East Africa's investment policies hurting foreign inflows into region

12 December 2018

East African countries’ increasing restrictions on foreign investments are being blamed for the decline in foreign inflows into the region.

A new survey by the US-based advisory firm AT Kearney shows that investors are more concerned about the operating environment in emerging markets and prefer putting their money into the US economy due to the country’s large domestic market, improving economic performance and new, lower corporate tax rate.

Foreign direct investment into East Africa — the fastest-growing region on the continent — declined three per cent from the previous year to $7.6 billion, according to the survey.

Regulations

Last year, an Australian mining company, OreCorp, announced plans to review its operations in Tanzania after the country revised its mining laws to enable the government to renegotiate all mining contracts.

The US Agency for International Development says foreign investors seeking to inject capital into the region are facing regulatory and policy restrictions, that have reduced their appetite for putting money into in the six-member economic bloc.

For example, in South Sudan, all businesses established by expatriates must be 31 per cent owned by locals while Tanzania discourages foreign investment in sectors such as telecoms, mining, shipping, fishing and civil aviation by imposing investment ceilings and difficult licensing requirements.

In addition, foreign investors are forced into compulsory actions, including forced joint ventures, mandatory use of local inputs and staff and conditions for hiring foreign staff.

The US agency, in its Investment Climate Assessment report for Tanzania, 2018, says that the government’s requirement for locals to hold at least 30 per cent shareholding in insurance companies may unintentionally slow down or repel foreign investments.

In the Tanzanian mining sector, foreign companies operating in the country are required to preserve 30 per cent shareholding to local citizens while the Electronic and Postal Communications (Licensing) Regulations provides that Content Services Licence for free-to-air broadcasting requires 51 per cent local ownership.

In the insurance sector, all operators are required to set aside a 30 per cent stake for Tanzanian citizens.

Tanzania also enforces mandatory hiring of local staff primarily through compulsory training and succession plans and quotas.

In Kenya, the telecoms industry regulator requires that foreign firms that invest in the sector preserve a 20 per cent shareholding for Kenyans within three years of receiving the licence while the Mining Act, 2016 restricts foreign participation in the mining sector.

The Act reserves the acquisition of mineral rights for Kenyan companies and provides for 60 per cent Kenyan ownership of mineral dealerships and artisanal mining companies.

An attempt by the Kenyan government to introduce a 30 per cent local ownership requirement for every foreign firm that invests in the country through the Companies Act, 2015 flopped after investors cried foul.

The rule required foreign firms to find Kenyan shareholders and sell them 30 per cent shares, a process that was perceived to be costly and time-consuming owing to the due diligence required to secure credible investors.

Kenya also repealed regulations that imposed a 75 per cent foreign ownership limit for firms listed on the Nairobi Securities Exchange, allowing such firms to be 100 per cent foreign-owned.

According to the Kenya Investment Authority (KeInvest), regulatory reforms are an important component of removing the barriers to investments and continuous improvement of the business environment is important for economies seeking to benefit from increased trade and investment.

“To gain investor confidence, governments must improve investment climate,” says KeInvest.

In Rwanda, the government has been more lenient to foreign investors by abolishing statutory limits on foreign ownership or control of local firms.

Local and foreign investors have the right to own and establish business enterprises in the country.

Foreign nationals are allowed to own shares in locally incorporated companies and foreign investors can acquire real estate, though there is a general limit on land ownership.

While local investors can acquire land through leasehold agreements that extend to a maximum of 99 years, foreign investors are restricted to leases of a maximum of 49 years with the possibility of renewal.

In Uganda the government allows 100 per cent foreign-owned businesses, and foreign businesses are allowed to partner with Ugandans without restrictions.

Foreign investors also have the right to establish and directly own businesses in any sector except crop and animal production.

The country’s constitution protects property rights, and foreigners have the right to own property.

Although there are no general restrictions imposed on foreign investors, they cannot establish any businesses unless they get a licence from Uganda Investment Authority.

Uganda’s capital markets are open to foreign investors and there are no restrictions for opening a bank account.

Foreign-owned companies are allowed to trade on the Ugandan Securities Exchange subject to some share issuance requirements.