Sustainable Investment Policy Perspectives of the East African Community

Executive summary

The EAC is a very diverse and dynamic regional community offering diverse investment opportunities. FDI inflows to the region have been steadily increasing over the last 20 years, but with strong fluctuations and uneven distribution among Partner States. While the region remains strongly dependent on its natural resources, there is a gradual shift in FDI towards less natural resource-intensive sectors. FDI in the EAC supports job creation and generates spillovers to local economies, but it could further contribute to sustainable development.

The EAC has been at the forefront of regional investment policy making in Africa, with the development of the EAC Model Investment Code in 2006, the EAC Model Investment Treaty in 2016 and the EAC Investment Policy in 2019. The latter was developed to address the challenges needed to improve the investment climate of the region, attract investments and promote the region as a single investment destination. Partner States have also worked to implement these frameworks at the country level and improve their respective investment environments with numerous national initiatives.

The Community is now working on developing the EAC Investment Strategy, which is meant to be the implementation plan for the EAC Investment Policy, and on revising the EAC Model Investment Treaty to adapt it to the recent African Continental Free Trade Agreement (AfCFTA) and its related Investment Protocol. This will necessitate an even greater need to focus on raising the competitiveness of the region for investment and ensuring investment supports sustainable development.

This report introduces newly developed OECD tools and analysis to the EAC region and explores ways to reinvigorate the reform of the EAC investment climate to prepare the region for the AfCFTA, while also providing a greater focus on improving sustainable outcomes from investment. The main messages and considerations are provided below.

Aligning the legal framework for investment to sustainable development objectives

• Consider revising the EAC Model Investment Treaty to align it with the AfCFTA Investment Protocol. The EAC Model Investment Treaty extensively incorporates sustainability considerations, though it does not yet fully align with other regional instruments, including with respect to States’ commitments and obligations. Reinforcing Partner States’ commitment to fostering sustainable investment in the model treaty would contribute to improved clarity and predictability for governments and investors.

• Increase coherence between national legislation and regional treaties. The analysis suggests that the EAC Investment Code as well as national investment laws do not yet fully reflect innovations implemented in the EAC Investment Policy. Substantive and procedural elements should be better delineated and additional sustainability-related obligations should be included not only for investors but also for States. This would allow the EAC to create a more enabling yet harmonised business environment, striking the right balance between rights and obligations of investors and EAC Partner States.

• Entrust EAC bodies with the responsibility of overseeing the implementation of the Investment Code. Effectively enforcing the EAC Investment Code across all Partner States should be encouraged to the extent possible to realise an enabling, transparent and harmonised regional investment regime. The non-binding nature of the model code has frequently been cited as a hindrance to FDI inflows in the EAC Investment Policy. An effective approach to accomplishing this goal could involve incentivising the EAC Partner States through offering capacity building and technical assistance in reviewing their laws and entrusting EAC bodies with the responsibility of overseeing the implementation of the Investment Code.

• Undertake a comprehensive evaluation of the effectiveness and relevance of current regulatory restrictions on FDI in achieving envisioned policy objectives. By analysing the direct and indirect effects of statutory barriers to FDI on variables such as investment inflows, economic growth, job creation, and sustainable development, policymakers are better enabled to identify any disparities between policy intentions and outcomes. Widespread stakeholder engagement, including with investors, businesses, and civil society, can provide a better understanding of diverse perspectives, informing evidence-based policy adjustments to address challenges posed by existing restrictions.

Promoting and facilitating sustainable investment

• In line with the EAC Model Investment Code’s recommendation, investment promotion agencies (IPAs) should increase their formal interaction with the private sector and other stakeholders, including academia and civil society. This would strengthen their commitment to investment objectives, gain deeper insight into investor needs and ensure that investment promotion objectives also allow for broader societal benefits. While some EAC IPAs currently include stakeholders in their board of directors, agencies might consider further expanding this representation. Periodic exchanges with other IPAs, including in the context of the upcoming EAC IPA Cooperation Network, would also allow facilitating exchanges and aligning strategies at regional level.

• As outlined in the EAC Investment Policy, IPAs, could leverage the digital transformation to enhance clarity and policy transparency, reduce the cost of doing business, and facilitate investment information exchange. Comprehensive information on investment opportunities and procedures should be made easily accessible through their one-stop-shops and online portals. IPAs should also offer sufficient support to facilitate the completion of these procedures in-house. At the regional level, this could be complemented with the establishment of an investors’ helpdesk at the EAC Secretariat.

• While prioritising sustainable FDI represents a commendable initial stride toward achieving the SDGs, IPAs could try to go further by developing and adopting relevant assessment indicators. These indicators should not be limited to metrics relating to the number and value of investment projects or the number of jobs created. To the extent possible, they must be comprehensive enough to ensure that IPAs attract investments that are aligned with their overarching national development strategy and yield favourable sustainable development outcomes.

Assessing the use and design of investment incentives

• Consider streamlining and revising the broad offering of corporate income tax incentives to avoid potentially costly redundancies and ensure that incentives are fit-for-purpose and aligned with investment promotion and development objectives. EAC Partner States offer various tax incentives that benefit almost every sector. Income-based tax incentives are particularly prevalent, despite limited evidence they are effective in mobilising investment for sustainable development. Some countries provide incentives with overlapping sector targeting, allowing investors to benefit from multiple incentives at the same time. Many incentives also target investment projects earning location-based rents (e.g. mining projects), which are less mobile and thus less responsive to incentives. Streamlining and re-designing incentives in a more cost-effective way is in the interest of EAC Partner States, as it can help secure tax revenues for broader investment climate reforms. But tax competition from peer countries can be a challenge for advancing such reforms. Increasing global and regional co-operation on tax policy matters, such as joining OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) or a transnational forum to create peer-learning opportunities on investment tax incentives, could support countries’ transition to smarter and more cost-effective incentives that can better contribute to sustainable development. Collective improvements may also help prevent a race-to-the-bottom in tax incentive competition.

• Prioritise expenditure-based incentives that are more likely to support investments that would not materialise otherwise. Expenditure-based incentives (tax allowances and tax credits) are typically more effective in attracting additional investment as they directly reduce the cost of capital of targeted investment expenses and are more cost-transparent as the size of the tax benefit is relative to the amount invested. They are also less likely to erode the 15% global minimum effective tax agreed by the OECD Inclusive Framework. It is encouraging that EAC countries have started using expenditure-based instruments in their incentives mix but most corporate income tax (CIT) incentives in place are still generous exemptions and reduced CIT rates that apply, either for multiple years or permanently, significantly reducing effective tax rates, running against the global minimum tax, and thus subject to potential top-up taxes.

• Enhance transparency, monitoring and evaluations for a more effective use of incentives. Increasing transparency of incentive frameworks can benefit investment promotion and foster accountability on the use of public funds. Monitoring and evaluation allows countries to assess whether incentives contribute to policy goals, and at what costs, which can inform decisions on incentive continuity, required amendments and phase outs. The EAC Investment Policy and Partner States already outline information on their tax incentives and engage in tax expenditure reporting. These efforts could be enhanced and complemented by periodical incentive evaluations.

Promoting and enabling responsible business conduct

• Raise awareness and understanding of responsible business conduct (RBC) and international principles and standards in the field. The EAC and its Partner States could build on existing initiatives led by some stakeholders to increase knowledge of businesses and other stakeholders about the importance of adopting responsible business practices for sustainable development and build their capacity to conduct risk-based due diligence to identify and address risks of adverse impacts on people, planet, and society. A specific focus could be given to key economic sectors for the region, such as extractive and agriculture, for example, based on the OECD sector-specific Guidance for these two sectors.

• Encourage responsible business practices at the EAC level across relevant policy areas and promote coherence with international RBC principles and standards. Taking advantage of the envisaged reform of its investment strategy and Model Investment Code, the EAC could seek to use its investment policies to promote responsible and sustainable investment by integrating considerations and expectations on RBC in these policies. Further, the EAC can leverage its platform to promote the alignment and coordination of policies pertaining to RBC across Partner States, ensuring a common approach aligned with international instruments.

• Create enabling environments for responsible business practices at the national level. EAC governments could reinforce their legal and policy frameworks in areas covered by the OECD Guidelines for Multinational Enterprises and take further sector-specific action, in particular to enhance transparency and good governance in the extractive sector. EAC governments could also consider developing and implementing overarching policy frameworks to promote responsible business practices through a whole-of-government approach, such as National Action Plans on RBC or Business and Human Rights.