TRALAC - Trade Law Centre

Higher Returns on Investment in Africa, says World Bank

Friday, 13 June 2003

Source: World Bank

On the surface, the news is grim. Global foreign direct investment is stagnant in some areas and dropping in others. Sub-Saharan Africa, which saw a dramatic drop in FDI inflows for 2002, is no exception. But peeling back the veneer, the picture begins to look a little different.

For starters, the projected two-thirds drop in FDI for sub-Saharan Africa as a whole, from $17 billion in 2001 to $7 billion in 2002, is pretty much explained by several large, one-off transactions in 2001, the global economic and investment slowdown, and geopolitical uncertainty in certain countries. A further breakdown reveals regional variations, particularly in East Africa, where FDI inflows have significantly outpaced global FDI growth since 1991. Projected FDI into the region over the next few years is in line with the average for 1997-2000.

Next comes the fact that according to recent World Bank findings, investors reaped higher returns on their investments in sub-Saharan Africa last year than in any other part of the world.

On top of that, many African governments are becoming increasingly aware of the pivotal role investment climate plays in the global competition for investment, and as a result, are beginning to focus more on areas such as open trade, more transparent laws, privatizations and other investment schemes, and fiscal incentives. The recent push to jumpstart FDI in the region through NEPAD (the New Partnership for Africa’s Development) is also contributing to increased awareness of the need for investor-friendly regulatory frameworks.

"In the near term--the next six to eight months--much will depend on factors that are beyond the control of policymakers in developing countries," says Uri Dadush, one of the authors of the World Bank’s Global Development Finance 2003. "Over the medium term, however, the improvements that developing countries can make in their policy framework and investment climate can be a powerful force for higher growth and more rapid poverty reduction."

Helping to get the climate right is the goal of MIGA’s investment promotion team, which to date has provided technical assistance to nearly 20 sub-Saharan investment promotion agencies. This work takes many forms, including capacity-building and advisory services, and information dissemination, as well as bringing investors face-to-face with business opportunities in developing countries.

Through a special multi-year pilot initiative jointly funded by the Swiss government, MIGA is taking its assistance one step further in four countries-Ghana, Mozambique, Senegal and Tanzania-going beyond capacity building to provide hands-on help in identifying investment opportunities in specific sectors.

For example, in Tanzania late last year, MIGA organized a tourism investment forum that brought together industry movers and shakers and resulted in a number of deals, including the redevelopment of a derelict hotel in Dar es Salaam.

In Mozambique, MIGA is working with the country’s Investment Promotion Center on a number of initiatives, including advisory work to help advance the development of the Beluluane Industrial Park free zone. The agency also conducted an assessment of the country’s apparel sector and is preparing an outreach program to take Mozambican apparel investors to China this year.

"There is undoubtedly an increased awareness among the countries of sub-Saharan Africa that the investment climate matters, especially with more countries now competing for less FDI," says Motomichi Ikawa, executive vice president of MIGA. "This is beginning to translate into improved investment conditions in a number of countries across the continent."

A handful of important trade agreements, allowing investors preferential access to industrialized markets for products exported from sub-Saharan Africa, are also making a difference.

The African Growth and Opportunity Act (AGOA), for example, offers 38 countries in the region duty-free and quota-free US market access for basically all products, through September 2008. The Cotonou Agreement offers tariff and quota-free access for industrial and almost all agricultural products to European Union markets for 76 African, Caribbean, and Pacific countries until the end of 2007. Other agreements, such as Everything But Arms, COMESA, and SADC, offer varying degrees of tariff and customs duty reductions.

A recent report by MIGA and the United Nations Conference on Trade and Development (UNCTAD) found that these trade agreements can have an overall positive impact, and often beyond the sectors traditionally associated with the region.

"The perception that sub-Saharan Africa offers commercial potential only for basic commodities is misguided. Recent trade agreements and liberalization make the region as deserving of attention from the business and investment community as any other part of the world," says David Bridgman, a program manager in MIGA’s investment marketing unit.

Helping to allay potential concerns about political risk is MIGA’s investment guarantees program, which offers coverage against the risks of expropriation, war and civil disturbance, breach of contract, and transfer restriction.

"Africa is MIGA’s top priority," says Ikawa. "The region’s share of our outstanding guarantees portfolio has grown from 7 percent in 1999 to 17 percent today. Similarly, sub-Saharan Africa currently accounts for 30 percent of our technical assistance portfolio."

Since its inception, MIGA has issued 82 contracts of guarantee in 18 sub-Saharan countries, for a total of $805 million in coverage and an additional $4 billion in FDI facilitated. Since July 1, 2002, the agency has issued six contracts worth $116 million for a variety of projects -- ranging from the production and sale of specialty vegetables and flowers, to the provision of telecommunications services, to the development of gas fields -- in Burundi, Mali, Mozambique, and Zambia.

The Multilateral Investment Guarantee Agency (MIGA) was created in 1988 as a member of the World Bank Group to promote foreign direct investment into emerging economies to improve people's lives and reduce poverty. MIGA fulfills this mandate and contributes to development by offering political risk insurance (guarantees) to investors and lenders, and by helping developing countries attract and retain private investment.