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Investors in Africa Benefit from Regional Trading Blocs
Friday, October 3, 2014

An investor new to Africa needs to understand not only the relevant local laws but also the applicable regional arrangements. Africa has multiple regional trading blocs, some of which provide significant advantages for investors. The main regional trading blocs are

  • The Economic Organisation of West African States (ECOWAS), which comprises 15 western African states with a population of about 300 million

  • The Common Market for Eastern and Southern Africa (COMESA), which comprises 19 mainly eastern and central states, from Egypt and Libya to Zimbabwe, with a population of more than 400 million

  • The Southern African Development Community (SADC), which comprises 15 southern African states with a population of 230 million

  • • The Communauté des Etats Sahélo- Sahariens (CEN-SAD), which comprises 28 northern, western and central African states

Memberships overlap: eight states are members of both SADC and COMESA, all but one of ECOWAS’s members are also members of CEN-SAD, and eight states are members of both COMESA and CEN- SAD. Other regional blocs include the East African Community (EAC), with five central and eastern African states and a population of 150 million; the Economic Community of Central African States (ECCAS), comprising 10 central and western African states; the Intergovernmental Authority on Development, formed of eight eastern African states; and the Union du Maghreb Arabe, comprising five northern African states.

These trading blocs aim to achieve ever- closer regional integration, including free trade areas, customs unions, monetary union, and legal and regulatory

harmonisation. Although conflicts arising from overlapping memberships have slowed or stalled integration attempts in some blocs, these memberships still provide significant benefits for investors.

Closer Unions

A number of important free trade areas have been established. The EAC (Burundi, Kenya, Rwanda, Tanzania and Uganda) has a common market for goods, labour and capital, but no monetary union yet. The remaining free trade areas are sub-sets of the larger trading blocs.

The Southern African Customs Union (SACU) is a customs union between certain SADC members (Botswana, Lesotho, Namibia, South Africa and Swaziland) that allows the free movement of goods between member countries. There is a common external tariff, and all customs and excise collected are pooled and then divided according to a revenue-sharing formula. 

All SACU states other than Botswana are also part of a monetary union.

The best integration has been achieved in west and central Africa. The Union Economique et Monétaire Ouest-Africaine (UEMOA), comprising Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo, is a full customs union amongst a sub-set of ECOWAS members. Similarly, the Central African Economic and Monetary Community (CEMAC) of Cameroon, the Central African Republic, Chad, Equatorial Guinea, Gabon and the Republic of Congo is a full customs union amongst a sub-set of ECCAS members.

Both UEMOA and CEMAC are matched by monetary unions under a unitary regional central bank. The CFA franc (XOF) is the name given to the West African CFA franc, which is used in the eight UEMOA states, with a population of more than 100 million, and the Central African CFA franc (XAF) is used in the six CEMAC states, with a population of 45 million. Both currencies trade at parity, are guaranteed by the French treasury, were formerly linked to the French franc and now have a fixed exchange rate to the euro (one euro to 655.957 CFA francs).

In addition, both UEMOA and CEMAC have enacted many other rules binding member states and overriding national laws. Harmonised regulations cover competition control, public procurement, taxes and customs, plus the telecommunications, mining (UEMOA only), public health (UEMOA only) and transport (CEMAC only) sectors. Both blocs act through regulations and directives that are binding upon members.

Business law in west and central Africa is being harmonised through an initiative by L’Organisation pour l’Harmonisation en Afrique du Droit des Affaires (OHADA) that applies to 17 countries, including all UEMOA and CEMAC countries, and draws heavily on French law. Importantly, the OHADA treaty has created a supranational court to ensure uniformity and consistent legal interpretations across member countries.

Investor Protections

Some of the treaties creating the regional blocs can provide investor protections. Usually investors seek protection through bilateral investment treaties (BITs), which allow an investor from one treaty country to seek money damages directly against the other treaty country in a neutral international arbitration

forum. In general, BITs promise investors treatment equivalent to that enjoyed by local and other foreign investors, protection from expropriation without adequate compensation, and freedom to transfer funds in and out of the host country without delay using a market rate of exchange.

Some countries, like Mauritius, are keenly expanding their BIT network. Mauritius has 24 BITs in operation and has entered into another 17 that are awaiting ratification. These BITs complement Mauritius’ expanding double tax treaty network and its low local taxes, making it a leading choice for African holding companies.

In contrast, South Africa, which has an extensive BIT network, recently terminated BITs with important investor countries, including Belgium, Germany, Luxembourg, the Netherlands, Spain and Switzerland, and other cancellations may follow. South Africa argues that BITs are too favourable to investors and that investor protections already exist under the constitution, although these are more limited. COMESA is also reviewing whether or not BITs should be retained. In this

“environment, investor protection in regional bloc agreements becomes more important."

CEMAC has a robust investment charter that requires member states to permit foreigners to make investments without discrimination, protect property rights and ensure free repatriation of profits, and allow disputes between an investor and a member state to be resolved by arbitration.

Competition Law

The COMESA competition regime came into force in January 2013 and was conceived as a one-stop shop for competition filings. There have been some teething problems, however. Filing thresholds were set at zero, with the result that even a very small merger involving businesses in two or more COMESA countries requires a COMESA competition filing to be made. Despite COMESA’s one-stop-shop rules, some local competition authorities have maintained that local competition filings are still required. Given that failure to comply with local law not only carries administrative fines and penalties, but also can result in criminal sanctions and contracts being rendered void, prudent investors may prefer to make both COMESA and local filings.  

Both UEMOA and CEMAC have enacted comprehensive competition rules superseding national laws. In CEMAC, notification is mandatory if one of the parties has a turnover of more than one billion Central African CFA francs or if the parties together have more than 30 per cent of the relevant market. In UEMOA, notification is not mandatory and there are no thresholds, but the merging parties may file an application for negative clearance if the merger creates or reinforces a dominant position in the market.

Zoe Walkinshaw, a trainee in the London office, also contributed to this article. 

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