South Africa has become the principal launching point for direct investment in other African countries, driven by transcontinental expansion by major parastatals and private corporations, including Eskom, Transnet, Spoornet, MTN, Vodacom and Standard Bank. [1] Foreign corporations also tend to use South African subsidiaries to venture into the rest of Africa – a notable example being the local subsidiary of Munich Re, the European insurance firm, now the largest South African investor in Mauritius. [2]

South African direct investment in the rest of Africa amounted to US$8.73bn (R59.1bn) in 2006, growing to US$11.98bn (R84.4bn) by 2007 – despite a US$2bn contraction in worldwide foreign direct investment outflows from South Africa over the same period [3]. By 2009, the United Nations Conference on Trade and Development (UNCTAD) reported 2 250 South African projects in the rest of Africa. [4] Direct investment in the rest of Africa now amounts to over 20% of all South African investment abroad, [5] with the most significant target markets being Zimbabwe, Mozambique, Mauritius, Botswana, Morocco, Ghana, Mali, Nigeria and the Democratic Republic of Congo. [6] Between 2005 and 2010, reports indicate that most South African investment on the continent continues to be market-seeking, driven by mergers and acquisitions rather than greenfield projects, focusing on natural resources, infrastructure, telecommunications, manufacturing and financial services. [7]

Moving into other African markets gives investors particular exposure to political risk – government actions which restrict access to assets or reduce investment value – sch as war, revolution, imposed currency export restrictions, seizure of assets etc. [8] Such risks pose at least three major challenges to insurers: (1) the insured events are not always entirely out of control of the insured party; (2) there is greater scope for moral hazard as the insured party has a perverse incentive to engage in riskier behaviour vis-à-vis the host country; and (3) the nature of the insurance cover entails proportionately high risk assessment, contracting, monitoring and claims management costs. [9]

Investors have four key options to mitigate the costs of political events in destination markets: (1) relying on South African government protection and preferential dispute settlement mechanisms through a bilateral investment treaty (BIT) currently in force between South Africa and the foreign country; (2) negotiating political risk cover with either private insurers or the parastatal Export Credit Insurance Corporation; (3) negotiating finite risk cover with their insurer of choice; and/or (4) transferring risk though a ‘cell captive’ mechanism.

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