High power, land costs affect FDIs

What you need to know:

  • The low level of Foreign Direct Investment (FDI) into the East African Community region decreased by 25 per cent in 2017 compared to 2016 and is attributed to a number of factors.

Arusha. The inordinately high costs of electricity and land for industrial development are among the major disincentives to investments in the East African Community (EAC) member states.

For instance, tariffs for the electricity used in industrial production in the region range between 10 and 14 US dollar cents: among the highest in the world.

“This makes EAC products uncompetitive, and affects investments,” says the latest report by the EAC Sectoral Council on Trade, Industry, Finance and Investment.

Access to affordable private sector credit also adversely affects investment promotion within the economic bloc, especially the domestic investment segment.

Released on November 15th last year – shortly before the aborted Summit of the EAC Heads of State – the report says credit to the private sector had been complicated by high interest rates on capital in the region.

At the same time, the potential for prospective companies leveraging equity to grow and expand is further limited by underdeveloped stock exchanges in East Africa.

According to the report, foreign direct investments (FDIs) to East Africa decreased by 25.3 per cent, to $6,6 billion, in 2017 – down from $8.8 billion in 2016, although the inflows to Burundi and Rwanda shot up.

Investment inflows to Burundi and Rwanda grew by 356 per cent and 91 per cent respectively, rising to $65.1 million from $14.6 million in 2016, and to $1.2 billion in 2017, from $600 million in 2016 in that order.

FDIs to Tanzania, Uganda and Kenya during the period fell by 7 per cent, 14 per cent and 61 per cent respectively, down to a combined total of $717.1 million.

South Sudan, on the other hand, registered FDI inflows amounting to $462.5 million in 2017. The country joined the EAC bloc in 2016.

But the EAC sectoral committee insists that the numerous challenges which hamper investment inflows growth in the region must be effectively addressed sooner than later.

Made up of senior officials from the EAC partner states, the committee identifies the challenges as including promotion of the EAC region as a single destination for FDIs, and making land acquisition processes easier for intending investors.

Also recommended is the creation of a credible rule-based regional investment regime that enhances predictability regarding investment policies and laws – complete with mechanisms to resolve trade disputes pronto.

Poor transport and Information and Communications Technology (ICT) infrastructure is also cited as being other disincentives to investments in the six-nation economic bloc. To address the anomalies, the EAC member countries are urged to fast-track completion of ongoing infrastructure projects that include roads, railways and energy “in order to improve the movement of goods across the region.”

Development and modernization of ICT, on the other hand, would support the integrated border management systems and harmonization of customs processes across the partner states.

Investment prospects in the region can be further boosted by fast-tracking the regional integration processes, and strengthening the legal and institutional reforms regarding business registration.