This article was written by David Parkes (Partner), Barri Mendelsohn (Managing Associate), and Ofei Kwafo-Akoto (Associate).
Although foreign direct investment (FDI) in Africa reached the highest level in a decade in 2013, the region experienced a slowdown in FDI in 2014, with inflows of around US$29 billion as opposed to US$32 billion in the previous year (World Bank Group’s report entitled “Africa’s Pulse”, October 2014, Volume 10). However, with ten of the world’s fifteen fastest growing economies, according to the Ernst & Young Attractiveness Survey, Africa (2014), Africa continues to attract considerable FDI inflows and the latest figures indicate that the continent as a whole is the world’s second most attractive region for FDI.
Foreign investments in Africa have traditionally been focussed on a small number of target jurisdictions, with South Africa and Nigeria being the top destinations. South Africa received nearly a quarter of FDI into the continent over the past seven years with investments of US$10.3 billion in 2013 alone, and is ranked 13th in the global 2014 A.T.Kearney Foreign Direct Investment Confidence Index.
However, new FDI ‘hotspots’ are emerging and Mozambique, another major investment destination, attracted approximately US$7.1 billion (up 30% from 2012 figures) as a result of the growth in its coal and gas markets. Other countries which have received significant FDI include Ghana, Uganda and Zambia.
FDI trends differ significantly between North Africa and sub-Saharan Africa. As a result of ongoing political uncertainty in the region, FDI projects in North Africa declined by almost 30% as a whole for the reported year up to 2014. Other major African economies have also seen a decline in investment, with FDI inflows to Nigeria falling by approximately 20% to US$5.5 billion, primarily due to the sale of petroleum assets by international oil companies such as Chevron and Shell. This is likely to be further impacted due to the fall in the crude oil price and uncertainty around the national elections.
Although investors have typically favoured natural resource assets, there has been a substantial shift away from the extractive industries and the continent is seeing growing investment in other sectors. The top three sectors are technology, media and telecoms, accounting for over 50% of FDI projects for the reported year up to 2014.
The same period also saw retail and consumer products overtake financial services to become the second most attractive sector in Africa. FDI projects in real estate, hospitality and construction have increased whilst the mining and metal industries fell outside the top ten sectors when measured by FDI project numbers.
In terms of future trends, investors highlighted the agricultural sector as having the greatest potential for growth in the next two years. Infrastructure is also viewed as another growth sector in addition to the consumer-facing services, consumer products and telecommunications sectors.
European FDI in Africa
Investors from Europe (in particular the UK) have long shown a strong interest in African assets and in terms of capital investment, Western Europe represented the major source region for African FDI, outstripping Asia Pacific and the Middle East. In fact, the UK is the lead investor into Africa in terms of FDI projects for the period (with 104 FDI projects totalling US$4.6 billion). The key sectors being invested into from the UK are business services, financial services and telecommunications.
FDI projects by Spanish companies saw a major rise, with an increase of 52% whilst German FDI rose by a more modest 9.7%. Due to its cultural and historic ties with Africa, France has been a key investor in the continent and the country was the third most active investor by projects from 2004 up to 2014, with 584 projects.
French President François Hollande has announced plans to reverse the decline in French FDI into Morocco, Tunisia, Algeria and Egypt, and double French investment into Africa and a number of high level delegations have been observed interacting of late.
Chinese FDI in Africa
Africa has long benefited from significant inflows of foreign direct investment from China. It is estimated that more than US$16 billion of China’s portfolio of global FDI is based in Africa, with an increase in FDI from US$392 million in 2005 to US$2.5 billion in 2012 (according to the Chinese Ministry of Commerce). However, China still invests more heavily in Hong Kong, Taiwan and Singapore as well as the US and Western Europe by comparison.
Of course FDI is dwarfed by bilateral trade between Africa and China, which is expected to have surpassed US$200 billion in 2014. The number of African countries with which China had more than US$1 billion in trade is estimated at more than 20.
China has signed agreements with several African governments in order to facilitate investment co-operation and fast-track the inflow of FDI into the continent. For example, in May 2014, China and Nigeria signed a memorandum of understanding which aimed at encouraging and supporting Chinese enterprises to invest in Nigeria through investment promotion events and introducing clients of China-Africa Development Fund to opportunities in Nigeria.
Such agreements have already led to major FDI projects in Africa. For example, Chinese FDI into Tanzania is expected to increase by 50% to US$3 billion, focussing primarily on the energy and mining sectors. Chinese FDI in the country has also been focussed on infrastructure and mining. As a result of this investment, Tanzania aims to become a net exporter of liquefied natural gas (LNG), agricultural produce, minerals and industrial manufactured products. China has also agreed plans to build a new railway line in East Africa by providing financing of approximately US$3.8 billion for the first phase of this project, and in November 2014 China Railway Construction Corp agreed to build a 1,400km railway in Nigeria, which amounts to China’s largest-ever FDI deal outside of the extractive industries.
US FDI in Africa
There was a 20% decline in US FDI projects in Africa up to 2014, however the country remained the second largest investor behind the United Kingdom. However President Obama launched the US$7 billion 'Power Africa’ investment initiative which aims to double access to electricity in six African countries, powering 60 million homes and business through cleaner energy sources such as wind and solar. In August 2014, President Obama pledged an additional US$300 million to help ensure that 30,000 megawatts of additional capacity is provided to the initial set of partner countries, being; Ethiopia, Ghana, Kenya, Liberia, Nigeria and Tanzania. US private companies have also committed a further US$12 billion to support the Power Africa electrification programme.
As potentially the trigger for further significant US interest in Africa, in August 2014, two of the largest private equity firms in the US, The Blackstone Group and The Carlyle Group, separately formed strategic partnerships with Dangote Industries, the African industrial conglomerate, to invest in sub-Saharan Africa.
Blackstone and Dangote Industries will jointly invest up to US$5 billion in energy infrastructure projects over the next five years, with a particular focus on power, transmission and pipeline projects. Dangote Industries' joint investment with Carlyle will focus on the oil and gas sector, as well as the consumer, financial services and agribusiness sectors, for which Carlyle will use its sub-Saharan Africa fund (a US$698 million vehicle that closed in April 2014).
Legal and regulatory highlights
As Africa continues to develop as an investment destination, greater emphasis will be placed on domestic and international regulation seeking to facilitate greater FDI levels whilst at the same time protecting national interests where required. Already there is a trend towards regulating foreign ownership of domestic assets by way of either restricting the percentage and/or control that a foreign investor may have, or by way of mandatory local ownership thresholds, generally, or in key sectors, such as banking and financial services as well as oil and gas.
In South Africa, there is the Broad Based Black Economic Empowerment (BBBEE) regime to principally favour domestic black business ownership and employment, while certain sectors have indigenisation charters, such as the mining industry, where a target of over 25% BBBEE ownership has been set. In Zimbabwe, there is the indigenisation and domestic empowerment legislation in place, particularly for mining and financial services businesses, which has been widely criticised as creating uncertainty for investors.
Regarding foreign ownership of banks in Africa, in Kenya, Central Bank consent is needed for foreign ownership of more than 25% and a “fit and proper person” test is applied while in Nigeria the level is set at 10% for prior approval by the Governor of the Central Bank. In South Africa under the Banks Act, a transaction proposing foreign ownership of 15% or more requires Registrar of Banks approval, and for more than 49%, the Minister of Finance’s consent is needed (“fit and proper” tests also apply).
In a number of jurisdictions in Africa, local content legislation covering principally the oil & gas sector, aims to encourage local ownership, employment and skills transfer. This is most evident in Nigeria with the passing of the Local Content Act in 2010, favouring domestic investors or partners by restricting new investment by foreigners to existing joint ventures or new PSCs.
In Uganda, under The Petroleum (Exploration, Development and Production) Act 2013 which came into force in April 2013, if there are goods and services not available in Uganda and if provided by a foreign company, the supplier must enter into a joint venture with a Ugandan company, with the Ugandan company holding at least 48% in the joint venture. A similar bill has also been proposed in Kenya and amendments to the Mineral and Petroleum Resources Development Act are billed in South Africa together with a Liquid Fuels Charter that applies.
Notwithstanding local content legislation, across the continent, legislation is in place to award the national oil company a stake in exploration assets to seek to ensure that the state benefits from exploitation of its natural resources. For example, in Kenya, the Mining Bill 2014 contains provisions for a free carried interest for the government of 10%. Under the Kenyan Energy Bill being proposed, there are also proposals for State and local interests and royalty sharing. In Nigeria, the NNPC typically has a 20% interest in blocks awarded. The Nigerian Petroleum Industry Bill is set to have wide-ranging changes but this has not been implemented for a number of years while national debate and infighting on the split of revenues and power sharing continues.
Foreign investors in Africa are also regulated by way of additional notification, registration or licensing requirements, such as in Nigeria for foreign capital flows and repatriation of profits under the Foreign Exchange (Monitoring & Miscellaneous Provision) Act No. 17 of 1995. Under the legislation, investments can be made in foreign currency or using imported capital, however information on transactions must be filed with the Central Bank of Nigeria by an authorised dealer within 24 hours who will then issue the investor with a certificate of capital importation. In Angola, there is legislation in place to control foreign ownership of oil & gas interests and all money flows are required to be transacted through domestic banks under Law No.2/12 de Janeiro which came into law in 2012.
Equally, there is also legislation in place across the continent to encourage foreign investment, whether by way of tax breaks or specific legislation to address investor concerns. In Nigeria, a new regime is in place to encourage investment into the infrastructure sector through new fund structures under wider powers of the Nigerian SEC. Nigeria also has the Nigerian Investment Promotion Commission Act 1995 and other measures such as Export Free Zones to encourage international investors, but these are not without their shortcomings.
There are also a range of double-tax treaties with a number of African countries specifically designed for investors to utilise when structuring their investments to promote greater tax efficiency.
However, investors have become increasingly concerned with the development of a "super tax" to apply on capital gains on assets sold in a particular country, even if implemented by way of an offshore sale of a holding company, such as in force in Mozambique. If known, investors could price this into their valuations but if applied arbitrarily this will create uncertainty for investors which ultimately derails investment.
It is important for foreign investors to approach investment into Africa on a country and sector specific basis, identifying the key legislation that is designed to encourage them to invest or to protect the domestic market. What makes Africa a particularly unique investment opportunity is its desire to encourage investment through strategic partnerships with local organisations.