Many African countries are introducing far-reaching reforms in an effort to attract investment in diversified sectors. Barriers to trade across the continent have long hampered potential FDI inflows, with complex regulations and tax practices offputting to cautious investors.
A total of 35 sub-Saharan African countries applied at least one regulatory reform in the 12 months to June 2014 aimed at securing foreign investment. These economies have been responsible for 75 reforms overall and clearly had a positive effect on their standings in international investment freedom rankings. Benin, the Democratic Republic of Congo, Côte d’Ivoire, Senegal and Togo all appear in the top 10 most improved countries in terms of simplifying business regulation, according to the World Bank's Doing Business 2015 report.
Even with the slowdown in African growth, which the World Bank forecasts will be about 4% in 2015, investors are still attracted to the wide range of investment opportunities found within Africa, especially when sub-Saharan Africa is on course to report the second best regional growth rate worldwide this year.
Rwanda has shown a willingness to undertake economic reform that would improve regional competitiveness and boost its ease of doing business. Earlier in 2015 the country adopted a revamped framework for the funding of projects through private investment, as well as significantly reducing the time it takes to register a new company, from two weeks to mere hours online. Rwanda also has the distinction of being the country with the most financial reforms implemented in Africa since 2005, followed by Mauritius and Sierra Leone.
According to global investment monitor fDi Markets, total global greenfield FDI reported lacklustre growth of only 1% in 2014. However, Africa managed to dramatically outperform the global average with a 65% increase in capital investment in 2014, to reach a total of $87bn.
The second largest sector in terms of capital investment into Africa was real estate, worth $12bn in 2014 for a total of 23 projects. The importance of streamlining the application process for construction and building permits, which both Ghana and Rwanda have recently achieved, cannot be understated.
Investor concerns must be addressed for FDI to reach its full potential in Africa. From government-backed infrastructure investment to a comprehensive political agreement around reducing corruption, there are still issues to be tackled before hesitant investors buy in.
Some 55% of respondents to EY’s 2015 Africa attractiveness survey named the unstable political environment as the single largest barrier to investment, compared with the combined 17% of people who named issues around regulations and tax policies.
Regulatory reforms should undergo vigorous scrutiny and a comprehensive business consultation process before being introduced, as rushed legislation has the potential to do more harm than good. South Africa’s Promotion and Protection of Investment Bill is a prime example of how good intentions can put up extra obstacles to FDI. The bill was originally intended to establish a balance between investors’ rights and obligations, but concerns were raised by foreign investors over the expropriation and dispute settlement provisions it contained.
Although South Africa received the greatest number of FDI projects in 2014, the country has somewhat fallen from favour with investors: capital investment fell by 31% in 2014 to $3.8bn. While Egypt and Morocco are experiencing booming FDI, both in terms of capital investment and project numbers, South Africa is at risk of falling behind continental competitors if this trend continues.
Morocco has arguably benefited the most from liberalising barriers to FDI, climbing from the 14th largest African FDI destination in 2006 to third place in 2014, driven by improvements such as reducing the time it takes to incorporate a business to less than a week, and by its burgeoning aeronautics industry.
However, despite continent-wide reforms, there are still barriers to overcome. No matter how welcoming the investment climate may be, it is unlikely that investors will choose to enter a region where their capital is at risk, as highlighted by the recent political turbulence in Burkina Faso.