Sudden changes in investment laws and regulations in some African markets is a reality for many investors. But, as Rian Geldenhuys reports, there are tested ways of dealing with this type of risk.
There are many spectacular success stories of investing in foreign countries, but tales about the failures are often nightmarish. Often businesses are just unaware of the potential pitfalls associated with investments (whatever form the investment may take). The reason for this is often that the investors only familiarise themselves with the domestic regulations, which are currently enacted, but take no heed of whether these laws may change in the future. In some instances investors invest without giving due consideration to the current domestic dispensation.
Indeed investors should familiarise themselves with the current domestic dispensation. Typically, though, the domestic legislation applicable to a specific sector merely regulates the rules of that specific industry. In other words the legislation tells the players how to behave, what to do and what not to do. In many instances it doesn’t specifically contain prohibitions on foreign participation or ownership of entities in that industry. Often the restrictions that are found are not the maximum level of restriction that the foreign government will always retain. There is thus always the possibility that a government may change the laws and this may prevent or restrict foreigners from participating in various forms in a particular sector or industry.
Few people, including professional advisors, are aware that in many instances one can obtain legal certainty in such instances. Most countries open to foreign investment are members of the World Trade Organisation (WTO). As such these counties have made commitments to all other members. Although the level of commitment may vary from member to member, all the member countries of the WTO make these commitments to provide business with legal certainty. Thus if you want to export product A to country X,Y and Z, we can know with legal certainty that you will pay a maximum of 5%, 25% and 0% respectively to import product A to those countries (what is known as “bound rates”). It may indeed be that countries X,Y and Z currently apply a lesser rate than the bound rate, as an example they all apply 0% (i.e. the import is zero-rated). However, this does not mean that they will always apply these lesser rates as they are entitled to apply the higher bound rate. This often happens as we have recently seen when South Africa raised its duties on most clothing and textile products to its maximum bound rates. However, as the manufacturer of product ‘A’ you have legal certainty that the countries to which you export may never levy a duty higher than the maximum bound rate.
In the same vein member countries of the WTO also maintain ‘bound rates’ on investments (referred to as “bound commitments”). In this instance, instead of levying a tax, the countries make use of other barriers to entry such as requiring a minimum local ownership requirement, requiring a minimum investment threshold or prohibiting a foreigner from investing in a particular business or sector. In the same way that government may apply a lower duty than the bound rate, government may apply lesser restrictions for investment than their bound commitments for investment. These lesser restrictions or absence of restrictions are normally found in the domestic legislation. However, often the restriction is not reflected in domestic legislation, neither do you find the ‘bound rate’ restriction contained in domestic legislation save for in very limited instances. These restrictions can be found in for instance a country’s General Agreement on Trade in Services (GATS) commitments.
These bound rate commitments on investment can be found in every country’s actual commitments it undertook at the WTO. The bound commitments again provide legal certainty to investors and they can rely thereon that a government can never apply a more onerous investment restriction on them. Thus, if the bound restriction states that a foreigner may invest without any conditions and the investor does take the plunge, the government cannot change the restriction. In other words the government is legally prevented from enacting legislation, which violates its bound commitments. As an example, if a country’s bound commitments contain no restrictions on investment, that government cannot pass legislation requiring all foreign investors to sell 25% of its shares to locals. Investors should take care that the investment advice they are receiving takes this legal aspect into account in order to avoid any potential pitfalls.
Rian is the director of Trade Law Chambers, a specialised trade law company that advises and supports clients. The company has a wealth of experience in international trade law and in particular trade regulation.