South Africa: African Countries Need Clear Regulatory Frameworks To Attract FDI

Last Updated: 9 January 2012
Article by Greg Nott

Enabling regulatory frameworks across Africa are vital for the continent to attract more foreign direct investment (FDI). 

As both developed and emerging economies seek new markets for growth, there is much opportunity for the continent to attract investment flows. 

One area in which Africa can attract more investment is the renewable energy space.  While China has established itself as a dominant player in the manufacture of components of solar energy plants, Africa could compete by attracting FDI in this area.

"Backed by lavish government support, tax breaks and incentives, China is now responsible for half of world production of solar energy components," says Werksmans Attorneys director, Greg Nott.

He says countries such as South Africa have established enabling legislation, including the Integrated Resource Plan to attract investment into the green economy, but politicians also needed to send the right message about the country embracing FDI.

Nott continues: "Pre-conditions, such as BEE and localisation requirements, must be consistently applied. Politicians, labour and business need to send a unified message that they want to attract more FDI. Investors want a clear and consistent framework in which to work."

Many African countries have implemented regulatory reforms to specifically attract FDI.  Out of the 15 SADC member states, for example, 12 have a specific law governing private investment, and/or foreign investment or have established an investment promotion agency. 

Countries such as South Africa, Lesotho and Botswana have no specific FDI legislation, but have liberal investment regimes.  FDI legislation is under review in Namibia, Seychelles and Zimbabwe, while Botswana's Industrial Development Act, which deals with licensing, is also under review.

"African countries are taking FDI seriously and looking to promote investment where possible. But overcoming negative perceptions about investing on the continent is also vital to attracting more investment in future," says Nott.

According to a recent survey by Ernst & Young capital inflows into the continent are expected to reach US$150 billion by 2015, yet Africa still attracts less than 5% of global FDI projects.

Nott says with Africa forecast to grow at rates above 5% and as the continent makes strong progress towards political reform, regulatory and economic stability and social development, investors will increasingly look to invest in a range of industries. 

But he points out that investors emphasise stability - both political and regulatory – as a major consideration when making investment decisions. 

"Investors want to know that no matter whether governments rise or fall, their investments will be protected by legal frameworks that have the backing of the courts and that there is a genuine commitment to the rule of law."

With each of Africa's 54 countries having different legal frameworks in place, bi-lateral investment treaties have proved successful in setting the ground rules for attracting FDI. 

Most of the major African countries, including Botswana, Nigeria, and South Africa, have bi-lateral treaties which set up specific conditions for investors in the host country.  For example, some treaties set the rules for how disputes will be arbitrated, while others determine issues regarding tax incentives, double taxation, local procurement and trade.

As Africa seeks to attract FDI beyond mining and extractive industries, it will also need to look to broader economic reforms. "Reforms are required to meet the demands on Africa's growing economy and to ward off the inevitable strains which will be placed on African countries as a consequence of the international economic woes experienced by some of its main trading partners. South Africa's Minister of Finance ended 2011 with a hopeful note for those wanting to invest in South Africa. He announced that within a year to a year and half a clear, legal regulatory framework will be in place so as to provide foreign and local business a clear picture of how to go about investing in South Africa. No doubt this necessary initiative wil be welcomed by commentators and businesses alike. In addition we will no doubt see moves afoot in other African states which are in need of such regulatory reform." Concludes Nott. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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