By Isaac Munyuki
In November 2020, the Zimbabwean government launched the National Development Strategy 1: 2021 – 2025 (NDS1), a five-year economic plan. The NDS1 succeeded the Transitional Stabilisation Programme (Oct 2018 – Dec 2020) (TSP). Like its predecessor, the NDS1 promises to, among others, reduce fiscal risks emanating from state-owned entities (SOEs) through expediting SOE reforms by way of restructurings, privatisation and various other methods.
While the NDS1 is silent on the actual SOEs targeted for privatisation, the TSP identified these SOEs to include, without limitation, TelOne, NetOne, Petrotrade, Agribank and POSB. Agribank was recently restructured into AFC Holdings Ltd, a move which effectively removes it as a candidate for privatisation.
Despite the privatisation programme having been launched in 2018 through the TSP and restated by the NDS1, there has not been any takers yet. The response to government’s privatisation programme has been underwhelming, as evidenced by the lack of mergers and acquisitions activity in respect of the targeted SOEs.
The challenges impacting on Zimbabwe’s ability to attract inbound investment are varied. Regulatory uncertainty remains a challenge. Corruption, the currency crisis and questions around the rule of law compound this issue.
Yet, others have opined, correctly in my view, that certain of these challenges are not unique to Zimbabwe and do not necessarily deter investors as investors in Africa plan around these challenges in advance. Further that, these challenges are part and parcel of investment.
So, why are investors avoiding these assets?
The scope of what needs discussing is wide. However, in this article, I shall confine myself to mergers and acquisitions in respect of SOE targets, particularly the deleterious effect that corruption may conceivably have on these mergers and acquisitions from a legal perspective. Hopefully, some of the issues can be taken up by others or on another occasion.
The various debates and coverage on corruption in the country have generally missed the connection between corruption risk and inbound investment. Consequently, the negative impact of corruption on mergers and acquisitions investment and in the broader foreign direct investment rubric continues to be understated or trivialised.
In the past years, some investor countries put in place both domestic and foreign anti-corruption legislation to police corporate conduct in the international market. The United States of America promulgated the U.S. Foreign Corrupt Practices Act (FCPA), and the United Kingdom enacted the UK Bribery Act (UKBA). Both discourage US and UK investors, respectively, from investing in jurisdictions with high corruption risks.
Various other countries have adopted numerous anti-corruption laws in one form or the other but for present purposes, focus is limited to the US and the UK as these countries have for the longest time been the top acquirer countries for mergers and acquisitions in Africa.
The FCPA and the UKBA are widely regarded as the toughest anti-corruption laws in the world with far reaching implications including for persons who are not ordinarily resident in the US and the UK. The extraterritorial reach of the FCPA and the UKBA means that a US or UK acquiring company can be held liable for the corrupt acts of the acquired company in certain circumstances.
Based on Mergermarket data as well as data by Refinitiv and other analysts, UK and US investors are the most active acquirers in Africa. In the past three years, UK and US investors initiated the largest number of acquisitive deals in Africa, including in terms of deal value. UK and US investors have constantly accounted for over 60% of the deals in Sub-Saharan Africa with Mauritius, Canada, Germany and France being the other significant initiators of deals in Sub-Saharan Africa.
On the global scale, and according to Statista, the US was the most active acquiring nation worldwide for mergers and acquisitions in 2018. US investors initiated over 4700 deals in 2018, accounting for almost 50 percent of the total cross-border deals in that year. The UK and France were next with 775 and 448 deals, respectively. In 2019, US investors were also the most active acquires worldwide followed by the UK. This trend is likely to continue in the post-COVID19 economic reconstruction.
The trends in mergers and acquisitions activity indicate that the most acquisitive nations are subject to the toughest anti-corruption laws and standards in the world. This is a serious challenge for countries with perceived high corruption risks and for acquisitions in the public sector as the chances of an acquirer inheriting corruption risks through a merger or an acquisition are high.
Grand anti-corruption due diligence processes could uncover corruption and other compliance risks before an acquisition but eliminating the risks and remedying violations post the transaction could be a challenge. This especially in the SOE space, a space that is largely dominated by political fixers and strong frontmen who will not be easily dismantled. Issues around corruption therefore make SOE targets unattractive to international acquisitive investors as the exposure to corruption risk is high as compared to non-SOE targets.
Privatisation: looking elsewhere
Despite Zimbabwe’s slow privatisation drive, elsewhere, Angola, which is also implementing a similar privatisation programme appears to have been more successful, having sold more than 30 parastatals through its programme which commenced in 2019. While the variables are many, Angola’s anti-corruption crusade appears to have been robust and has been supported by numerous legislative reforms.
The Angola approach underscores the importance of dismantling corruption and creating conditions in the commercial environment that build the necessary confidence and provide comfort to investors of SOE targets.
Issues around corruption are a matter of legal compliance and cannot be ignored without harsh legal penalties. As such, if these issues are not dealt with, market sentiment will likely remain negative for the targeted SOEs and acquisition activity will remain stunted.
By way of analogy, and as is common cause, the primary concerns of a person engaged in criminal activity are detection (the ability of the relevant authorities to detect the crime), prosecution (the capacity of the prosecuting authorities to prosecute such crime) and sentence (the harshness of the sentence to be imposed upon successful prosecution). If one of these elements can be disregarded, criminal activity will likely take place. It is the same with corruption. Therefore, a failure to acknowledge corruption risk and to act thereon could negatively impact the privatisation project.
Munyuki Isaac is a Corporate & Commercial lawyer and the views expressed in this note are his personal views which do not constitute legal or professional advice. For feedback, Munyuki Isaac can be contacted at firstname.lastname@example.org, Twitter: @Munyuki_Isaac