Eye on Africa

Volume 1 | March 2010

Africas risk environment in 2010: what we think Why invest in Zimbabwe? Beneficiation: Who should lead the charge?

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at a glance
Our African footprint West Africa East Africa 3 13 20

features
2 4 6 8 11 14 18 22 Editor's note | The Africa Business Center Africas risk environment in 2010 China investments into Africa Investment opportunities in Zimbabwe Beneficiation | Who should lead the charge? Investing in Senegal Unlocking Africas investment potential Introduction of the East African Community Customs Common Market in July 2010 | Opportunities and challenges

editors note

The Africa Business Center

You have come to the right place

The Ernst & Young Africa Business Center is our way to help companies navigate the challenges and opportunities of doing business across the African continent. As the next economic growth frontier, Africa is an exciting place to do business; but also poses its unique challenges. Africa offers the most sustainable real GDP growth prospects of all emerging markets, according to forecasts by the World Bank among others.
Sub Sahara Africa Developing countries Developed countries

assured of a one point of contact that can give them helpful information about the continent as well as linking them to one of our many audit, tax, transaction advisory and risk experts all over Africa. We have relationships with a host of clients in many African countries going back up to 160 years. So, whether you want to be part of the emerging oil industry in Ghana and Uganda, or you want to take advantage of the creation of a common East African market of over 120 million people; whether your company is interested in expanding into Nigeria Africas largest market or be part of the fastgrowing gold industry in Tanzania; be it you want to acquire assets in Kenya or list on the new stock exchange in Rwanda; for tax advice, audit, risk or transaction advisory services, get in touch with the Africa Business Center. It does not matter if you want to take your business to Senegal, Mozambique, Zambia or Ethiopia; you have come to the right place the Africa Business Center. In this inaugural issue of our regular publication, EYe on Africa, we feature perspectives on the risk environment in Africa from our Advisory professionals. We also highlight the role played by the Investment Climate Facility based in Dar es Salaam, Tanzania courtesy of a write-up by their CEO Omari Issa. Still in East Africa, our tax team talks about the implications of the promulgation of the East African Common Market; and check out our country snapshot on Rwanda. A profile of Senegal and Ghana in the west, and Zimbabwe in the south, are part of this exciting expose on Africa alongside many other informative inserts. Enjoy your reading and send us suggestions about what you would like to see in the next issue of EYe on Africa. Karibu!

2011

2010

2008

2008

2007

-5.0

5.0

10.0

Recovery from the recession is a given from 2010. Although China will still register the highest growth rate, Sub-Sahara Africa promises a steady climb going into the future. The Africa Business Center aims to assist our clients from China, India, the UK, US and everywhere else in the world as they expand their business into the continent. Using our African footprint and local experience in more than 20 countries on the continent, investors and business leaders can be

For more information, please contact:

Victor Kgomoeswana
Associate Director, Africa Business Center Tel: +27 11 772 5249 [email protected]

at a glance

Tunisia
o cc ro o M

Algeria
Western Sahara

Libya

Egypt

Cape Verde Senegal Gambia Guinea Bissau Guinea Conakry

Mauritania

Mali Burkina Faso

Niger Chad Sudan Nigeria

Eritrea Djibouti Ethiopia Uganda Somalia

Sierra Leone Liberia

Coted'Ivoire

Ghana

Togo Benin Equatorial Guinea Sao Tome

Central Africa Cameroon Republic Congo Democratic Republic of Congo Burundi Angola

Gabon

Kenya Rwanda Tanzania Comoros Malawi Mauritius Zimbabwe

Mad agas car

Seychelles

Ernst & Young office No Ernst & Young office, but support available No offices, no support

Zambia

Namibia Botswana

Mozambique

Reunion

Swaziland Lesotho South Africa

Our African footprint

Africas risk environment in 2010

What we think

Expectations that emerging markets will lead recovery in 2010 have renewed interest in Africa. With a population of 922 million over 54 countries, a GDP of over $1.6 trillion, mineral resources and untapped potential, Africa is the next major investment frontier. African governments must expedite service delivery and create environments that are conducive to business. Investors need to understand the key risks so as to manage them profitably. The risk environment for corporates in Africa is generally improving due to increasing maturity in respect of corporate governance. For example, South Africa, Africas biggest economy and worlds 25th largest by GDP, recently released the King III Code of Governance principles which are widely seen as being ahead of international trends. They cover diverse issues such as ethical leadership, integrated sustainability reporting and risk management. These enhancements, as in Egypt and Nigeria, reduce unmanaged risk and increase investor confidence. Politics goes hand in hand with reputational risk and many multi-national companies are more diligent in managing their reputations with anti-corruption policies. The other major risks are infrastructure challenges and shortage of talent at certain levels. These risks are not insurmountable and often the higher returns in Africa prompt investors to focus on risk management rather than risk avoidance.

The impact of the financial crisis was indeed reduced in Francophone Sub-Saharan African countries (FSSA) as their financial system is both highly regulated and not borrowing on the international markets; for most of these countries already underwent an economic crisis in the recent years and almost all of them are very much supported by International Donors. The impact of the economic crisis significantly reduced the flow of money from the Diaspora, i.e. remittances. This is true especially for the countries with no raw materials or oil to export. There are so far no new initiatives taken by the governments and the International Financial Institutions for which capacity-building for public administration and good governance issues remain at the top of their agenda. What really matters in FSSA countries is how political stability can be maintained to secure an economic environment where business can safely be boosted with Foreign Development Investments.

Bady Dieng
Director, Advisory Services Ernst & Young Senegal

Mandla Moyo
Director, Advisory Services Ernst & Young South Africa

For more information, please contact:

Trevor Rorbye
Advisory Leader, Ernst & Young Africa Sub-Area Tel: +27 11 772 3000 [email protected]

The global economic crisis has accelerated the need for Mauritius to review its code of corporate governance to align it with the latest best practices which capture lessons learned from the crisis. It is with this in mind that a national governance committee of private and public sector stakeholders is currently reviewing the (voluntary) code of governance in Mauritius.

Shailen Ramgoolam
Director, Advisory Services Ernst & Young Mauritius

Initially Africa looked less affected by credit crunch because historically a small percentage of the market had access to the credit. However, around 2008 easy money coming from US donors dwindled and local currencies depreciated against the US dollar. For instance in Uganda, the exchange rate weakened from 1,638 in September 2008 to 2,300 in May 2009. As giants collapsed, panic forced most organisations to focus on risks and manage them. Africa realised that the risk to business has never been higher. Besides the credit crunch, risks continue to emerge in technology, entering new markets, changing consumer habits, new products and dealing with emerging economies. Corporate governance and risk management though most are still at their pre-implementation stage - have resulted in strong governance structures, effective risk management practices and strengthening the function of Internal Audit.

Amos Bagumire
Executive Director, Advisory Services Ernst & Young Uganda

China investments into Africa

Africa used to be home to lions and elephants, it is now also home to the dragons. Chinas investment into Africa is huge. For those who are not aware of the opportunities and challenges, it is important to understand where the core of the new economy will be. The large telecom and infrastructure projects are well underway in areas such as Nigeria, Ghana and Angola.

Africa has become extremely important to China, as it supplies much needed raw materials. China offers in return construction of infrastructure and investments.

margins for local and foreign companies are usually around 15 - 25%, while Chinese companies operate at around 10% margin. There are certainly some challenges that they face:

Never before has any other country taken African investment this seriously.
The activity in Africa is bubbling, Nigeria, Ghana, Zimbabwe are a few of the countries that are experiencing substantial investments. Chinese aid and investment have flooded into Africa in the form of interest-free loans, infrastructure projects and lucrative mineral extraction contract. A report published recently found that the number of Chinese companies operating in Africa has swelled from 800 in 2008 to more than 2,000 at the beginning of 2010. Most of the large construction projects are carried out by the SOEs (state-owned enterprises) which often utilize large numbers of Chinese workers. China has managed to secure the large construction projects due to their low cost margins. Average profit

Continual tension with labour unions due to lower pay and lack of benefits on contracts; Unrest from locals as the state-owned enterprises send Chinese labour across to complete the projects; There is also tension between the local traders as they compete for local business. There is however a substantial reduction in poverty for people living in the surrounding areas. Some of the large Chinese corporates that are leading the way into Africa are: Huawei and ZTE (telecommunications), Bank of China and ICBC (Banking), Evergreen (Shipping) and COSCO. Investment into African countries varies, depending on the opportunity for oil extraction, construction or retail. China mainly exports to South Africa, Egypt, Nigeria and Algeria, while the main imports come from South Africa, Angola, Congo and Equatorial Guinea. In the past 15 years, Chinas investment in Africa had risen to $850 million and has become one of Africas top trading partners.

Figure 1 - World Trade Atlas' Value of Trade

120,000 100,000 80,000 60,000 40,000 20,000 0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

The EY China Africa In-bound Desk is set up to assist Chinese corporations in navigating foreign markets and expanding beyond their borders. Our China Africa Desk works hand in hand with our Ernst & Young offices in China, and is linked to our 22 offices in Sub-Sahara Africa. We have multicultural professional team members, with skills to communicate in Chinese and other local African languages and assist with on the ground experience. We cover all compliance-related work, international acquisitions, accounting and audit, tax, advisory and other strategic services.

For more information, please contact:

Lauren Patlansky
Associate Director, China Business Services Tel: +27 31 576 8029 [email protected]

Investment opportunities in Zimbabwe

Like its Southern African neighbours, it is well-endowed with mineral, agricultural and other resources. Zimbabwe offers many development opportunities, but has to overcome its main challenge - securing finance, says Welton Makwarimba from Ernst & Youngs Account & Business Development in Harare
Why Invest in Zimbabwe?
Zimbabwe with its abundant natural resources largely missed the commodities boom of the last decade. Skilled, semi-skilled and unskilled labour the majority being English-speaking with at least 4 years of secondary education is abundant. It is located in close proximity to South Africa and has above-average infrastructure making it an ideal candidate for growth and investment. The Government has introduced varied incentives to spur investment, and offers access to regional and world markets. Zimbabwe now operates on a free monetary system and subscribes to various international Treaties and Bilateral Investment Protection Agreements.

Tax Incentives for Investors

5-year tax holiday for industrial park developers and 10% thereafter. 5-year tax holiday for Build Operate Transfer (BOT) arrangements, 15% for the 2nd 5 years, 20% for the 3rd 5 years and 30% thereafter. Duty-free on importation of information and communications technology (ICT) related equipment. Deregulated banking system for expedition of payment and loan approvals. Investment allowance of 15% on cost of construction, addition or alteration on industrial or commercial buildings or staff houses can be claimed. New manufacturing projects are taxed at 10% in growth point areas. 20% income tax for manufacturing companies that export 50% their output. 25% income tax for a holder of special Mining lease. Double deduction for non-capital expenditure incurred in seeking new opportunities/markets to export of goods, in creating or increasing the demand for cash goods.

Economic growth rates of key economic sectors

According to the Medium-Term Plan 2010 - 2015 (MTP), growth estimates for the key economic sectors of Zimbabwe are as follows:

2010 GDP Growth % Agriculture Manufacturing Mining

Source: MTP 2010-2015

2011 13.3 20 18.8 66

2012 15.7 8.9 10.5 64

2013 15.3 13.3 9.5 13.1

2014 14.7 9.4 9.1 7

2015 15.4 9.8 8.3 5

12.5 33.5 61 98

Investor Protection
Zimbabwe is a signatory to the Multilateral Investment Guarantee Agency, Overseas Private Investments Corporation, International Convention on Settlement of Disputes, the New York Convention on the Enforcement of Bilateral Awards, the UN Convention on International Trade Law; Bilateral Investment Promotion & Protection Agreements (BIPPAs) - with UK, China, Germany, Malaysia, France, Italy and South Africa.

Sector investment opportunities

Sector and description Potential projects/opportunities
Re-capitalisation of mines, prospecting, quarrying and exploration, mergers and acquisitions Beneficiation, e.g. cutting and polishing of diamonds,

Mining
Nickel, chrome, coal, gold, platinum (worlds 2nd largest reserves), iron, diamonds, copper, significant gas reserves in the Zambezi Basin

Infrastructure
Existing infrastructure extensive, but needs refurbishment and rebuilding.

Building, refurbishment and maintenance of infrastructure airports, toll roads, dams, bridges, power generation and transmission facilities and telecommunication systems. Building new hydro-electric power stations, thermal power stations and/or refurbishment of existing structures Alternative energy sources - wind and solar Building and refurbishing of hospitals, community health centres, and provision of equipment Advisory services - operational and financial/budgetary changes

Energy
26 billion tons of coal reserves available for power generation 8 000 years of use at current consumption (3 million tons/year)

Health
Infrastructure inadequate and equipment needs modernisation
Continued on next page

Continued from previous page

Sector and description

Potential projects/opportunities
Refurbishment and capacity-building to bring capacity up from less than 10% in 2008 currently below 40% due to working capital constraints Computerisation of operations and processes Development of appropriate budgeting and financial reporting framework, upgrading of infrastructure, e.g. buildings Capacity for new mobile and fixed network telephonic providers New entrants in the print, visual and sound media industry

Manufacturing
Industrial production down 59% between 2005 and 2007

Government and public sector

Governance of public expenditure will undergo significant changes

IT/Media
There is 0% duty on all imported IT equipment

Agriculture
Sector remains undercapitalised with insufficient inputs and infrastructure

Capitalisation of commercial farming enterprises including meat processing, poultry and fish farming, juice extraction, horticulture, floriculture and cotton-processing Infrastructure development and refurbishment, as well as investment in value-adding processing of agricultural equipment

Banking and financial sector

Sector heavily undercapitalized

Recapitalisation of financial institutions, updating or enhancing platforms to support newer banking and finance products and computerisation of exchanges Investment in new fleets and upgrading current fleets Enhancement of rail communication links and greater usage of rail networks Capacity for new mobile and fixed network telephonic providers Entrants of new players into the sector to service 60% of the countrys population of 12 million

Transport
Airspace is being opened up to new entrants and city transportation inadequately funded

Telecommunications
Major players: Econet Wireless (nearly 3 million subscribers), Telecel (1.2 million) and government-owned NetOne (300,000) and fixed line operator, TelOne

Sources: Zimbabwe Investment Authority, Ministry of Power & Energy Development, Ministry of Finance - The Medium Term Plan 2010-2015 Document, Banks & Banking Survey 2009 - Zimbabwe Independent Newspaper, CZI July 2008 Manufacturing Sector Survey, Financial Gazette (7th January)

For more information, please contact:

Welton Makwarimba
Assistant Director, Accounts & Business Development, Ernst & Young Zimbabwe Tel: +263 4/75 0979/75 [email protected]

Joe Cosma
Regional Leader, Ernst & Young Central Africa Tel: +263 4/75 0979/75 [email protected]

10

Beneficiation
Tshepisho Makofane
Director, Tamela Holdings

Who should lead the charge?

Beneficiation doubles the value of minerals produced. The debate has moved beyond a discussion of the merits, as there is enough evidence in support, to how it should be done, argues Tshepisho Makofane, director of Tamela Holdings
The following paragraph from the Chamber of Mines is just part of the proof that mineral beneficiation is the way to go. Total primary mineral sales exports increased by 35.4% to a total of R219.6-billion in 2008. This accounted for 31.1% of South Africas total merchandise exports. If secondary beneficiated minerals such as PGM catalytic converters, ferroalloys, steel and chemicals are added to primary exports, the South African minerals complex accounted for just over R352-billion or about 50% of South Africas total merchandise exports in 2008. The additional R130 billion of foreign currency generated by secondary beneficiation would have advantaged the country in many ways, such as balancing the countrys current account. Another statistic, from the Draft Beneficiation Strategy Document, is further proof of the benefits of beneficiation, the pun excused: In 2007, gross revenue from sales of all minerals in South Africa amounted to just below R225 billion. Similarly, just over R40 billion was generated from processing of base metals as well as precious metals and minerals, which represented less than 10% of the total volumes of minerals produced. This shows that beneficiation doubles the value of minerals produced. The debate around mineral beneficiation has moved beyond a discussion of the merits, as there is enough evidence in support, to how it should be done. Without any natural resources, countries like Japan, India and Switzerland have built strong competencies for tertiary to final beneficiation of minerals by focusing on the higher value, industrial/manufacturing and technological sectors. Africa, with its own natural resources, must and can indeed move up the value chain. As correctly articulated by the Chamber of Mines in South Africa, it is important to understand the different stages of beneficiation and then decide which industry is best suited to execute which stage of beneficiation.

The term mineral beneficiation entails the transformation of a mineral (or a combination of minerals) to a higher value product, which can either be consumed locally or exported. The term beneficiation is used interchangeably with value-addition or downstream beneficiation. The beneficiation of minerals includes downstream and side-stream linkages (input sector, such as R&D for new product development).
Source: South Africas Draft Beneficiation Strategy

11

The four stage downstream beneficiation process

Stage

Mineral beneficiation process

The action of mining and producing an ore of concentrate (primary product) the action of converting a concentrate into a bulk tonnage intermediate product (such as a metal or an alloy) The action of converting the intermediate goods into a refined product suitable for purchase both by small and sophisticated industries (semis) The action of manufacturing a final product for sale

Process flow-chart

Labour intensity

Capital intensity

Industry cluster

1.

Run-of-mine ores

Washed and sized concentrates

High

High

Mining

2.

Worked shapes and forms

Ferro alloys/ pure metals

Low

High

Mining

3.

Steel/alloys

Worked shapes and forms

Low

High

Refining/ Manufacturin g

4.

Mattes/slags/ bulk chemicals

Worked shapes and forms

Medium to Medium to Manufacturin high high g

Source: Chamber of Mines, 2007

The mining houses view is that, stages 3 and 4 are more suited to manufacturers than mining houses. This is aptly captured in a quote from the Chambers Chief Executive, Mr Zoli Diliza: You cant expect a mining engineer to design a piece of jewellery. South Africa has made large strides at stage 2 beneficiation, with products such as catalytic convertors and ferro chrome being manufactured locally; but should move further to tertiary and final beneficiation. Furthermore, the country could lend a

hand to other countries on the continent to catch up. African governments need to now put in place systems and processes of attracting investment into the tertiary sectors, for example: Investment incentives; Actively discouraging the exporting of raw ore, including via legislation or penalties; Investing in enabling infrastructure; and Skills development and training.

12

at a glance

Country Benin Burkina Faso

Population 8,900,000 15,800,000

GNI p/capita in $ 690 480

Main Exports Cotton, palm oil Cotton, animal products, gold Shoes, clothes, fish, bananas, hides, pozzolana (volcanic rock, used to make cement) Cocoa, coffee, tropical woods, petroleum, cotton, bananas, pineapples, palm oil, fish Peanuts and peanut products, fish, cotton lint, palm kernels Gold, cocoa, timber, tuna, bauxite, aluminium, manganese ore, diamonds Bauxite, alumina, gold, diamonds, coffee, fish, agricultural products Cashew nuts, shrimp, peanuts, palm kernels, sawn timber Diamonds, iron ore, rubber, timber, coffee, cocoa Cotton, gold, livestock Fish and fish products, iron ore, gold Uranium, livestock products Petroleum, petroleum products, cocoa, rubber Fish, peanuts, petroleum products, phosphates, cotton Diamonds, rutile, cocoa, coffee, fish Cocoa, phosphates, coffee, cotton

Main Imports Food, petroleum products Capital goods, petroleum products, food Consumer/intermediary/capital goods, petroleum Foodstuffs, petroleum products, capital equipment Food, machinery & transport equipment, minerals, fuels, manufactured goods Oil

Cape Verde

506,000

3,130

Cote d'Ivoire

21,100,000

980

Gambia

1,700,000

390

Ghana

23,800,000

670

Guinea GuineaBissau Liberia

10,000,000 1,600,000

400 250

Food products, petroleum, capital goods Food products, capital equipment Minerals, fuels, lubricants, food, animals, machinery, transport equipment, manufactured goods Capital goods, petroleum products, food Oil exploration services, public investment, aid Food products, capital goods, petroleum products Machinery, transport equipment, chemicals, food, animals Food, petroleum products Fuel, lubricants, food, machinery, transport equipment Capital goods, food, petroleum products

3,900,000

170

Mali Mauritania Niger Nigeria Senegal Sierra Leone Togo

13,000,000 3,300,000 15,300,000 154,700,00 0 12,500,000 5,700,000 6,600,000

580 840 330 1,160 970 320 400

Sources: United Nations (UN) and the World Bank

In this issue of Eye on Africa, our West African focus is on doing business in Senegal. See Investing in Senegal on page 14.

13

West Africa

Investing in Senegal

Private rights are guaranteed by the Constitution, which provides that expropriation is prohibited unless for reasons of public interest and further provide that adequate compensation be fixed prior to expropriation; and there are no local ownership requirements, writes Raky Gueye, Ernst & Youngs Senior Manager, Tax & Legal.
Senegal is a multiparty democracy; a country spanning an area of about 200,000 square kilometres and a population of 12.17 million. The national capital of Dakar has a population of approximately 3 million. 85% of the population is Muslim, 5% is Catholic with the remainder following traditional beliefs. The official language of the country is French and a large number of African languages spoken in the country.

Currency and regional integration

The currency used in Senegal is the Franc of the Financial Community of Africa (FCFA), which is the common currency of the 8 West African Economic and Monetary Union (WAEMU) countries. These include Senegal, Mali, Guinea Bissau, Burkina Faso, Ivory Cost, Niger, Benin and Togo. The Central Bank of West African States (BCEAO), located in Dakar, is in charge of the monetary policy in this zone. As a member of WAEMU, Senegal offers the opportunity to access to a: market of 200 million consumers, based on the free movement of people and goods; market relying on a common commercial and costumer policy; regional financial market with a stock exchange. Senegal is also a member of ECOWAS with 15 member states. It is signatory of the European Union/Africa Caribbean Pacific (ACP), African Growth and Opportunity Act (AGOA), the Canadian Initiative Act which offer the opportunity to access respectively to European Union, American and Canadian markets.

Investment environment
Fishing is a significant sector of the economy, but agriculture is Senegals principal resource accounting for almost 50% of the countrys total exports. Peanuts are the main commodity produced in the country, but attempts have been made to diversify into others, particularly cotton, the second largest export commodity, millet, sugar cane, fruit and vegetables. Phosphate is the most important mineral resource, although there are also significant iron ore deposits as well as oil.

Infrastructure
The system of roads in Senegal is relatively well developed; there are 14,500 km of roads, responsible for 90% of the movement of people and goods. The Senegal River is also used for the transport of goods within Senegal and for transit to Mauritania. Dakar port is the largest in West Africa and extends over 3,260,000 square metres. The railway network stretches 1,057 km with a main axis from Dakar to Mali. Senegal has three international airports; the Dakar Airport being a major hub in Economic Community of West African States (ECOWAS), with a flow of 1.2 million per year.
14

Business organisations
Senegal has 11 Chambers of Commerce. The Dakar Chamber of Commerce & Industry is one of the most important business support services in Senegal. The Chamber is an independent organization serving and promoting the commercial and industrial interest of small and large companies in the country.

Investment Promotion Agency (APIX)

The official agency in charge of the promotion of investment in Senegal is APIX. The main targets of the APIX are the following: Welcome and support investors all throughout the investment chain. Support investors for the formalities of registration and for obtaining the various administrative authorizations. Direct towards financing structures. Provide assistance in the search for partnership. Solve administrative problems. Besides, APIX fulfils all the functions of a one-stop office by: Issuing in 10 days the certification to the Investment Code and providing the exemption certificate for the customs formalities. Issuing in 21 days the certificate to the status of an off-shore export company. Carrying out within 48 hours formalities for administrative registration and retirement and social security fund registration. Ensuring a follow-up of the approved investment projects

In order to promote public/private partnership and with the view of continually improving the business environment, Senegal adopted the Built Operate and Transfer (BOT) law in 2004. In accordance with this law, local authorities or public institutions/enterprises entrust a third party to run a public interest infrastructure (from conception, financing and operation). In return the private operator remunerates itself mainly from the fees paid by the users.

Main taxes applicable in Senegal

Corporate Income Tax Rate Capital Gains Tax Rate Branch Tax Rate Withholding Tax: Dividends Directors Fees and Non-Deductible Expenses Interest: interest on long-term bank interest other interest Royalties from Patents, Know-how Payments to Non-residents for Certain Services and Activities Branch Remittance Tax

25% 25% 25% 10% 16% 6% 8% 16% 20% 20% 10%

Business ownership in Senegal

Business in Senegal may be conducted in the form of unincorporated businesses, partnerships or companies. Foreign companies are free to establish branches in Senegal. When the branch is owned by a foreigner, it shall be attached to a company in existence or to be created governed by the law of Senegal not later than 2 years after the branch is set up except with an exemption of the Minister in charge of commerce. A foreign company is allowed to carry on business in Senegal through a subsidiary; a company being considered a parent company of another when it holds more than 50% of its capital. There are no local participation requirements.

Incentives for investors

Investment Law
Eligibility to the regime of the Code of Investment grants following advantages: Exemption of customs duties and suspension of VAT during the investment stage. Exemption from tax on salaries during five years. Benefit of a tax credit which amounts to 40% of the fixed assets investments. Derogations from the labour law.

15

The special regime of Free Export Companies (FEC)

The main advantages granted by this regime are the following: Profits subject to a 15% company tax rate (instead of the standard 25%). Exemption from the tax on movable capital on distributed dividends, the payroll tax, the business license duty, the property tax on developed land, the property tax on undeveloped land and registration fees. Exemption from VAT on local purchases made by FEC. The main advantages granted these two special regimes can also be conferred in terms of the Dakar Technopole.

NOTE: Eligibility to the above investment incentives generally guarantees: The free transfer of all sums required to make the investment. Free transfer of the dividends to foreign shareholders. The arbitration of the International Centre for the settlement of disputes relating to investment. Furthermore, private rights are guaranteed by the Constitution, which provides that expropriation is prohibited unless for reasons of public interest and further provide that adequate compensation be fixed prior to expropriation.

Investor protection and international agreements

Senegal has signed a multilateral tax treaty with the twelve other member states of the WAEMU states. Bilateral tax treaties with Belgium, Canada, France, Italy, Norway, Tunisia, Morocco, Mauritania and Qatar are in place. Although these have yet to be ratified, Senegal has signed treaties with China, Lebanon, Saudi Arabia, Egypt, Spain, Guinea, India, Kuwait, Mauritius and Indonesia.

The special regime of the Senegal Free Zone

For those enterprises located in the Zone, the following incentives apply: Exemption from all taxes and duties for acquisition of goods, equipments, raw materials. A reduced system tax concerning the Corporate Income Tax; only a lump sum tax equal to 2% of the turnover is applicable. Exemption from the specific tax on salaries, capital gains taxes, business license tax, land taxes, registration fees. Exemption from payment of withholding taxes from dividends arising out of free zone investments. Besides the provisions applicable to mining companies, there are other investment incentives, such as: Capital gains reinvested under certain conditions will not be subject to tax. Individuals and companies who invest in the field of solar or wind energy can benefit from a reduction in company tax or individual income tax.

ECOWAS
As a member of ECOWAS Senegal is signatory to a treaty that establishes free movement of persons in the 16 Western African states, namely, Benin, Burkina, Cape Verde, Gambia, Ghana, Guinea, Guinea Bissau, Ivory Coast, Liberia, Mali, Mauritania, Niger, Nigeria, Sierra Leone and Togo.

16

Lome convention
Senegal is a member of the Lome Convention between the European Community and more than 60 ACP countries. Under the trade chapter of the Convention, industrial exports from ACP countries can enter the European Union duty-free. A preferential import regime is applied to most agricultural exports.

repatriation of export proceeds. Other important features of exchange controls include: Import licenses authorize importers to obtain the required foreign exchange. Export proceeds must be received within 120 days of arrival of the products at their destination. They must be repatriated to Senegal within 1 month from expiration of the 120 days. Capital necessary for direct or portfolio investments in Member countries of the Franc Zone as well as the Comores and Congo can be freely transferred provided the necessary prior authorization for the acquisition of securities is granted. Transfer of capital to residents of other countries is subject to prior authorization for the acquisition of securities is granted. Transfer of capital to residents of other countries is subject to prior authorization from the Finance Ministry, but can normally be effected without delay. No prior authorization is required for Government guaranteed loans and for securities, the issuance of which is authorized in Senegal. The transfer of profits, dividends, interest, royalties, salaries or FECs to residents of Franc Zone countries as well as Congo and the Comores, can be freely affected. Transfers of such income to residents of other countries require prior approval of the Finance Ministry but normally can be realized without delay.

Business law harmonisation and intellectual property protection

Laws pertaining to business and the settling of contractual disputes in Senegal are harmonised with those of the West and Central African states that are members of the Organization for the Harmonization of Business Law in Africa (OHADA). 8 Uniform Acts were adopted within the framework of OHADA. They concern arbitration law, accounting law, regulations relating to contracts for the carriage of goods, general commercial law, securities law, debt recovery and enforcement law, corporate business law and bankruptcy and insolvency law. Similarly, intellectual property is protected under the uniform regional property protection of the member states belonging to the African Intellectual Property Organisation (OAPI).

Foreign exchange control

Exchange control is administered by the Ministry of Finance in concert with the BCEAO, according regulations adopted by other WAEMU states. Exchange control does not apply to members of the Franc Zone or to the Comores and the Congo except for transactions in gold and the compulsory

For more information, please contact:

Makha Sy
Managing Partner, Ernst & Young Senegal Tel: +221 33 849 22 22 [email protected]

Raky Gueye
Senior Manager, Tax & Legal, Ernst & Young Senegal Tel: +221 33 849 22 22 [email protected] or
17

Unlocking Africas investment potential

Several Africa governments are taking significant measures to improve their investment climates. The goodwill of these governments is being translated into tangible and very positive action and the time is ripe for the private sector to respond.
ICF is currently supporting 32 projects in 12 African countries. We focus on priority areas that shape a healthy investment climate for example, the streamlining of business registration, increasing efficiency in taxation and customs, securing property rights and strengthening judicial systems, as well as removing critical infrastructure challenges in the power and financial sectors. An example of ICFs practical success can be seen in Rwanda where, two years into a three year partnership project with the Government, a dedicated commercial court system has been established. Four new commercial courts are fully operational, a pre-existing backlog of 3,000 pending cases has been cleared, and 1,000 additional cases have been addressed. A new legal library, with 800 reference books, has also opened to support legal teams when preparing for cases. The link between strong judicial systems and a healthy investment climate is intrinsic. When disputes spill into the commercial world, investors need the assurance they will be resolved quickly, efficiently. Otherwise they will take their business and money elsewhere. A separate project in Lesotho is delivering particular benefits for smaller businesses. For businesses in more remote areas of Lesothos mountainous countryside, the burden of visiting the countrys single VAT return processing centre was costly in time as well as money. Faced with long and difficult journeys, as well as multiple and complex manual procedures, tax was neither being paid or reimbursed and cash flow problems were causing many small businesses to default on payments. The solution was for the Government of Lesothos Revenue Authority to approach ICF and request support in establishing two regional VAT offices, and rationalising the assessment and administration of VAT in Lesotho. Businesses can now file VAT returns in regional branches of three banks and the amount of VAT collected between 2007 and 2008 showed a 32% improvement. The VAT payment and lodgement process also takes no longer than 20 minutes. This type of project is particularly important to the Africas SMEs where they account for just 10% of GDP, rather than 50% of gross GDP in developed countries where they are the backbone of economies. The speed and scale of ICFs achievements have been possible because of the willingness and commitment by the respective African governments to improve the business environment. We are working collaboratively not only with these governments but also with the private sector. ICF hopes that 2010 will be shaped by even greater involvement from domestic and international private sector organisations interested in working with ICF to help change Africas economic destiny - we welcome interest from all organisations interested in joining this exciting journey.

Omari Issa
CEO, Investment Climate Facility for Africa www.icfafrica.org

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Omari Issa is Chief Executive Officer of the Investment Climate Facility for Africa (ICF). ICF works to remove the barriers that exist to doing business in Africa, recognising that a healthy investment climate is vital for the continents economic growth. It is a unique and unprecedented partnership between private companies, development partners and governments, founded on the principle that all parties need to work together to enable the continent to finally realise its very real investment potential. It is the only pan-African body, based in Africa, explicitly and exclusively focused on improving the continents investment climate. www.icfafrica.org

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Rwanda, compared to other EAC countries

Population Nominal GDP million $bn
7.9 (2005) Burundi 9.5 (2009) 1.3 (2009) 3.5 (2009) Industrial supplies, machinery & other capital equipment, consumer goods, food & beverages 1.0 (2006)

Country

Real GDP Main Exports Growth %

4.5 (2008) Coffee, tea, manufactures

Main Imports

Capital goods, food, intermediate goods, consumption goods

35.1 (2005) Kenya 39.6 (2009)

22.5 (2006)

1.7 (2008) Horticultural products, tea, coffee, fish products

35.9 (2009)

2.5 (2009)

9.2 (2005) Rwanda 10 (2009)

2.9 (2006)

4.9 (2009)

11.2 (2008) Coffee, tea, cassiterite (source of tin) & tin, coltan (metallic ore from Energy, capital goods which nobium and tantalum used in 6.0 (2009) cellphones and computer chips) 7.4 (2008) Gold, cotton, cashew nuts, coffee, tea

38.5 (2005) Tanzania 42.6 (2009) 28.9 (2005) Uganda 33.3 (2009)
Source: BMI Country Reports

14.4 (2006)

22.6 (2009) 10.0 (2006) 15.8 (2009)

4.9 (2009) 9.0 (2008) Coffee, fish, cotton, tea 7.0 (2009)

Machinery, oil & other fuels, food & foodstuffs, industrial raw materials

Machinery equipment, vehicles & accessories, vegetable products, animal fats & oils, chemicals, petroleum

Rwanda - major trade partners

Exports in US$m

Exports
China Germany United States Hong Kong Pakistan

Imports
Kenya Uganda Germany Belgium China
Hong Kong 45.3 14%

Pakistan 38.3 11% China 150.7 45%

USA 47.4 14% Germany 52.7 16%

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at a glance

Registering business/property/construction permits

Starting a Business
Procedures - Total Number Time in Number of Days Cost as % of Income per Capita

Burundi
11 32 151.6

Kenya
12 34 36.5

Rwanda
2 3 10.1

Tanzania
12 29 36.8

Uganda
18 25 84.4

Registering Property
Procedures - Total Number) Time in Days Cost as % of Property Value

Burundi
5 94 6.3

Kenya
8 64 4.2

Rwanda
4 60 0.5

Tanzania
9 73 4.4

Uganda
13 77 3.5

Dealing with Construction Permits

Procedures - Total Number Time in Days Cost as % of Income per Capita

Burundi
22 212 7968.2

Kenya
11 120 161.7

Rwanda
14 210 456.1

Tanzania
22 328 3281.3

Uganda
16 143 584

The 2010 World Banks Doing Business in identified Rwanda as the top reformer in the world. On its website, it said: For the first time since Doing Business started tracking reforms, a Sub-Saharan African economy, Rwanda, led the world in reforms. Rwanda has steadily reformed its commercial laws and institutions since 2001. In the past year it introduced a new company law that simplified business start-up and strengthened minority shareholder protections. Entrepreneurs can now start a business in two procedures and three days. Rwanda has also enacted new laws in order to improve regulations to ease access to credit. Other reforms removed bottlenecks at the property registry and the revenue authority, reducing the time required to register property by 255 days. Overall, Rwanda introduced reforms in 7 out of the 10 categories, rising from 143rd to 67th place on the ease of doing business rankings.

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East Africa

Introduction of the East African Community Customs Common Market in July 2010
Opportunities and Challenges

Important to note is that even if the goods will be imported free of any duty, customs procedures will still have to be followed. For instance, customs documentation will have to be prepared and clearing agents will have to be employed, says Hadijah Nannyomo of Ernst & Youngs Tax Services in Uganda
The East African Customs Community (EAC) was formed in 2005. It is currently made up of five nations namely Uganda, Kenya, Tanzania, Rwanda and Burundi. The legal framework for Customs administration in the EAC region is the East Africa Community Customs Management Act. The partner states agreed to have four stages for the EAC Regional Cooperation and Integration including: A Customs Union in 2005 to be fully realised in January 2010 Common Market to be in place by 2010 Monetary Union to be in place by 2012 A political Federation with no definite date of implementation The Customs Union in 2005 saw the reduction of import duty on goods from within the partner states from 25% to 0% for some goods and to10% for others. It was agreed that the 10% rate will reduce by 2% each year until it is reaches 0%. Effective January 2010 the rate for ALL imports originating from within the partner states reached the rate of 0%. In November 2009, the member states signed the protocol for the establishment and implementation of a Customs Common Market effective 1 July 2010. When the common market is implemented taxpayers within the member states will be allowed free movement of goods produced within the member states, free movement of labour as well free movement of capital and services. This will imply that in addition to goods produced within the region paying 0% import duty, they will not pay any other duties payable at importation such as Value Added Tax, Excise Duty, etc. It also implies that one will no longer need a work permit to work in any of the member states as long as they are citizens of the member states. Important to note is that even if the goods will be imported free of any duty, customs procedures will still have to be followed. For instance, customs documentation will have to be prepared and clearing agents will have to be employed. This will enable the Authority to still perform its duty of providing trade statistics and also ensuring that the goods imported should actually be imported free of duty. With the formation of the Customs Common Market, rules of origin criteria will be the determining factor for importation of goods free of duty. The EAC criteria, for example, prescribe that goods shall be accepted as originating in a Partner State where they are consigned directly from a Partner State to a consignee in another Partner State and where: they have been wholly produced ; or they have been produced in a Partner State wholly or partially from materials imported from outside the Partner State or of undetermined origin by a process of production which effects a substantial transformation of those materials such that: - The cost plus insurance plus freight value of those materials does not exceed sixty per centum of the total cost of the materials used in the production of the goods; - The value added resulting from the process of production accounts for at least thirty five per centum of the ex-factory cost of the goods. - The goods are classified or become classifiable under a tariff heading other than the tariff heading under which they were imported.

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Part of the documentation that will be required by the Customs Authorities to confirm origin will be a certificate of origin issued by the relevant regulatory authority in the member state, e.g. the Ministry of Trade or Ministry of Finance. The Common Market will have several opportunities and/or advantages for taxpayers in the member states including: Reduced cost of doing business; with no import duties, the cost of doing business will decrease for importers. This will increase profits and boost trade. Prices of goods may be reduced in the longer term for final consumers. Increased market size, which will lead to increased sales for exporters within the region. Because the goods being exported will be free of import duty in the member countries where they are destined, more will be ordered. Efficient use of resources as there will be ease of movement of labour, services and capital (i.e. plant and machinery) within the region. Increased networking amongst taxpayers within the region. There will also be some challenges expected with the formation of the Customs Common Market: Taxpayers in the different member states will not equally benefit owing to the fact that different member states are not at the same level of development. All the member states are currently still members of other regional groupings like COMESA and SADC. This will imply that taxpayers importing from COMESA and SADC regions will be more disadvantaged since the duty rates for those two regions will remain higher than those within the EAC.

Currently most of the traders/importers do business with, and import from, the Far East and Asian countries, so they will still have to pay taxes at importation and compete with those who purchase from within the region. This category of importers will not fully benefit from the Customs Common Market. To fully benefit from the upcoming Customs Common Market importers should consider the following planning ideas: Tax Efficient Supply Chain Management, for those who have been importing from outside the EAC region, to restructure their supply chains and look for producers of similar items within the region. Those manufacturers outside the member states, but with a presence in different member states where they have been exporting products, should consider opening up manufacturing plants within the region. Caution should be taken to ensure rules of origin are satisfied. All importers should ensure that a certificate of origin is obtained on importation of goods produced from within the region. During the current economic downturn and in the early stages of recovery, Customs Authorities are doing everything possible to collect and hit their set revenue targets. The formation of the Customs Common Market may further reduce their collections. They are therefore expected to be more efficient and increase their scrutiny of Customs documentation through audits. Taxpayers should consider improving their awareness of Customs operations, planning and management to avoid unnecessary audits and penalties.

For more information, please contact:

Hadijah Nannyomo
Manager, Tax, Ernst & Young Uganda Tel: +256 414 343520 [email protected]

Gitahi Gichahi
Regional Leader, Ernst & Young East Africa Tel: +254 202 715300 [email protected]
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8
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Our contacts in Africa

You have come to the right place

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Africa Business Center Contacts

Victor Kgomoeswana Africa Business Center Tel: +27 11 772 5249 Mobile: + 27 83 603 4731 email: [email protected] Louw Roets Southern Africa Tel: +27 11 502 0125 Mobile: + 27 82 611 7777 email: [email protected] Eme Agha West Africa Tel: + 234 1 4630 479-80 Ext: 110 Mobile: +234 808 880 8087 email: [email protected] Makha Sy FSSA Tel: +221 338 49 22 02 Mobile: +221 77 638 34 41 email: [email protected]

Robson Mugomba Africa Business Center: UK Tel: +44 (0)20 7951 2355 mobile: +44 (0)77 7185 8102 email: [email protected] Lauren Patlansky China Business Tel: +27 31 576 8029 mobile: +27 83 301 4597 email: [email protected] Mitch Khalpey India Business Tel: +263 4 750979 mobile: 912417591 email: [email protected]

Welton Makwarimba Central Africa Tel: +263 4 750979/83 | Office: +263 4 750905/14 email: [email protected]

Jennifer Kinyoe East Africa Tel: +254 20 2715300 Mobile: +254 711 591446 email: [email protected]

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