The Potential of Investment Partnerships for Mutual Benefit
Research paper
Published 31 October 2019
Updated 11 December 2020
ISBN: 978 1 78413 345 0
Trade between Central and Eastern Europe and sub-Saharan Africa has increased significantly in the last decade and a half. There is a strong case to be made for greater economic re-engagement, especially in terms of investment, that has the potential to support inclusive growth in both regions.
The picture is mixed in terms of African recognition of the potential for an invigorated relationship. Some sub-Saharan African governments have taken more interest than others in identifying the relative strengths of Central and Eastern European economies, on which such a relationship could be based, and have acted accordingly. For instance, South African President Cyril Ramaphosa has called on investors from Poland – as part of a group consisting mainly of more established investors from Western European countries – in his bid to attract $100 billion in investments to South Africa by 2023, and South African investment envoys have visited Poland to pitch their country as an investment destination.48 The Ghanaian agriculture minister issued an open invitation for Czech investors during his visit to the country in April 2018.49 Similarly, in July of that year the then Ethiopian president, Mulatu Teshome, called on a delegation of Czech investors visiting Addis Ababa to enter the Ethiopian marketplace.50 Those sub-Saharan African governments that recognize the potential benefits to be had from a relationship with private-sector investors in the V4 group see the following sectors as most promising: agri-processing, especially meat (poultry) and dairy products; ICT; transport; construction; and water and waste management.51
Other governments, however, are not as aware of the potential opportunities that such a partnership could entail. Unfamiliarity with Central and Eastern European economies and what they could bring to the table was a somewhat common theme identified during interviews. Furthermore, Turkey’s and Russia’s engagements in sub-Saharan Africa were often a starting point of discussions, reflecting misconceptions of precisely which countries constitute the Central and Eastern European bloc.
While investments from Central and Eastern Europe are certainly welcome in sub-Saharan Africa,52 no overall strategic approach is being employed to attract investors and intensify the trade relationship with Central and Eastern Europe. Although there is some evidence of selectivity when African governments are seeking potential partners in specific sectors, many of those governments will not exercise ‘discrimination’, opting instead for a more general approach to investor outreach.
In order to successfully attract investment, a tailored approach needs to be put in place. The World Bank recognizes that governments must have a nuanced understanding of investor motivations to best unlock the benefits of FDI for local economies.53 South Africa provides a notable case in this regard, where, as a complement to the efforts of the national investment agency SAInvest, offices have been set up within provincial investment and trade agencies to target relations with Central and Eastern Europe. For instance, the Cape Town and Western Cape Tourism, Trade and Investment Promotion Agency (WESGRO) has a ‘New Europe’ department in charge of Central and Eastern European affairs. Investment envoys appointed by President Ramaphosa to help accomplish South Africa’s $100 billion foreign investment target have been accompanied on their external missions by WESGRO staff. Similarly, the Gauteng Growth and Development Agency has assigned responsibility for relations with Central and Eastern Europe to its department for ‘Middle East, Eastern Europe and Asia’.54
In many instances, sub-Saharan African governments have positive perceptions of their past ties with Central and Eastern Europe. They reminisce about Hungarian, Czech, Polish, and former Yugoslav state enterprises that helped in building up their countries’ economies, the goods that were introduced in their markets, and the political support provided by the Central and Eastern European countries for independence movements. However, relationships of this kind dropped away during Central and Eastern Europe’s transitional period.
|
Country |
Embassy |
Consulates and honorary consulates |
|---|---|---|
|
Bulgaria |
South Africa, Nigeria |
Ghana, Kenya, Mauritius, Seychelles, Uganda |
|
Croatia |
Burkina Faso, Côte d’Ivoire, Namibia, South Africa, Sudan |
|
|
Czech Republic |
DRC, Ghana, Nigeria, South Africa, Sudan |
Benin, Botswana, Cabo Verde, Mali, Mauritius, Niger |
|
Estonia |
Namibia, South Africa, Tanzania |
|
|
Hungary |
Angola, Nigeria, South Africa, Sudan |
Benin, Côte d’Ivoire, Eritrea, Ghana, Guinea, Lesotho, Madagascar, Mauritius, Namibia, Seychelles, Sierra Leone, Uganda, Zambia |
|
Latvia |
Benin |
|
|
Lithuania |
Mauritania |
|
|
Poland |
Angola, Ethiopia, Kenya, Nigeria, Senegal, South Africa |
Ethiopia, Ghana, Malawi, Mauritius, Seychelles, South Africa, Zambia |
|
Romania |
Angola, Nigeria, South Africa |
Ghana, Senegal, Central African Republic, Equatorial Guinea |
|
Slovakia |
DRC, Lesotho, Mali, Senegal, Seychelles, Sierra Leone, South Africa, Uganda |
As a first step in their opening towards Central and Eastern Europe, sub-Saharan African states might consider adopting a general orientation strategy. This might be followed by a more intensified diplomatic presence in Central and Eastern Europe. Given the scarcity of resources, a more pragmatic approach would be to focus on countries where they see the most potential for an invigorated relationship. The political relationship needs to be elevated from a deputy ministerial level in order for concrete changes and sustainable engagements to take place.55
Bearing in mind the vast diversity of sub-Saharan African economies, and the different structural problems that they face as a consequence, there can be no single approach to improving the domestic business environment. Each country will need to follow a separate path, adopting policies that generate investor confidence based on its own unique circumstances, but each programme will certainly include improvements in education (perhaps involving tailor-made programmes), and infrastructure development, among other things, as efficiency-seeking and market-seeking FDI rely on good human capital and quality infrastructure. Whatever the choice of investment policy, where a country’s constitution provides for a devolution of powers to the local level, the central government will need to ensure that it coordinates its investment-promotion efforts.
BITs are agreements concluded between the ‘host’ and ‘home’ state, to provide protection for investors from the latter when doing business in the host state. Since the Treaty of Lisbon came into effect in January 2009, investment has been an exclusive competence of the EU. However, the EU provides the option for member states to conduct and complete treaties with third countries.
While some studies find strong evidence that the conclusion of BITs promotes investment in a country, others find little or no relationship between the two. The dramatic increase in FDI to Eastern Europe following the transition period of the 1990s coincided with the signing of BITs, as did the Asian economic ascent in the 20th century. However, it is difficult to disentangle this effect from other factors.
Numerous factors will ultimately combine to determine whether an investor decides to venture into a new market. While some governments place the greatest attention on improving their ranking in the World Bank’s annual Doing Business reports, this measurement of the ease of doing business in a host country leaves out important considerations.56 The World Bank’s Global Investment Competitiveness Report 2017/2018 found that while investment incentives may help when investors are wavering between similar locations as a new base for their exports, political stability and security, as well as the level of legal protection against political and regulatory risks, were of far greater importance to investors.57
To illustrate the difference in circumstances, most Central and Eastern European businesses that were trying to penetrate the Ethiopian market at the time of research conducted for this paper in 2019 pointed out that the right accorded since 2012 to foreign investors in the country to repatriate profits (and capital) has presented a considerable obstacle for firms willing to invest there. While technically possible, repatriation of monies to a foreign country is a lengthy process, primarily due to the strict foreign exchange controls in the country. On the other hand, in Ghana, where repatriation has not been an issue for businesses, the principal barriers to investment are rather the depreciation of the local currency (the cedi) and a lack of quality infrastructure, which raises the cost of transport. With regard to Kenya, the greatest obstacle identified by businesses was widespread corruption – both at local level and within higher political circles – which served to increase the degree of unpredictability and the cost of doing business. In the case of South Africa, the frequency and intensity of social protest (e.g. in the context of poor service delivery), together with the requirements of empowerment legislation,58 were cited as disincentives to investment.
A step in the right direction might be the signing of BITs that are designed to increase protection for investors, provided that they do not favour investor protection over the national government’s ability to legislate on important matters of development policy.59 In other words, they need to be mutually beneficial for both host governments and investors. BITs are no longer an option for South Africa, the government of which opted instead for the Investment Protection and Promotion Act, whereby foreign investors are protected through domestic, rather than international, law. The option of entering into BITs remains open for other sub-Saharan African governments.
Table 3 shows the number of BITs and DTTs that Central and Eastern European countries have in place with sub-Saharan African countries. Although on a cumulative basis relatively few BITs (i.e. treaties with an investment protection provision) had been signed by 2019, it can be seen that Romania has taken a notable lead in this regard. Among the V4 countries, the Czech Republic has prioritized the conclusion of a BIT in its relations with Ghana;60 the treaty was expected to be signed in late 2019.61 Other Central and Eastern European and sub-Saharan African countries could enter bilateral negotiations and conclude mutually beneficial investment treaties to the benefit of both foreign investors and the host country.
Furthermore, DTTs can also help incentivize companies to invest. A DTT is an agreement between two countries that determines which country has the right to tax in specified situations, thereby eliminating instances where income is taxed twice. However, only 12 DTTs have been signed to date between Central and Eastern European countries and sub-Saharan Africa, with Romania accounting for a third of these.
|
BITs |
DTTs |
|
|---|---|---|
|
Bulgaria |
2 |
2 |
|
Czech Republic |
2 |
3 |
|
Estonia |
0 |
0 |
|
Hungary |
0 |
1 |
|
Latvia |
0 |
0 |
|
Lithuania |
0 |
0 |
|
Poland |
0 |
1 |
|
Romania |
8 |
4 |
|
Slovakia |
1 |
1 |
|
Slovenia |
0 |
0 |
As of late 2019, a Slovakia–Kenya BIT had been signed (in 2011) but was not yet in force.
Source: Data compiled from websites of the national ministries of finance.
In May 2019 the African Continental Free Trade Agreement (AfCFTA) entered formally into force; by the time its operational phase was launched, in early July, 27 AU member states had signed the accord.62 The agreement initially required signatories to remove tariffs from 90 per cent of goods. It is early days for AfCFTA, but it is intended to effectively increase the volume of intra-African trade. It represents the biggest free-trade area globally, as measured by the number of participating countries. AfCFTA presents a positive signal to investors who want to pursue African markets, as even investments in small markets can be expected to ultimately achieve a much broader reach.
The African Continental Free Trade Agreement presents a positive signal to investors who want to pursue African markets, as even investments in small markets can be expected to ultimately achieve a much broader reach.
AfCFTA will coexist with Regional Economic Communities (RECs) – sub-regional bodies that play a central role in terms of regional economic integration. While another stated goal of AfCFTA is to tackle overlapping memberships (Article 3), this appears to have been superseded by Article 5, on the preservation of the acquis and the role of the RECs as building blocks for AfCFTA.63 Around 80 per cent of all intra-African trade flows through RECs.64 With the exception of the Arab-Maghreb Union (AMU),65 there are seven sub-Saharan African RECs:
Africa’s RECs are at different stages of trade liberalization and economic integration. For instance, the member states of the EAC (Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda) have established a common market and monetary union, while ECOWAS has established a customs union and is approaching a common market. SADC has formally established a free-trade area, but faces major implementation obstacles. While RECs have formally removed a significant number of tariffs between their respective members, implementation issues and non-tariff barriers remain. In line with the plan of continental integration, and from a pragmatic standpoint, it is important that RECs constitute the principal vessel of such integration, especially in the coordination of AfCFTA. Sub-Saharan African governments can pursue the same course of action to achieve regional economic integration and further lower tariffs and technical barriers between the states that make up the bloc.
For its part, the EU could continue to lower barriers, especially for imports bearing added value; remove internal subsidies (external subsidies having already been lifted); and remove non-tariff barriers to create a level playing field for those African countries that are still at an early stage of development. While the EU has significantly lowered tariffs on imports from Africa – principally through the conclusion of bilateral Economic Partnership Agreements (EPAs),66 the complete removal of tariffs (through the Everything But Arms programme) for states with least developed country status, and the granting of preferential access under the extended Generalized System of Preferences (GSP+) scheme – non-tariff barriers, such as extremely high quality and safety compliance standards, still remain the biggest obstacle to African goods entering the EU.
