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Zambezi River Basin Series: No.12, Poverty

    Efforts to attract foreign direct investment to the Southern African Development Community (SADC) have not been easy since most countries are rated in the high-risk category. The economic outlook has not been encouraged by military conflicts in Angola and the Democratic Republic of Congo (DRC) which still drive away investors due to instability.

    Add to that, some countries register depressing economic indicators while others have failed to guarantee investors, security for their money. The investment framework for selected countries in the SADC region shows a wide variety.

    In the DRC, there is concern over the security situation and how the government will handle the issue of contractual, as well as new, agreements. The provision of 100 percent tax exemptions has been suspended by government until a review of the taxation system is conducted, creating uncertainty about the investment climate. The economic outlook in the vast central African country is characterised by high external debt and escalating levels of inflation.

    Angola, where opportunities exist in diamond mining, oil and gas exploration and large-scale commercial fishing, fiscal incentives are offered to companies who give preferential treatment to local job seekers and provide them with professional skills. For mining companies, a tax is levied on the basis of the surface area under mining and a royalty of three to 10 percent is paid by government on the gross value of minerals produced.

    However, these incentives count for nothing as the two-decade-old civil war has devastated crucial infrastructure and continues to scare away investors, except in the oil-reach Cabinda enclave. Despite many efforts, peace has remained elusive in this country richly endowed with natural resources.

    Analysts say the situation in the DRC and Angola has impacted negatively on neighbouring states. Apart from the fear for direct military attacks, such as occurred in parts of Namibia and Zambia bordering with Angola, refugees fleeing into the region are straining the infrastructure and resources of host countries.

    In Tanzania, private sector investment is the driving force in economic development with priority areas being petroleum and mining exploration, agriculture and livestock development, construction and manufacturing, high technology business, tourism and transport.

    The Tanzania Investment Centre outlines priority areas and gives investment incentives and extensive guarantees while the private sector gives an ample forum to discuss matters affecting the business environment. There are special incentives for mining and oil exploration, internal and external trade has been liberalized and foreign exchange controls have been eliminated.

    However, the unstable political situation in the neighbouring Great Lakes countries of DRC, Uganda, Burundi and Rwanda has worked against some of these efforts, resulting in reduced foreign direct investment (FDI), as would have been expected in a peaceful country.

    According to press reports, Swaziland has failed to attract FDI into the country, with investors preferring South Africa, the kingdom’s neighbour. The Swaziland Central Bank’s 1998/1999 annual report said the slowdown in the inflow of FDI has led to a decline in the country’s economic growth from 3.7 percent in 1997 to 2.3 percent in 1998.

   “Viewed against an estimated population growth of 2.7 percent per annum, this implies further worsening of the standard of living of the average Swazi people,” the Central Bank said.

    Vast potential exists in Mozambique for investment in the development and rehabilitation of infrastructure. Opportunities have also been identified in agriculture, fishing, forestry, tourism, mining and manufacturing. The law gives legal protection to property used for investment and allows for repatriation of capital invested upon divestment. Foreign investors may operate both local and foreign accounts.

    Different tax rates are given to different sectors, foreign investors are allowed to repatriate capital and tax incentives are offered to new companies and those facing closure. Mozambican products, like those in other countries in southern Africa, are eligible for duty free export to the European Union (EU) and other industrialized countries under the Lomé Convention and the General System of Preferences (GSP) respectively. However, Lomé expires soon and is currently being negotiated. The Mozambique Investment Promotion Centre, which processes business applications, helps source for suitable partners.

    In the 1998/99 fiscal year, Mozambique was the only country in the region that registered a double-digit economic growth rate (11.6 percent) while it has also enjoyed declining inflation in the last few years. Consequently, it has managed to attract significant foreign direct investment since it emerged from a two-decade civil war that ended in 1992.

    Available figures show a marked recovery in SADC’s mining sector in the 1990s with South African companies venturing into the region as some countries shed off less-performing state enterprises, under wide-ranging economic reforms. This investment wave is beginning to be felt in the value-added sector of mineral-processing, although falling world prices are dampening hopes in the industry.

    Despite falling prices, there is increased expenditure in exploration and advanced feasibility work translating into new project developments in countries like Tanzania and Zimbabwe. Investor activity is wide-ranging including Canadian exploration specialists and South Africa’s established mining companies.

    Total FDI in the region’s financial sector alone for the period 1992 - 1999 totaled US$173 million, excluding South Africa. FDI for the mining sector to Botswana, DRC, Mozambique, Namibia, Tanzania, Zambia and Zimbabwe for the period 1995 -1999 amounted to US$1,577 million.

    Countries like Mozambique have been able to make use of other factors such as cheap surplus electricity at Cahora Bassa and access to navigable waters to entice private sector capital.

    For foreign investment to have meaningful impact in the region there is need for host countries to create an enabling environment in terms of security of projects and provision for supporting mechanisms to ensure the viability and competitiveness of projects.

    In the last 20 years, many Less Developed Countries (LDCs) have pursued conducive environment for investment. Foreign investment inflows amounted to 14 percent of official development assistance in 1996. A significant amount of that investment was in the oil and mining sector. Some investment has also taken place in agro-industries and tourism but on a smaller scale.

   There is, however, growing evidence suggesting that investment in the manufacturing sector has remained weak and there has been considerable divestments by multinationals as a result of structural adjustment policies adopted by some member countries. Not only has liberalization in import substituting industries adversely affected foreign firms but extensive devaluations have also undermined foreign currency rates of return.

    It is also apparent that some of the new investment has gone towards trading and to the final value-added end of the manufacturing process such as re-packaging which contributes little to development.

    Developing countries find it difficult to attract foreign investment due to low levels of income, small market size, poor international competitiveness and weak physical infrastructure. A vibrant domestic private sector is an important magnet for luring investors. Many countries have lackluster indigenous private sectors, the financial sector is underdeveloped and private sector savings are low SADC is no exception.

    However, recent moves toward deeper market integration under the SADC Trade Protocol should emerge as a significant attraction for the much-needed FDI. The protocol is expected to create a bigger regional market with free movement of capital and finished products.

    But there is no doubt, significant increases in investment in the region lie mainly in the continued performance of macro-economic fundamentals, sustained political stability and the implementation of, and commitment to, financial sector reforms that are aimed at integrating the region’s financial services market.

    The 1980s and 1990s demonstrate that while options for development are abundant, SADC countries must offer internationally competitive conditions for them to get investment ahead of other regions. This will involve governments leading the way by investing in infrastructure development. The development of infrastructure and facilities such as transport and communication, electricity and water as well as human resources need to be given more priority.