African commercial law must be reformed.

Recent trade and investment headways in Africa have made it clear both here in the United States and abroad that an African economic renewal is underway. US exports to Africa grew 20% last year and foreign direct investment flows to sub-Saharan Africa reached $4.5bn.

Earlier this year, for example, the Texas-based BC Communications Inc. and Telex Malaysia Berhad bought a 30% stake in Telkom South Africa, the state-owned phone company, for $1.26bn.

A recent task force sponsored by the Council on Foreign Relations reported that the United States exports more to Africa than to Eastern Europe and the Soviet Union combined, and that Africa will become increasingly important as a market because more than a third of US economic growth results from exports.

Once marginalised continent

This once marginalised continent has been capturing the attention of US investors in a series of summits held recently, from New York City and Washington, DC, to African capitals. July's African African-American Summit in Harare, Zimbabwe attracted over 3,000 participants. AT&T, General Motors, Chevron, Chrysler, Coca-Cola, Shell Oil, Microsoft, Philip Morris, Johnson & Johnson, and Proctor and Gamble were among the US firms represented.

A major business summit held this spring in northern Virginia also included numerous Fortune 500 companies among its 700 participants. This surge in interest comes at a time when the Clinton Administration and a bipartisan group in Congress are presenting a ground-breaking trade and investment policy to move Africa away from dependence on foreign aid and into the international business arena.

Commercial Legal Reform in Africa

A recent conference in Washington, DC focused attention on a critical and often overlooked aspect of the trade and investment equation, the commercial legal regulatory environment.

The panel discussion, co-sponsored by the American Bar Association and the Centre for Strategic and International Studies, provided a timely discussion and debate on the need for commercial legal reform in Africa as an essential component to creating an enabling environment for domestic and foreign trade and investment.

The programme itself was testimony to the rising business interest in the continent by the standing-room only crowd which packed the hall.

The 120 participants included representatives of businesses, law firms, banks, embassies, the US Congress, and the State, Commerce and Treasury Departments. The Chairman of the International Law Institute, the Vice-Dean of Harvard Law School, and the Chief Counsel for Africa at The World Bank were among the distinguished panelists.

With the support of multilateral, bilateral, and local donors, commercial legal reform projects have been on the rise in Africa and are expected to continue to grow. Such projects have already taken root in Zambia, Uganda, Tanzania, Kenya, Mozambique, Namibia, and Ghana.

In addition, two major regional reform efforts are underway: the Harmonised Investment Code for the West African Economic and Monetary Union (UEOMA), and the treaty of the Organization for the Harmonisation of Business Law in Africa (OHADA). These have already been signed by 17 nations in a bid to harmonise the business laws of African nations, beginning with the francophone countries.

A comprehensive commercial legal regulatory reform project should address areas that directly and indirectly impact the private sector such as laws governing commerce, corporations, contracts, property and taxation, as well as those interconnected areas which support the legal environment. These include the recording and dissemination of laws, regulations, and court decisions; training for lawyers and government officials in new laws and legal concepts; public education campaigns about the role of law in a market economy; and efficient judicial and alternative dispute resolution mechanisms, including arbitration, conciliation, and mediation.

Broad-based reforms

The techniques for implementing commercial legal reform projects should be broad based. The 1977 amendments to Egypt's foreign investment law included the input of users in the international business and banking community. The broad based discussion which surrounded the drafting of these laws presented the opportunity to deeply root these laws in the broader society and not just in books.

The "foreign investment code" was one of the earliest models used to structure trade and investment regulatory regimes in Africa. Many of the codes adopted in the 1970s and 1980s were so strict and complicated that they discouraged investment. Some countries, such as Cote d'Ivoire, have successfully reformed these codes.

The cumbersome red tape, numerous checkpoints, licensing requirements and voluminous forms involved in the investment process have been a major deterrent to investors. The forms, when compiled in a single volume, can weigh as much as five pounds!

Moreover, the establishment of the one-stop-shop by many African nations for foreign investors has not served to streamline the investment process because all of the administrative powers of various ministries and agencies must be delegated to the shop. This requires each agency and ministry to have a knowledgeable delegate at the shop. The best solution, therefore, is to solve the problem at its source, by disaggregating the elements of the investment code addressing each of the underlying components of the investment process that is burdensome.

Ms Judith O'Neil, a partner at Reid & Priest, outlined legal areas for attention in attracting private investment and gave examples of the types of changes that may need to be made. The national Constitution can be resorted to as a vehicle for instituting change. The freedom of expression equivalent in the Zimbabwean Constitution was used to have the monopoly of a telephone company declared unconstitutional. The Restrictive Trade Practices Act, or Competition Law has been used as a price control mechanism, which, in many cases, needs to be expanded.

Public-private partnerships

In public-private partnerships, the State Corporations Act may need to be changed to satisfy the private partner, since the stringent controls placed on the government in the act may not be acceptable to the private partner. In Tanzania, a successful partnership between a private cellular operator and the government investor was created when a Parliament changed the State Corporations Act to make it more receptive to the private partner.

Multiple licensing requirements and different check points with unscheduled payments can be burdensome and pose unpredictable costs to the investor.

Central Bank laws may have oppressive reserve limits which should be more realistic and less chilling to an investor (e.g. although the Central Bank of Kenya allowed reserves to be kept at 6%, the law required 40% because the government wanted the right to increase it to 40%).

Insurance and all fiduciary laws are very important because when companies are placed onto the capital markets, pension plans and insurance companies are the most likely and desired investors. In many countries with centralized economies, these types of companies were prohibited from investing more than 10% of their money in the private sector. These laws were changed in Tanzania and Kenya to allow insurance companies to invest more than 10%.

Bankruptcy laws should provide an escape hatch for the investor. If the exit is perilous and high priced, the investor will be deterred.

Reid & Priest is currently reconciling the abolition, revision or complete amendment of 57 laws and related regulations in Uganda. Their approach to legal reform begins with stakeholder interviews in the public and private sector to determine the stakeholder's knowledge of the law and its application, and how it helps or hurts them.

Mr David Smith, Vice-Dean of Harvard Law School, spoke about the need for legislative and contractual provisions to regulate natural resource development in African nations to prevent costly environmental damage, and to enable African governments to maximise the revenue they collect from mining and timber projects.

Environmental clean-up cost

If environmental damage goes unchecked, 8-9% of the growth rate of African countries will be consumed with environmental clean-up costs. The potential financial and political costs should be factored into the equation when mining and timber projects are planned and contracts negotiated.

In Africa, US mining companies are competing with European and Asian companies which have already done extensive damage to the environment in their own countries. The establishment of a US/Africa regional resource fund would enable the US to take the lead in helping African nations benefit from their resources in an environmentally sound manner.

Government revenues can be severely effected by 'transfer pricing' the pricing of goods and services from affiliated companies within a corporate system to suit a company's internal needs. Carefully designed tax laws and tax provisions of mineral and timber contracts alone are insufficient to detect transfer pricing. Such practices can only be uncovered through the careful monitoring of company purchases and sales by tax authorities who have experience in dealing with transnational companies and knowledge of the relevant industry.

Joint ventures with the government have not guaranteed the governed a greater transfer of know-how and technology or greater control of a mining or timber venture. The government can have greater control over a natural resource venture through legislative and contractual regulation; not through equity ownership.

State owned natural resource enterprises such as those in the petroleum sector have often cost governments billions of dollars in poor investments, poor monitoring and marketing practices, and corruption. Governments must devise legislation and organisational frameworks that will allow the state enterprise to operate efficiently, with accountability, and in the public interest.

Finally, more emphasis should be placed on preventative approaches within state enterprises and government agencies in dealing with corruption than on penalties. Corruption can be discouraged or made more difficult through systems of checks and balances, adequate salaries, and requirements that government and state enterprise officials declare their assets.