The projects are two of the largest investments made in the Seychelles Islands and generally reflect growing Middle Eastern investments in the Indian Ocean.
The Attractions of Africa
China's booming economy, which has grown by an average of nine percent annually for the last two decades, requires massive levels of energy to sustain its growth. Although China relies on coal for most of its energy needs, it is the second-largest consumer of oil in the world behind the United States. The International Energy Agency projects China's net oil imports will jump to 13.1 million barrels per day by 2030, from 3.5 million barrels per day in 2006. China currently imports about half its oil supplies from the Middle East, and that percentage is projected to grow in coming decades. Yet the extent of the country's energy demand has also compelled China to push into new markets, and particularly Africa.
Some 85 percent of Africa's exports to China come from five oil-rich countries – Angola, Equatorial Guinea, Nigeria, the Republic of Congo, and Sudan – according to a World Bank report. But Chinese interest in Africa extends beyond oil. China now ranks as the continent's second-highest trading partner, behind the U.S., and ahead of France and Britain. From 2002 to 2003, trade between China and Africa doubled to $18.5 billion; by 2007, it had reached $73 billion.
Much of the growth was due to increased Chinese imports of oil from Sudan and other African nations, but China also imports a significant amount of non-oil commodities such as timber, copper, and diamonds. China recently began to import some African-manufactured value-added goods, such as processed foods and household consumer goods.
Experts say Chinese companies see Africa as both an excellent market for their low-cost consumer goods, and a burgeoning economic opportunity as more countries privatise their industries and open their economies to foreign investment. Some textile manufacturers, for example, are reportedly investing in African factories as a way to get around U.S. and European quotas on Chinese textiles.
Chinese investment into Mauritius in the last three years has been substantial. During President Hu Jintao's visit to the country in 2009 he promised $260 million to redevelop the Island's international airport. Meanwhile, the $730 million Shanxi Tianli Enterprises Park – a special economic zone in the Indian Ocean to service Beijing's expansion in Africa (Source: Financial Times, January 2010) – currently in development near the capital of Port Louis – represents the largest ever foreign direct investment into Mauritius.
Furthermore, the African Financing Partnership ("AFP") reported that it is adopting a collaborative co-financing platform to facilitate cost-effective preparations of African projects for financing by the Development Finance Institutions ("DFIs"). The investors promoting the AFP, who have pledged a $15 billion investment fund for supporting the growth of the private sector in Africa, include the International Finance Corporation ("IFC"), the African Development Bank ("AfDB") Group, the Agence Française de Développement ("AFD"), the Development Bank of Southern Africa, the European Investment Bank, the Islamic Development Bank Group, KfW Bankengruppe and the World Bank Group.
The AFP is expected to finance large scale projects in infrastructure, extractive, industrial and agro-industries in Africa. Some of the several transactions that the DFIs are carrying out, according to AFP, include the new Dakar Airport projects by the AIDB; the Lake Turkana Wind Farm project in Kenya, by LWTP; the Main One Cable and Helios Towers projects in Nigeria; the Nairobi toll road project by the IFC; the Egyptian Refinery Company project by Proparco; African Outgrower Development project, and the Ruzizi III project by the European Investment Bank. IFC highlighted the profitable nature of the projects and called for more investors to join in supporting and funding them, since there is still room for more investors to team up with the AFP in promoting the economic growth of Africa.
FDI Flows to Africa
In terms of sources of foreign direct investment ("FDI") flows to Africa, the U.S., France, United Kingdom, Germany, and Portugal accounted for most flows to the region from 1996 to 2000. Within the same period, the U.S. was the most important source of FDI flows into the region, accounting for approximately 37 percent of inflows from developed countries. This represents a marked shift from the period 1991 to 1995, in which the UK and France were the most important sources of FDI flows to the region (source: Foreign Direct Investment in Africa: Performance, Challenges and Responsibilities, African Trade Policy Centre; Work in Progress by Chantal Dupasquier and Patrick Osakwe).
India has been present in Africa for decades, with its FDI mostly in the services and manufacturing sectors but also in Africa's natural resources, including the oil sector (in Sudan, for example).
India is also seeking to secure energy sources and other natural resources from Africa to support its dynamic economic growth. In eastern and southern Africa, Indian immigrants, with business ties to India and a good knowledge of Africa, have played a significant role in attracting new investment to the continent. This is especially true in recent years because "India is flush with foreign reserves and the government has lifted regulations and controls, allowing firms to go abroad, and removing the $100 million cap on foreign investment by Indian firms," according to Harry Broadman, writing in Connecting Africa and Asia, Finance & Development.
Why Mauritius and Seychelles?
Mauritius and Seychelles combine the traditional advantages of offshore financial centres in the Indian Ocean (no capital gains tax, no withholding tax, no capital duty on issued capital, confidentiality of company information, exchange liberalisation and free repatriation of profits and capital etc.), with the distinct advantages of being treaty-based jurisdictions, with a substantial network of treaties and Double Taxation Avoidance Agreements (DTAs).
By contrast, capital gains taxes, where imposed in Africa, are generally levied at a rate ranging from 30 percent to 35 percent.
The DTAs in force in Mauritius or Seychelles, meanwhile, restrict the levying of capital gains taxes, resulting in significant potential tax savings for the Mauritius or Seychelles-resident entity.
Also, Mauritius has signed Investment Promotion and Protection Agreements ("IPPAs") with 15 African member states: they provide for free repatriation of investment capital and returns; guarantee against expropriation; most favoured nation rule with respect to the treatment of investment; compensation for losses in case of war, armed conflict or riot etc., and arrangement for settlement of disputes between investors and the contracting states.
Furthermore, while these two nations are fully part of Africa, Mauritius and Seychelles are not continental African countries. This ideal geopolitical situation eliminates spillover effects from potential neighbouring conflicts. Thus, much of the FDI increase in Africa has been routed through Mauritius and Seychelles domiciled investment vehicles.
This article first appeared in the August 2010 edition of Offshore Red.
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