This article was written by David Parkes, Barri Mendelsohn & Ofei Kwafo-Akoto
Foreign direct investment (FDI) in Africa has reached the highest level in a decade and is set to reach an estimated USD$80b this year. With ten of the world’s fifteen fastest growing economies, it is no wonder that Africa continues to attract considerable FDI inflows and this positive trend is expected to continue.
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 fifth of FDI into the continent last year, with investments of US$10.3b. However, new FDI ‘hotspots’ are emerging and Mozambique, another major investment destination, attracted approximately US$7.1b (up 30% from 2012 figures) as a result of the growth in its coal and gas markets. Other countries which have received significant foreign investment 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. Other major African economies have also seen a decline in investment, with FDI inflows to Nigeria falling by approximately 20% to US$5.5b, primarily due to the sale of petroleum assets by international oil companies such as Chevron and Shell.
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 in 2013.
Last year 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 have 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 2013. In fact, the UK is the lead investor into Africa in terms of FDI projects 2013 (with 104 FDI projects totalling US$4.6b). 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 in 2013, 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 between 2004 and 2013, with 584 projects.
In December 2013, the French President François Hollande announced plans to reverse the decline in French FDI into Morocco, Tunisia, Algeria and Egypt, and double French investment into Africa.
Chinese FDI in Africa
Africa has long benefited from significant inflows of foreign direct investment from China. Currently, more than US$16b of China’s portfolio of global FDI is based in Africa, with an increase in FDI from US$392m in 2005 to US$2.5b in 2012 (according to the Chinese Ministry of Commerce). Of course trade is much larger than FDI and the figures exclude usual credit lines.
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. Such agreements have already led to major FDI projects in Africa. For example, Chinese FDI into Tanzania is expected to increase by 50% this year to US$3b, 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$3.8b for the first phase of this project.
US FDI in Africa
There was a 20% decline in US FDI projects in Africa last year, although the country remained the second largest investor behind the United Kingdom in 2013. However, in 2013, President Obama launched the US$7b ‘Power Africa’ investment initiative As a potential 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.
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.
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.
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.
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.
The latest issue of our market leading ‘Made in Africa’ newsletter looks at some of these regulations and the wider issues surrounding FDI in Africa and is available here together with access to past issues.
- David Eliakim, Partner, Australia
- Jane Jin, Counsel, China
- Barri Mendelsohn, Managing Associate, Europe
- David Parkes, Partner, Europe
- Paul Schroder, Partner, Australia
- Raymond Wong, Partner, Hong Kong