Africa
KPMG Opinion on regulatory

Africa regulatory environment 

The recent lack of growth in the developed markets coupled with perceived improvements in political and macroeconomic stability, is leading to increasing interest by foreign companies and institutions in Africa as an investment destination.

Legislation in Africa

The recent lack of growth in the developed markets coupled with perceived improvements in political and macroeconomic stability, policy certainty and legal systems in many African countries, as well as Africa’s growing middle class and rise in consumption is leading to increasing interest by foreign companies and institutions in Africa as an investment destination.

Added to this, the US Government is looking to strengthen its commercial ties with Africa through its “Power Africa” and “Investing in Africa Trade for our Common Future” initiatives and its “Doing Business in Africa” campaign.

Is this perceived improvement in political and macroeconomic stability, policy certainty and legal systems in African countries really an actuality and, more importantly, is policy uncertainty and poor legal systems likely to curb foreign direct investment into Africa?

Africa did not score well in the Frazer Institute Survey of Mining Companies 2013 Policy Perception Index which measures the overall policy attractiveness of 112 jurisdictions globally. The top five African countries and their ratings were Botswana (25/112), Namibia (34/112), Ghana (43/112), Burkina Faso (46/112) and Eritrea (52/112). South Africa rated 64th and Nigeria 75th, well ahead of the lowest three ranking African countries, namely, Angola (108/112), Zimbabwe (106/112) and Ivory Coast (103/112).

Policy factors examined include uncertainty concerning the administration of current regulations, environmental regulations, regulatory duplication, the legal system and taxation regime, uncertainty concerning protected areas and disputed land claims, infrastructure, socioeconomic and community development conditions, trade barriers, political stability, labour regulations, quality of the geological database, security, and labour and skills availability.

While Botswana achieved the highest ranking in Africa and had high scores in most areas, it should be noted that Botswana’s ranking dropped from 17th of 96 jurisdictions in 2012. The deterioration in Botswana’s ranking is a result of lower ratings in nearly all policy factors compared to the prior year, particularly, regulatory duplication and inconsistencies, uncertainty concerning the administration, interpretation or enforcement of existing regulations, taxation regime and uncertainty concerning disputed land claims.

 

In addition, Botswana scored notably lower ratings with regards to the quality of its geological database, infrastructure, trade barriers and availability of labour/skills.

In terms of the 2014 Corruption Perceptions Index prepared by Transparency International, which measures the corruptness of one hundred and seventy five (175) jurisdictions globally, Botswana is perceived to be the least corrupt country in Africa. Botswana ranked 31st with a score of 63/100 (where 0 is very corrupt and 100 is very clean), followed by Mauritius (47th with a score of 54/100), jointly Lesotho, Namibia and Rwanda (55th with scores of 49/100 each) and Ghana (61st with a score of 48/100).

According to the United Nations Conference on Trade and Development (“UNCTAD”), subsequent to the 2012 slump, global foreign direct investment (“FDI”) increased by 9% in 2013 to US$1.45 trillion. UNCTAD has projected that FDI flows should continue to rise over the next few years, however, it cautions that weaknesses in some emerging markets and risks relating to policy uncertainty and regional instability could negatively impact on the expected FDI upturn.

Despite Africa’s far from perfect scores in both the Frazer Institute Survey of Mining Companies 2013’s Policy Perception Index and the 2013 Corruption Perceptions Index, total FDI flows into Africa increased by 4% to approximately US$57 billion in 2013 according to the 2014 World Investment Report. However, it should be noted that FDI inflows to Africa are being sustained by increasing intra-African investments mainly in the manufacturing and services industries, led by South African, Kenyan and Nigerian transnational corporations.

In addition, the main beneficiaries of the increased FDI flows were Ethiopia and Kenya in East Africa and South Africa and Mozambique in Southern Africa. FDI flows to North, Central and West Africa declined by 7%, 18% and 14%, respectively, which decreases are partly due to political and security uncertainties.

The decline in FDI flows to North Africa is mainly a result of the political instability in Egypt which resulted in a decrease of 19% in FDI flows to that country. The decrease in FDI flows to West Africa is largely due to decreasing flows to Nigeria resulting from uncertainties over the petroleum industry bill and security issues and Central Africa has been negatively impacted by the political upheaval in the Central African Republic together with on-going armed conflict in the Democratic Republic of the Congo.

 

The impact of the Ebola virus on FDI flows to West Africa during 2014 has yet to be determined.

The UNCTAD has also revealed that although the share of the extractive industry in the cumulative value of announced cross-border greenfields projects is still significant for Africa, at 26%, the extractive industries share of the total number of projects in Africa has dropped to 8%. 90% of the announced greenfields investments in Africa in 2013 related to manufacturing and services projects. This is in line with a world-wide reduction in investment into the extractive industries.

Mining companies have been, and continue to, face difficulties resulting from commodity price fluctuations, global economic concerns and supply/demand imbalances.

According to the October/November 2013 ResourceStocks World Risk Survey, there has been a significant shift in investment focus to the developing countries, with Mexico, Botswana, Chile, Peru, Burkina Faso, Brazil and Namibia all featuring in the top ten, despite these countries scoring generally lower scores than their peers in the developed world. This shift is attributed to the prospect of greater returns due to a lower cost base in terms of labour and the lack of red tape in these jurisdictions.

Based on the above it would seem that while many jurisdictions in Africa still have some way to go in order to achieve rankings that are in line with their peers in the developed countries, others are achieving better rankings. It is apparent that poorer rankings in certain African jurisdictions, particularly with regards to political and policy uncertainty, have deterred FDI flows to those regions.

It does seem equally clear, however, that the higher levels of growth and increasing GDP, populations and consumption in many African countries is, and will continue to, attract increasing FDI inflows, both regional and foreign, into Africa, particularly, in rapidly growing economies such as those in Zambia, Nigeria, Ghana and Uganda.

Those African countries that are making progress in creating a more investment friendly environment resulting in increased FDI inflows could assist other African jurisdictions, who are still working on improving their policies and regulations, by collaborating with them and sharing best practices.

Contact

Robbie Cheadle
Associate Director
Tel: +27 (0)82 718 4592
robbie.cheadle@kpmg.co.za