Investing in Africa can offer opportunities for growth and diversification, but it’s essential to approach it with careful consideration and understanding it unique opportunities and challenges.
Many people understands investing as a key concept that involves in grasping key concepts, strategies, and principles related to financial markets, assets, and risk management. But the crucial part on investment is to look deep at funancial literacy where people needs to understand the basic financial terms such as risks of Africa’s investment.
In a look out for investment country, investors must understand does the target country have a foreign investment law?
As part of its due diligence, a foreign investor should verify the local incentives and restrictions on foreign investment and, more importantly, the degree of protection afforded to foreign investments. Of particular relevance in this regard will be the target country’s foreign investment law, if any.
Foreign investment laws typically deal with protection against expropriation, repatriation of profits and capital, tax and customs exemptions, holidays and similar concessions, relief from labour law provisions, licences and authorisations, and dispute resolution.
Not all foreign investment laws provide for an investor-State dispute resolution mechanism. Absent such mechanism, a foreign investor will normally have to claim before the host country’s local courts, which can bring with it potential uncertainty regarding outcome. This is where bilateral investment treaties can come in handy.
Is there a BIT or IPPA between the home country and the target country?
A number of African countries are parties to Bilateral Investment Treaties (BITs) or Investment Promotion and Protection Agreements (IPPAs). For instance, Switzerland is a party to such arrangements with 38 African States3.
BITs/IPPAs aim to promote economic cooperation and favourable conditions for investment by investors of a contracting party in the territory of another contracting party. They generally provide that:
a foreign investment must be accorded fair and equitable treatment and enjoy full (not always) protection and security;
the host country may not treat a foreign investment less favourably than investments from local investors (national treatment) or third states (most favoured nation treatment), except where the host country and a third state are parties to a free trade area, customs union, common market or double tax treaty;
a foreign investment must not be impaired with unreasonable or discriminatory measures;
the host country must grant free transfers of payments relating to investments (e.g. returns, repayment of loans, proceeds of liquidation of investment) and transfers of currency in freely convertible currency; and
a foreign investment must not be subjected, directly or indirectly, to any measures of expropriation, nationalisation or other measures having the same effect (e.g. creeping expropriation), except in limited cases, in the public interest, on a non-discriminatory basis, under a due process of law, and provided that prompt, effective and adequate compensation is paid.
A distinctive and paramount feature of some BITs/IPPAs will be an investor-State dispute resolution mechanism under which a foreign investor can force the host country to go to arbitration before the International Centre for the Settlement of Investment Disputes (ICSID) or ad-hoc arbitration under the United Nations Commission for International Trade Law (UNCITRAL) Arbitration Rules.
The astute foreign investor will look for exceptions to the above principles, including the exclusion of business sectors, currency transfers potentially being subject to the approval of repayment plans by the host country’s central bank, and staggered transfers where there could be an effect on the host country’s external payments.
Is the target country a WTO member?
The World Trade Organization (WTO) aims to reduce obstacles to international trade. Its guiding principles include the pursuit of open borders, non-discriminatory treatment (national treatment and most favoured nation treatment), and discouraging unfair practices (e.g. dumping, subsidies). The WTO Agreements go further than BITs and FTAs, but do not provide for investor-state arbitration.
WTO members recognise that investment measures can have trade-restrictive and distorting effects. In this respect, the Agreement on Trade-Related Investment Measures (TRIMS Agreement), which applies to trade in goods only, provides that no member shall apply any TRIM that is inconsistent with GATT Art. III (National Treatment) or XI (Quantitative Restrictions) (e.g. local content requirements). Such rules can prove useful to a foreign investor where a host country contemplates restrictions on foreign participation or preferences for local players or the procurement of supplies in the local market.
Most African countries are WTO members. Algeria, Comoros, Equatorial Guinea, Ethiopia, Libya, Sao Tome and Principe, Somalia, South-Sudan and Sudan have observer status only. Eritrea is not a WTO member.
By Sam Mchunu