Africa remains an alluring and challenging destination for foreign investors. African governments continuously grapple to create enabling environments through the adoption of attractive investment strategies, which are necessary to ensure a steady flow of foreign direct investment (FDI). To provide a snapshot of the approach being taken across the continent, this article takes a comparative look at the investment regimes adopted by five African countries, namely: Nigeria, Kenya, Zambia, Uganda and Cameroon, looking at factors that are arguably most pertinent to investors, such as the ease of business startup, investor incentives, currency, political and enforcement risk, and the trends being seen in these countries.
Typically, investors will incorporate a local entity, usually a limited liability company (LLC) and will seek to do so in the shortest time possible. According to the 2018 Doing Business ranking, Zambia and Uganda lead the pack with an impressive five days typically required to incorporate, while Cameroon is at the tail end with a typical duration of 16 days. Alternatively, investors may opt to register a branch of a foreign company. However, investors are not always unrestricted; for instance, Cameroon requires that branches of foreign companies are converted to local LLCs within two years of registration of the foreign branch.
Each of the reference countries provides investment incentives to varying degrees, often sector-dependent. Incentives generally include: tax concessions; free trade zones; industrial parks; waivers on license fees; and unrestricted repatriation of funds. These incentives substantially account for the success in attracting investors to the respective countries that offer them. A noteworthy example from our reference countries would be the tax incentives offered by Nigeria, which has attracted favourable comment from international investors such as venture capitalists.
Foreign exchange risk
Apart from Cameroon, which operates a fixed exchange rate for euros and a floating exchange rate for US dollars, all the other reference countries operate a floating/flexible exchange rate and all suffer from currency volatility; a particularly deleterious scenario for commodity-dependent states. For example, Nigeria and Zambia have both suffered weak currencies in the wake of the fall in crude oil prices in 2015-2016 and copper prices in 2014-2015. To mitigate the risk, Nigeria adopted a managed floating exchange regime, while Zambia maintained a free-floating exchange regime. The central banks of both countries regularly intervene to ensure stability of their respective currencies. For Nigeria, the interventions have had mixed success, characterised by forex shortages in the main market and recourse to the parallel market, which is reflective of the market forces. Inevitably, this has hurt investors whose payments (ie debt and equity) are provided in major world currencies. Zambia has been fortunate that the rise in the copper price has strengthened the kwacha.
The shadow of political risk haunts the countries as a whole. Elections are generally a fragile period, often accompanied by looming threats of violence. Nigeria, Uganda and Zambia have experienced these issues in their past elections and Cameroon is currently experiencing these issues in relation to its forthcoming 2018 election, which has stirred dissent among the anglophone minority, who feel marginalised.
This year, the Kenyan Supreme Court nullified its presidential election with the follow-up election being marred by pockets of violence and subject to a further petition of validity. The nullification of the first election resulted in a massive bear run on the Nairobi Securities Exchange. The overall effect of these uncertainties in countries is dampened investor appetite, with some investors adopting a ‘wait-and-see’ approach. By way of example, the managing partner of PG Bison, a furniture and construction supplier, recently informed the media that projects were being delayed in the construction industry until the political situation had settled down.
Beyond the politics of elections, security threats posed by divergent groups continue to threaten investor confidence. This is evidenced, for example, by Al Shabaab’s attacks in Kenya and the Boko Haram insurgency in Nigeria and to a lesser extent the northern region of Cameroon. The activities of the insurgents target major infrastructure assets such as pipelines and facility plants, drawing negative global media attention and scaring away potential investors.
Against the backdrop of risks, investors will look for recourse in robust dispute resolution mechanisms. These are largely uniform across the reference countries, which are all parties to the New York Convention.
The reference countries continue to undertake reforms to be responsive to investor concerns. In Kenya, the Mining Act 2016 was recently enacted to provide a predictable and transparent legal regime for the extractives industry. Cameroon has also enacted a Mining Code, which grants prospective or existing license holders a number of tax and customs incentives. In Uganda, there are ongoing amendments to the land laws to expedite the acquisition of land for government-backed public-private partnerships. Similarly, Ugandan petroleum exploration licences and production-sharing agreements which were previously issued on ad hoc, first come first served basis, are now issued through a competitive bidding process. Nigeria, for its part, has established the Presidential Enabling Business Environment Council to attempt to improve the country’s ‘ease of doing business’ ranking within two years. Meanwhile, Zambia is implementing its Seventh National Development Plan (2017-2021) with a focus on inter alia infrastructure development. Interestingly, the Zambian 2018 Budget Address revealed that the government will remove the five-year tax holidays currently provided to foreign investors and replace this with accelerated depreciation for capital expenditures by qualifying investments in priority sectors.
It is evident that there is concerted effort by each of the reference countries to improve their respective investment climates, albeit using different approaches. The legal anchoring of investor incentives and introduction of clear regulations pertaining to doing business are positive indicators of this.
Each of the countries is desirous of continued economic growth and conscious of the competition for FDI, and they therefore have a strong incentive to continue with their reform efforts.
Theresa Emeifeogwu, Olaniwun Ajayi LP, Nigeria; Jesutofunmi Olabenjo, Aluko & Oyebode, Nigeria; Matthew Magare, Magare Advocates, Kenya; Peter Kamero, Hamilton Harrison & Mathews Advocates, Kenya; Pauline S. Murari,, Mukumbya Musoke Advocates, Uganda; Hyacinthe Fansi,Ngassam Fansi & Mouafo, Cameroon; and Misozi Hope, Masengu, Mwenye & Mwitwa – Advocates, Zambia
*The authors are secondees under the International Lawyers for Africa Flagship Program 2017 and are grateful for the assistance of Andrew Buisson and Chloe Taylor of Norton Rose Fulbright with the preparation of this article