo drone projects could start, Mr Ledgard has identified 80km routes in Tanzania, Uganda and Rwanda. Other prospective countries for early routes are Angola, Zambia, Ethiopia, Kenya, Namibia and South Africa.

Routes can be strung together to extend range. For example, Rwanda could set up a route from the town of Gitarama over the Nyungwe forest to Lake Kivu and down to Bukavu, Congo. A country as compact and hilly as Rwanda can quickly draw routes across its lower sky and intersect them to most improve health and economic outcomes.

The project is far from a pipedream. Mr Ledgard says: “An associated fund based in Africa and Switzerland will push for research into the robotics, engineering, logistics and related law. It also will push for the establishment of an international agency that will set global norms for the use of civilian drones.

Mr Ledgard anticipates three phases to the technology: In phase one, starting in 2016, drones will serve hospitals and humanitarian emergencies.

Other early adopters will deliver small payloads to government offices, mines, oil and gas installations, ranches and conservancies.

In phase two, industrial sweetspots such as the spare parts industry in southeast Nigeria will be connected to cities by drone routes. Companies of building and mining equipment will stock their large inventory of spare parts using drones carrying 10 kilo payloads.

Phase one and two would be enough to make drones useful contributors. But the real reason for the technology is phase three, when drones will better connect businesses with customers across Africa.

Mr Ledgard is convinced drones will help small companies grow through e-commerce. “Wherever you have impecunious young people ubiquitously connected to the internet, e-commerce is desperate to happen. This is even more true in Africa, where, for various reasons, the retail high street will never be built out and where existing sales of electronics, appliances and most other imported goods are dominated by supermarkets with limited stocks and high margins.

“Drones can extend the range of e-commerce beyond big cities. Amazon, in seeking government approval to test the latest iteration of its Prime Air drones, said 86% of the packages it delivers weigh less than 2.3 kilos.”

Mr Ledgard believes: “Within a decade, drone stations will have shops where people might purchase goods on a tablet or mobile phone and have them delivered by drone from a distant warehouse. In effect, the back room of the village shop will stretch out of sight, with unlimited choices and low prices.”

The key to its success in Africa is repetition. A drone can make many journeys through the day and into the night. Mr Ledgard emphasizes: “We’ll soon have 9 billion people on the planet, all of them vying for limited resources.

Unmanned flight is inevitable.”

He firmly believes: “This future will be radical. And yes, cargo drones will be useful in wealthy countries with dispersed populations. But the biggest opportunity is in Africa. Many people are going to save a lot of lives and make a lot of money putting the donkey [drone] there first.”

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11/11/14 08:10:35

Transport

14

INDUSTRY SECTOR

Threat of litigation hangs over mega transport projects across east Africa

K

ENYA RAILWAYS Corporation has started a sustained engagement campaign with communities whose land the Standard Gauge Railway (SGR) will pass through as it seeks to avoid lawsuits, a prominent risk that has befallen mega transport projects in east Africa.

SGR line is one of the ‘disruptive’ mega transport projects that President Uhuru Kenyatta’s government has initiated as it seeks to lower the cost of transport to and from the Port of Mombasa, one of east Africa’s most uncompetitive aspects.

The new railway will increase the speed of trains from the current average of 40km/ hr to 120km/hr, significantly improving railway efficiency from Mombasa to Nairobi.

Every fortnight, Kenya Railways Corporation holds symposiums with communities that own land along the corridor where the new 500km MombasaNairobi railway line costing $5bn will pass.

The decision is partly informed by the increasing trend where litigation is slowing down the progress of some of the major projects. The lawsuits are mostly initiated by the losing bidder, communities whose land will be affected by the project and, in rare cases, consumer rights groups.

But even with the consultations, as in the case of Kenya Railways Corporation, lawsuits are being instituted. On 23 October, the High Court temporarily stopped construction of the SGR in Kibwezi area in lower eastern Kenya until a case filed

by Kibwezi Member of Parliament Patrick Musimba is heard and determined.

The Member of Parliament claims that the residents were not properly compensated for land compulsorily acquired by the government for the project.

Uganda’s plans for a SGR are also threatened by wrangling in court over the $8bn separate but related project. The matter is between two Chinese companies, state-owned China Civil Engineering Construction Corporation and China Harbour Engineering Company over who has the right to construct the line based on previous agreements both companies made with government.

The SGR in Kenya and Uganda is one of the components of the Northern Corridor infrastructure projects that the East African Community partner states started planning as early as 2004, but in June 2013, the presidents of Kenya, Uganda, and Rwanda agreed to fast-track it, with a March 2018 deadline.

CONFIDENCE ISSUES Risk experts say litigation issues cropping up over major infrastructure projects, including those in the transport sector, are a threat to investor confidence, progress of the projects and economic growth.

“This pattern of seeking courts’ intervention to stop projects is a big risk to investments and general economic growth,” says Tom Mulwa, Chief Executive Officer of Liaison Risk & Pension Consultant.

“What needs to change is not the procurement law but the judiciary. Judiciary should require that persons who file cases against such projects raise an equivalent financial guarantee in form of a bond to show that the complaints they have are of substance,” says Mr Mulwa.

“It should not just be a matter of filing cases in courts. Some of those filing cases are tricksters. If this continues, it will reduce the appetite of investors and also could

12_CRA_2014_#19_Industry.indd 14

STEVE MBOGO hears from those worried about investor confidence as landowners, local communities and governments try to work through the risks thrown up as major transport infrastructure projects are pushed through

Infrastructure in large parts of Africa is in need of upgrade or repair

potentially delay a major project of mass benefit to Kenyans,” he adds.

Transport is among the factors contributing to east Africa’s high cost of doing business. The good news is that leaders in the region have accepted this reality and have been holding regular mini-summits aimed at revamping the obsolete infrastructure and constructing new transport arteries.

The focus of the mini-summits has been on expansion of the ports of Mombasa, Dar es Salaam, and Bagamoyo in Tanzania; construction of the SGR in Kenya and Uganda and later Rwanda; expansion of airports in Tanzania, Kenya and Rwanda; and pipelines in Uganda and Kenya to evacuate the new found wealth of oil and gas.

Transport experts estimate that the poor status of the infrastructure accounts for as much as 50% of the cost of import and exports.

“The east African region continues to be plagued by high costs of doing business.

Transport and logistics costs are predominant drivers of this inefficiency, estimated at 42% of the total value of imports and as high as 75% of the value of exports. Without logistics efficiency problems being addressed, East Africa’s growth potential will be seriously constrained,” says Frank Matsaert, CEO of TradeMark east Africa.

The UK-funded trade improvement body has started a $16m initiative known as TradeMark east Africa Logistics Innovation for Trade (LIFT), which is meant to help reduce transport time along the main transport corridors in East Africa by 15% by 2016.

LABOUR AND MATERIALS Chinese influence is evident in the construction of mega transport projects across east Africa. Nearly all major transport projects are being handled by Chinese private or government companies.

Thika Superhighway in Kenya—the region’s modern, 12-lane, 50km road—was constructed by three Chinese companies.

Chinese companies have won tenders and in other cases benefited from single sourcing practices to construct the Port of Bagamoyo in Tanzania, SGR in Kenya, a new airport

terminal in Kenya and several roads in Uganda, Tanzania, Rwanda and Burundi, among others.

As a result, labour relation issues have cropped up in many of these projects over the allegations that Chinese contractors are not employing adequate local labour.

The most recent case happened in midOctober when residents of Voi, a town near Mombasa in Kenya, blocked the MombasaNairobi highway protesting over similar issues against the China Roads and Bridge Construction, the company that was single sourced to build the SGR. “The allegations are that the contractor has imported labour, including drivers, which are jobs the locals are can do. There are also claims that those employed are poorly paid and mistreated,” says Taita Taveta county governor, John Mruttu.

The SGR will require 35,000 workers.

The government and the Chinese company have agreed that 5,000 workers will be imported from China to handle specialist roles while 30,000 jobs will be reserved for Kenyans.

Along with labour issues, there is the risk of protests because of lack of local content in the construction being handled by the Chinese companies.

For instance, cement that was used in the construction of the Thika Superhighway was all imported from China over claims that the locally available cement did not meet the technical requirements of the project.

Manufacturers have called on the government to ensure that this practice is not repeated in future projects.

“The Standard Gauge Railway presents very many opportunities, especially for the cement manufacturers if one takes into account that cement is 100% wholly local content and value addition,” says Betty Maina, CEO of the Kenya Association of Manufacturers (KAM).

“Cement to construct Thika Road should never have been imported since we had all the necessary materials locally. This opportunity cost the local sector and the experience should not be repeated in future government projects,” she says.

Steel and consumer goods magnate Manu Chandaria, Chairman of ComCraft Group, called on Kenya Railways, the

COUNTRY FOCUS

government agency overseeing the SGR, to ensure that the 40% local content agreement is met by cataloguing all locally available content to be presented to the company constructing the railway and to negotiate for inclusion of more items and services.

The nature of awarding contracts by single sourcing to Chinese companies as a payback to concession loans to finance the projects is also seen as a risk as it has ruffled the private sector here.

According to Polycarp Igathe, the CEO of VIVO Energy, the nature of awarding these contracts has eroded the trust the private sector has in the government.

“The missing ingredient now is trust.

Trust between government on the one hand and the private sector, civil society and media on the other. We seem perpetually stuck to the rear view mirror. Past scars make media, private sector and civil society actors paranoid and distrustful of government and its intentions. We cannot fish by draining the pond,” he says.

SOUTH AFRICA at a glance

SECURITY CONCERNS Security remains a key risk because regional and local dynamics are influencing the human security aspects. Top of the chart are the Al Shabaab terrorists, the Somalia-based group that has staged tens of attacks in Kenya and several in Uganda.

General crime in east Africa has become sophisticated because of the proliferation of small arms filtering in from Somalia and South Sudan.

But some analysts say this risk will not slow the progress of infrastructure projects in general, partly because of the determination of the governments and the short-term nature of the risks.

“The corporate and public sectors have internalised the current negative issues and concluded that they are of short-term nature. They are moving in when things are fluid and being there when the situation stabilises,” says Professor Joes Kieyah of the Kenya Institute for Public Policy Research and Analysis.

He says confidence is also building up within the government because of the structural changes aimed at proper management of public resources but which are not being widely recognised because most people are caught up in the security and political debates.

The driving force appears to be the impact the transport projects are likely to have on the future of the region. “The future impact aspect of the mega projects, particularly the 500km standard gauge railway and the Lamu Port Southern Sudan-Ethiopia Transport Corridor is very significant in defining the future of this country. They will not only reduce the cost of transport but also open the regional economies,” Professor Kieyah says.

Some of the key transport projects include: ongoing construction of the 532km gas pipeline from Mtwara to Dar es Salaam at a cost of $1.2bn in Tanzania; construction of the 500km SGR in Kenya; construction of a new airport in Kenya; rehabilitation of the Dar es Salam-Mpanda railway line and ongoing construction of the first three berths at Lamu Port in Kenya at the cost of $400m.

Tanzania has secured $164.3m from the Netherlands for the expansion of the Julius Nyerere International Airport in Dar es Salaam. Others are the ongoing expansion and modernisation of Mombasa’s second container terminal; development of Mwambani port in Tanga; Musoma Port and New Kampala Port at Bukasa; and tens of major road constructions that are ongoing.

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Pretoria [EXECUTIVE], Cape Town [LEGISLATIVE] & Bloemfontein [JUDICIAL]

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1,214,470km2

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2,798km

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NEIGHBOURING COUNTRIES: Botswana, Lesotho, Mozambique, Namibia, Swaziland, Zimbabwe

■

GDP:

■

GDP GROWTH RATE:

■

INFLATION RATE:

Presidential republic President Jacob Zuma 14.6m (2013 est.)

US$353.9bn (2013 est.)

2% (2013 est.)

5.8% (2013 est.)

SOURCE: CIA World Factbook

South Africa Key stakeholders urged to ‘stick to their knitting’ to revitalise South Africa’s faltering economy

The slow growth dilemma

S

OUTH AFRICA’S ECONOMIC GROWTH OUTLOOK HAS BEEN

repeatedly downgraded through 2014, business and consumer confidence remain low and company CEOs have flagged uncertainty as a major hindrance to strategic planning.

What can stakeholders expect from Africa’s second largest economy through 2015?

The country’s private banks have already revised GDP growth to a mere 1.3% in 2014 and less than 2% next year. But while the National Treasury is slightly more upbeat, economists have dismissed as a pipedream the 3% 2017 growth forecast made

by Finance Minister Nhlanhla Nene in his Medium Term Budget Policy Statement on 22 October.

“We are struggling with a stagflation trap because our growth drivers are weak—households are in tatters—and inflation is on the rise,” says Investment Solutions’ chief strategist, Chris Hart.

“To make matters worse, this slowdown has come at a low point in our interest rate cycle—we have to hike interest rates into a soft market and at the same time expect a cut in government and household expenditure.”

There are many reasons for the country’s poor growth outlook. “The 2014 GDP downgrades can be attributed in part to lengthy strike action in the mining sector, legislative uncertainty and a delay in implementing the

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National Development Plan (NDP) infrastructure projects,” says George Bishop, Deputy CEO at Willis SA. Additional growth constraints include an inadequate and unstable electricity supply; labour unrest; the Reserve Bank’s tight monetary policy; and high levels of government debt. “Poor labour relations and the inadequate investment Wayne in infrastructure such as roads, electricity and Abraham water are among our major concerns,” says Wayne Abraham, MD at AIG South Africa. State power utility Eskom is battling to meet electricity demand and has to restrict supply when unplanned supplyside shocks occur.

Although AIG welcomes government’s commitment to infrastructure development, it is wary of budgetary constraints and the potential for higher taxation as early as next year. CEO and chief economist at Efficient Group, Dawie Roodt, says an increase in the corporate tax rate is unlikely, but warns that consumers could expect a mixed-bag of increases in personal gains tax and VAT. It is also possible the minister will hike capital gains tax and the recently introduced Dividend Withholding Tax to raise additional revenue.

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16

South Africa

COUNTRY FOCUS

COUNTRY FOCUS South Africa

CONTINUED FROM PREVIOUS PAGE issue that we have with TCF is the cost of implementation, especially the extra burden on the organisation to report compliance to the regulator.” Companies that were conducting business in a TCF fashion prior to the regulation have incurred additional costs to comply with and implement management information requirements, including hiring additional staff and upgrading computer systems.

OTHER HEADWINDS Insurers face numerous challenges outside of regulation. Mr Kirk singles out the insurer’s ability to rate for and mitigate risks associated with climate change, the decline in the quality of municipal infrastructure and disaster management and a general deterioration in risk management in the commercial space as causes for concern. Climate change is mentioned by virtually every insurer as a major risk for 2015 and beyond.

According to Hollard, cyber risk, environmental risks, conflict-related risks and the emergence of class action lawsuits in South Africa are changing the face of the risk industry. “The investment landscape has changed since the global financial crisis (GFC) and nobody knows what the new normal is,” says Mr Kohler. “There are concerns that the flood of ‘cheap’ money following quantitative easing and similar post-GFC interventions will lead to the next financial market bubble.”

The poor economic outlook creates other problems. “Tough economic times lead to increased incidences of fraud, both in the consumer and commercial environments,” says Mr Abraham. “Control measures to address fraud are therefore key—on the commercial side, it remains essential to bring specialist expertise to bear to assess the quality of risks, improve risk management by making safety and other recommendations and, where there are valid claims, help companies get back to running their businesses.”

What can insurers do to address these risks? “We tighten up where we can,” says Mr Kirk. Santam is focusing on internal models to deal with climate change and is working with the municipalities in an effort to improve its disaster management capabilities. The insurer is also tightening up its underwriting rules and using new technologies such as geocoding to make sure that it better understands environmental risks.

Another concern is that insurers are pricing for market share rather than rating appropriately for risk. “The insurance market will continue to price risks competitively,” says Mr Bishop. “The degree of competitiveness varies depending on the type of cover and the number of markets underwriting the particular category of risk.”

The bottom line is that insurers need to add value for their shareholders. Investors expect developing markets to deliver a return on equity of 15% to 20% or they will look at other opportunities, placing insurers under tremendous pressure. “If profitable growth is to be achieved, it is necessary to segment the market and focus on specific areas, or you could be looking at a decline in profitability,” says Mr Abraham. He adds that although the insurance market is ‘soft’ at present we cannot discount the possibility of further reductions in underwriting margins and profit going forward.

“Successful global insurers have mastered their core skills and are applying those skills in

GROWTH: Regulation adds to firms’ costs CONTINUED FROM PAGE 15 “The biggest problem that we face presently is that we have a government that is ideologically conflicted, resulting in confusing and poorly implemented policy,” says Mr Roodt.

“The inefficiency of the state is another major worry.”

TURNING THINGS AROUND Each stakeholder in the economy must play its part to turn around the country’s lacklustre performance. The private sector is fairly clear on what it expects from government in this regard. “Government must create an enabling environment for businesses to grow and to thrive,” says Ian Kirk, CEO of Santam.

“The state’s main duty is to support the private sector in creating wealth, something best achieved through an efficient and productive public sector that displays clear political leadership,” says Mr Roodt. He would like to see major cutbacks in the state’s wage bill and, failing that, significant productivity gains.

AIG’s Mr Abraham says government needs to focus on investment in infrastructure and infrastructure maintenance while remaining friendly to international investors.

For many, the blueprint for an economic revival is contained in the NDP. The plan has widespread buy-in from both business and government, bar the occasional ideological hiccup or disagreement about implementation. Unfortunately, government is dragging its feet on NDP implementation and it is unclear whether the policy has universal support within the ruling African National Congress. To make matters worse, partners in the ruling alliance—such as the Congress of South African Trade Unions and the SA Communist Party—are openly critical of the plan.

“If government prioritises the NDP it will succeed in creating the enabling environment that will allow the private sector to get on with the business of doing business,” says Mr Kirk. Another issue often raised by local executives is the uncertainty and confusion exhibiting in both the political and regulatory environment at present. “In uncertain times people tend not to invest, which is a problem for insurers because we rely on this investment to create insurable interest,” he says.

INSURER OUTLOOK The challenge that South Africa’s insurers face is how to adapt to this difficult business environment and to make the best of the hand they have been dealt. For insurers, this means

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trying to win back market share by being more competitive, diversifying business geographically and moving into higher growth areas.

Insurance brokers face similar challenges. “We will achieve growth by focusing on industry and product specialisation, developing advanced technology processing capabilities and employing the best available skills, expertise and experience,” says Mr Bishop. “A sensible strategy is for brokers to give customers what they want—professionalism, sound financial advice, innovation, integrity and a responsive real-time service.”

“In addition to trying to extract growth from a sluggish economy we face unique challenges as an industry, most notably from regulation,” says Nic Kohler, CEO at Hollard.

In a presentation to the Financial Intermediary Association of Southern Africa’s (FIA) recent national roadshow he singled out regulation as a game changer.

“Regulation adds costs to an insurance business, including the cost of new hires to fulfil administrative requirements and the cost of undertaking specific projects to accommodate the regulatory changes,” says Wikus Luus, Chief Risk Officer at Hollard. “But we must also consider changes to legal, compliance, actuarial and other processes, as well as the need for additional governance.”

Why so much regulation? The regulators are under pressure to implement reforms to deliver a first world financial regulatory system befitting South Africa’s G20 status. A consequence of this is that both the Financial Services Board (FSB) and National Treasury will push ahead with regulatory reforms regardless of the economic environment.

As a result, insurers that are wrestling with Solvency Assessment and Management (SAM), Treating Customers Fairly (TCF) and new binder regulations will soon have to get to grips with demarcation regulations, a comprehensive Retail Distribution Review and major changes to the consumer credit insurance and micro-insurance landscapes to name just a few.

All of this takes place against the backdrop of a major shift in the regulatory framework by way of the so-called ‘twin peaks’ model of financial services supervision.

Mr Kirk says that each new regulation has both positive and negative connotations for insurers. SAM has had major cost implications, with insurers incurring costs to develop their internal models. “We have had to pay the FSB so that they can approve our model—pay the professional firm that assists the regulator—and pay for all manner of staffing and administrative expenses,” he says. SAM has positive consequences for insurers once implemented because it introduces risk-based capital controls.

AIG says that sound, well-enforced regulations are welcomed by the sector as they deliver a level playing field.

Their only disclaimer is that new regulation should not be punitive from a cost and compliance perspective. “SAM requires a change in risk management and behaviour, with specific capital requirements and implications on how the business is run,” says Mr Abraham. “There is a significant compliance cost that has to be borne, which smaller and medium insurers may struggle with.”

Although the two insurers agree on SAM, they take a different view on the recently introduced binder regulations.

“Binder regulations present no particular issue as long as we trade in an open market without mandating of fees between parties—who should be free to negotiate payments on the basis of value added,” says Mr Abraham.

Santam, meanwhile, says that binder regulations have been a net negative for the group. “We ended up with a situation where we are paying fees for work that we did not previously pay fees for—and higher levels of fees for work where we did pay fees,” says Mr Kirk. An unintended consequence of binder regulations was to widen the gap between the intermediated and direct insurance distribution channels.

From Hollard’s perspective, SAM and TCF have consumed the most human resources, but have had limited direct cost implications to date while the new binder regulations have had little impact on people and processes, but have come with significant costs attached.

“Binder regulations have proven difficult to integrate into the insurance environment because they represent a step change in how insurers and binder holders contract with one another,” says Mr Luus. “The cost of providing insurance has increased as a result of these regulations and we have noticed worrying changes in risk assessment and claims management practices.” Hollard observes that an overall increase in the fees paid and costs incurred in delivering services to customers is inevitable.

TCF, meanwhile, has been welcomed as a common sense doctrine that codifies how business should approach the customer-supplier relationship. According to Mr Abraham, the industry still has some way to go to align with these regulations.

A particular challenge domestically is that ownership structures which lead to perceived or actual conflicts of interest have to be dealt with for TCF to work.

“I cannot image an insurance company that would not want to treat its customers fairly,” says Mr Kirk. “The only

CONTINUED ON NEXT PAGE

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17

a highly adaptive way, taking on new risks in an ever-changing landscape,” says Mr Kohler.

“They have increased efficiencies through right-sizing their respective businesses and investing in systems and people as well as embracing technology such as cloud computing, big data and social media.”

The South African insurance market remains extremely competitive and penetration in traditional segments of both the shortterm and life sectors is high. “Opportunities for growth are linked to a firm’s ability to differentiate from competitors by way of innovative product, smart distribution and market-leading skills,” says Mr Abraham.

While differentiation is crucial in attracting the emerging middle class there are dangers in engaging in a ‘race to the bottom’ by way of competitive pricing in the commoditised insurance market.

REASONS TO BE CHEERFUL

Despite this, insurers remain upbeat about prospects for 2015 and beyond. Insurers are seeing great potential in moving with their clients as they expand into Sub Saharan Africa, with many opportunities in the oil and gas and infrastructure sectors where substantial investment is expected in the next few years.

“South Africa will be a tough place to conduct business in over the next few years; but with 90% of our business written domestically we have to make the best of uncertain times,” concludes Mr Kirk. “Santam will focus on market share gains and organic growth over the medium term because large acquisitions are tough for a business of our scale.”

“It is a difficult environment for insurance brokers to grow their revenue,” agrees Mr Bishop. “Those companies that get the basics right and work harder than their competitors will retain existing clients and acquire new appointments…He challenges all insurance stakeholders to go the extra mile in delivering the best possible service to consumers.

Aside from opening new distribution channels insurers can also make inroads by attracting business from new market segments and developing their businesses in the rest of Africa. “The maturity of the South African market, particularly when compared to the rest of Africa, makes it highly competitive,” concludes Mr Abraham.

“Customers benefit from a variety of products and solutions as insurers are obliged to innovate to deliver solutions that meet specific insurance needs—those insurers that segment the market and attract the right customers will prosper.”

Mr Hart says: “South Africa is big in Africa; but in global terms we are small—so we need to be smart about which economic model we follow.” He questions the sense in trying to go head-to-head with Brics partners in, for example, financing the recently announced Brics bank.

Factors that are crucial for economic transformation are freedom from financial repression, good macroeconomic management and a reliable currency. It is also important that economic policy is certain and supportive.

“It does not help for government to dismiss the ‘nationalisation of mines’ debate when it subsequently sets policy that, at best, offers the private sector a choice between dreadful and awful,” Mr Hart says. “If we focus on our natural competitive advantages and offer investors a haven from risk then we can do so much better.”

Partner with Aon Best Global Insurance Broker in Africa for 2013* Anton Roux, CEO: Aon South Africa, explains: “This award follows a number of innovative risk management and insurance solutions, empowering human and economic possibilities for our clients to help them achieve sustainable growth, continuity and profitability. Aon has the largest majority-owned network in Africa, servicing clients in 45 out of 54 countries.”

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South Africa

18

COUNTRY FOCUS

CONFERENCE 2nd Nigeria Risk Awards, Lagos

KEEP THE FLAME BURNING

The state of the South African economy is heading the concerns of two rating agencies, which are waiting to see how the new government tackles issues of high unemployment, poverty and fiscal deficit

Rating agency warning for South African insurance market

T

CAPITAL Turning specifically to the South African market, Mr Gosrani said: “Our view is unchanged and the assessment is intermediate with a bias of negative.

“A lot of that is driven by the South African economy. Our analysis combines country and industry,” he explained. “Where we view the country as weaker relative to industry, it carries a greater bias overall. The weaker economy and a weaker rand do create a downward pressure.

“That and some of the bigger claims coming out of the South African market may drive a lower view in the future,” he warned.

Insurers need to maintain a weather eye on the sovereign ratings too, said Mr Gosrani. “The country in which an insurer is based informs our analysis. The environment will have a bearing on credit ratings. We also look at sovereign ratings as a starting point to understand the risks facing an insurer.”

Return on equity is another important measure and Mr Gosrani reported that if that figure falls below 10% for a prolonged period, it would impact negatively. Another factor for the South African market is the threat of new risks emerging. For instance, said Mr Gosrani, if hailstorms became an annual event, then it would negatively impact local insurers.

He said: “There are quite a few areas we are monitoring.”

Looking more closely at South Africa, Mr Gosrani said: “There is a more bearish sentiment.”

He admitted it could be a little misleading in that insurers have been pushing through premium increases, led by Sanlam. However, he said: “According to recent results some of the big players have been showing underwriting losses rather than underwriting profit. It suggests the increases have not been enough or are not sticking.”

REGULATION Mr Gosrani also believed the regulator will play a part in shaping the market in the short term as Solvency Assessment and Management regulations come into force. It could lead, he suggested, to some insurers looking for opportunities to purchase

15_CRA_2014_#19_Country.indd 18

It has been a rollercoaster year for Nigeria in the world of risk as the country faced security challenges, health risks and economic uncertainty. Billie McTiernan takes a look at the country’s prospects

labour tensions will be resolved and that lacklustre economic performance will not affect South Africa’s fiscal and external balance beyond our revised expectations,” he explained.

He too warned: “We could lower the ratings if South Africa’s business and investment climate weakens further, for instance if labour disputes fester. We could also lower the ratings if external imbalances continue to increase, or funding for South Africa’s current account or fiscal deficits becomes more difficult or costly.”

Conversely, he added: “We could raise the ratings if an improvement in investment and economic growth prospects produces stronger government and external debt positions than we currently expect.”

Meanwhile, Fitch Ratings reported that the South African Medium-Term Budget Policy Statement (MTBPS) signalled an intention by the government to tighten fiscal policy despite persistent weak GDP growth. But implementation will be challenging and government projections for public debt were revised up again, underlining the pressures on the public finances.

The rating agency said Minister of Finance Nhlanhla Musa Nene’s first MTBPS on 22 October outlined fiscal policy tightening intended to stabilise the public finances in the face of structurally lower GDP growth and rising debt interest costs. Fitch viewed the government’s commitment to reduce the budget deficit, rather than delaying consolidation again or relying on a rebound in economic growth, as supportive of creditworthiness. However, the central government debt to GDP ratio will continue to rise until 2017/2018, even if the latest fiscal plans are fully implemented.

HE STATE OF SOUTH AFRICA’S economy was top of the agenda at Standard & Poor’s South African Insurance Seminar in Johannesburg last month (OCT), when speakers also warned that one of the big threats to the ongoing success of the insurance markets remains new entrants, bringing overcapacity to the market.

Speaking after the S&P event, Neil Gosrani, Associate Director, said it had been the second time the ratings agency had held a one-day conference in the South African city and ‘was definitely one to repeat’. He added the 140 delegates had included a mix of industry CEOs and financial directors, as well as leading insurers and insurance service providers.

However, in his speech, aptly entitled ‘South Africa Non-Life 2014: Teetering On The Edge’, Mr Gosrani warned the outlook for insurance markets generally was not hugely encouraging, in part thanks to the new entrants.

Looking to the reinsurance market, he said the figures sum it up. New capital providers, he said, have an allocation of 4% of reinsurance markets but at the moment have only used 1% of that. “There is a $50bn increase in capital available,” he said.

I

N THE PAST YEAR NIGERIA’S RISK SECTOR proved its maturity through the diversification of risk players in the industry. Typically, banking and finance is the most recognised sector that incorporates risk in its operations but industry experts say many others are getting involved.

Both the challenges and successes were acknowledged at the second edition of the Nigeria Risk Awards, organised by risk management consultancy company Conrad Clark on 5 November in Lagos.

At the event, Director of Risk Management at The Central Bank Of Nigeria (CBN) and Special Adviser to the Governor, Folakemi Fatogbe, noted: “Risk management is a practical science and art that enhances an institution’s resilience to withstand adverse events and better exploit opportunities in a way that will create value for the institution and, ultimately, the country in which the institutions operate or reside.” She further added that, as a state institution, the central bank has a responsibility to help create an enabling environment and should play a developmental role in the country.

However, this year Nigeria has struggled with its rapidly devaluing currency. The naira fell by 7.5% to the dollar this year and hit a four-year low in the first week of November as the naira traded for 172.78 per US dollar, outside of the central bank’s target of +/- three percentage points from 155 naira to the dollar. The CBN was forced to step in and defend the currency after the fall, by increasing dollar sales to slow its decline.

Ms Fatogbe also went on to cite the dwindling oil price as a risk that has come to the fore this year. “Since the peak in June this year oil has lost 5% of its value,” she said. “The government is dependent on oil for 80% of its revenue and since June we have lost significant income.”

Oil prices have gone from $108 per barrel in June to $82 per barrel in November.

In the given circumstances, she highlighted the need for the country to diversify its economy and also put its efforts into other sectors.

BUDGET MEASURES

Downward revisions in GDP growth forecasts have become persistent in recent years. Meeting the National Development Plan’s longterm target of a minimum of 5% annual GDP growth looks difficult and distant other firms.

Most insurers are reasonably well prepared for the regulatory changes ahead, he stressed, but added that in the future these changes are more likely to favour the larger companies with a broader infrastructure and that is likely to be reflected in the overall make-up of the sector.

Giving his view of the local market, Konrad Reuss, Regional Manager Africa for S&P, said South Africa has a ratings outlook of ten. “The stable outlook reflects our view that current

19

Controlling and then reducing the budget deficit will rely on a combination of tax rises and expenditure cuts relative to the 2014 budget baseline. Tax measures will be introduced to raise at least ZAR12bn (0.3% of GDP) of additional revenue in 2015/2016 and ZAR15bn in 2016/2017, but details will not be disclosed until the 2015 budget.

The government has cut the main budget non-interest expenditure ceiling by ZAR5.7bn in 2014/2015, ZAR10.1bn in 2015/2016 and ZAR15.5bn in 2016/2017. Fitch warned: “Implementation will be challenging in view of strong social pressures and the focus on efficiency savings. Expenditure projections are based on the ambitious assumption of public wages increasing only in line with CPI inflation and a freeze in net headcount. The public wage negotiations currently under way will be an early and important test of the government’s capacity to deliver on its new targets.”

Fitch added: “Downward revisions in GDP growth forecasts have become persistent in recent years. Meeting the National Development Plan’s long-term target of a minimum of 5% annual GDP growth looks difficult and distant.”

Fitch’s next review of South Africa’s sovereign ratings will appear on 12 December and the agency said: “Our Negative Outlook and BBB rating for South Africa recognises the growth and fiscal consolidation challenges the country faces, while acknowledging the economy’s credit strengths and shock absorbing capacity through a floating exchange rate, strong banking system and financing flexibility afforded by a high share of local currency debt with long maturity.”

EXPANSION

Joachim Adenusi, Founder of the Risk Awards and Chief Executive of Conrad Clark, commented that, in the area of risk at least, there has indeed been some expansion by players in the other sectors.

One of the clearest indicators of this was that Adewale Akinwale, Enterprise Risk Officer at the Nigerian Aviation Handling Company, won the the Risk Manager of the Year award.

“It was shock to us to find out that a third dimension out of that sector emerged as a winner,” Mr Adenusi said to Commercial Risk Africa. “So it means that maybe there are lots of people doing good things secretly that we are not aware of; I’m sure very soon we will expand into the health sector and public sector. The day we see the public sector will be my dream.”

Ahmed Tunde Popoola, one of the co-chairs of the Risk Awards, who also doubles up as a judge, told Commercial Risk Africa he was happy that the Risk Manager of the Year award was not won by a banker.

“That is very significant, it is now very clear that safety is a major issue that we need to focus on. Manufacturing is a major issue that we need to focus on.”

In July, a report by investment banking and financial advisory company Renaissance Capital found that the manufacturing sector grew by 22% in 2013 from 14% in the previous year.

An example of where the industry is going can be seen in the award for Young Risk Manager of the Year. The 31-year-old winner of the award, Kunle Odetola Odeleye,

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a Risk Officer at Old Mutual Life, has his eyes set on eventually becoming a risk consultant after achieving a chief executive position.

PROJECT NIGERIA

When it comes to using risk to develop the country, in what she has dubbed ‘Project Nigeria’, Ms Fatogbe said there are some key points that Nigeria can take from the World Bank’s 2014 World Development Report, which notes that taking on risks is necessary to pursue opportunities for development and that the risk of inaction should be avoided.

The report details that to confront risk successfully it is essential to move away from unplanned and ad hoc responses when crises occur to proactive, systematic, and integrated risk management. It also pointed out that governments have a critical role in managing systemic risks, providing an enabling environment for shared action and responsibility, and channelling direct support to vulnerable people.

Giving examples of the state of risk in Nigeria, Ms Fatogbe made mention of the annual Legatum Prosperity Index, in which Nigeria was ranked 125th out of 142 countries and is deemed at being high risk. In a report by the Economist Intelligence Unit, the country was placed at high risk of social unrest alongside Egypt, Iraq and Syria.

“Nigeria is in dire need of risk management,” she said.

Going forward with the country’s development, Nigeria needs around $2.9tn to close its infrastructure gap during the next 30 years. According to a report compiled by the Presidential Project Assessment Committee in 2012, there were 11,886 abandoned projects, which will cost approximately NGN 7.8tn to complete. Costs that, Ms Fatogbe said, could have been avoided if effective risk analyses had taken place.

MAKING PROGRESS

Looking towards the future of risk in Nigeria, Mr Adenusi was keen to see more growth in the telecoms and health sectors. “Clinical risk is going to be one of the biggest things—people are dying needless deaths,” he stated.

His comments on the health sector come at a time that Nigeria is being celebrated internationally for successfully clamping down on Ebola in the country.

After the first case was detected in July, the federal government, Lagos state government and health authorities worked relentlessly to contain the disease and raise awareness around it.

The continued effort to keep Ebola in the minds of the population so they can effectively protect themselves from the virus can be seen across Lagos, from temperature tests in banks to digital campaigns at petrol stations.

The campaign stands as an exemplary example of how to identify, prioritise and also share the action and responsibility a risk poses across all sections of society, as highlighted in the World Development Report.

Mr Adenusi also made mention of the expansion of risk managers in the media. Conflict in the north of the country has not been stymied. Bombings have continued and this year a number of kidnappings have taken place, including the mass kidnapping of more than 200 girls in April by Boko Haram militants.

Many journalists that have gone to some of the areas where the militant groups operate have lost their lives. A special recognition award was given to Channel TV for covering risk reports across the country; and a special remembrance was made for Enenche Akogwu, a journalist for the station who died in Kano while reporting in 2012.

And as Ms Fatogbe made clear: “Terrorism and insecurity [are] not bedmates with foreign direct investment.”

POLITICAL UNCERTAINTY

As the country nears elections in February 2015, some observers are bracing themselves for what could be an unfavourable lead-up to the polls.

There is currently an internal political crisis in the recently formed All Progressives Congress opposition party. With just three months until the election, the party is yet to choose a flag-bearer. A power struggle has ensued between the founding leaders of the party, Mohammadu Buhari and Bola Tinubu, while demands are coming from former People’s Democratic Party (PDP) state governors that defected to the opposition and now want one of their own to run for vice-president. However, the ruling PDP has put President Goodluck Jonathan forward for reelection. Meanwhile, the Boko Haram crisis poses a threat to a smooth-running election and analysts say there may not even be elections held in some parts of the north.

Despite the country’s political uncertainty, Mr Adenusi remains proud of how far the sector has come and wants to encourage good news in Nigeria.

“It is like a little light and it’s shining. We need people to help us to let it shine. People always want to say something negative about Nigeria [but] what about saying something positive, it’s very little but it’s good. We need to burn the flame to make it brighter and brighter,” he said.

■ While the risk world celebrates its achievements, the National Insurance Commission (NAICOM) is becoming more stringent in its efforts to safeguard policyholders and investors in the insurance sector by banning companies with solvency gaps from operating. The allowance for such practises was first made following the 2009 capital market crash, where some companies made huge losses. Five years on and NAICOM commissioner Fola Daniel said it is no longer acceptable for insurers to operate under such circumstances and increasing the sector’s exposure to risk.

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