As the Parliamentary committee on Finance prepares to release its recommendations to the House about the Investment Code Bill 2017, Ms Faith Lumonya, programme officer, Southern and Eastern Africa Trade Information and Negotiations Institute, spoke to Prosper magazine’s Christine Kasemiire about why the Investment Code should be on your radar. Excerpts below.
What is the Investment Code?
The Investment Code is the overarching investment legal framework. It is a binding legal framework that was created to hold investors accountable for their actions in the investment sphere. It gives citizens a legal right to hold both government and investors accountable for their actions.
Why is it important?
Before an investor injects capital in a country, there are key concerns they have. The investment legal framework is one of things they look at to understand the dynamics of the country’s investment policy environment, how it facilitates, regulates and promotes investments.
The finance committee in Parliament was tasked to determine the need to make changes in this code. Why is government amending it?
The current law has been in force since 2000 when it was last amended, and has been over taken by events. A number of changes have happened over the years including reducing donor support and changes in the investment financing mechanisms which have all influenced the increasing need to attract Foreign Direct Investments (FDI). Countries such as Uganda are now looking at FDI to finance large infrastructure, energy and mining projects. Hence through the amendment, the government is looking to create a more attractive environment for investment.
One would argue that Uganda already has an attractive liberal investment environment. What does government want to amend?
The government wants to amend provisions in the Act that have become redundant. Looking at the provisions that are being repealed, the idea is to make it easier for investors to come in and operate. Such provisions include the Certificates of incentives, which should have been maintained as it can facilitate a certain level of accountability, which is, comparing the value of the incentive to the value the country is accruing from the investment.
Another provision which was repealed was a provision on Approval to externalise funds. This provision required that foreign investors should obtain certificates before freely transferring their funds. The provision that allowed foreign investors to obtain credit from domestic sources was removed. Locals cannot be competing with foreigners for credit, given the already existing challenges including high interest rates and demand for high value collateral as security. Other provisions which should have been maintained included the provisions on priority sectors and technology transfer.
Why should a Ugandan business person care about these government reforms?
Government in complying with the regional common market protocol has broadened the definition of a domestic investor to include the East African Community. If this is incorporated, we need to balance our interests. There is a risk that Ugandan investors might be crowded out of business because they will have to compete with other EAC partner states such as their Kenyan counterparts, who are already economically more competitive. This could mean loss of business, and livelihoods. Therefore, the government must ensure that in complying with the EAC Common Market provisions, Ugandans remain in business.
Macro-economic challenges faced by Uganda will also not cease if we keep allowing the foreign investors to repatriate all their profits. The exchange rate will continue to rise against the weakening Uganda shilling, because while investors repatriate their profits, we are also importing a lot and yet exporting so little, because even the investors have not been required by government through the law, to enhance export trade which is a source of foreign currency. The country will most likely continue to lose out.
As a collection of concerned civil society bodies, you came up with recommendations to government in regard to what you thought needed to be addressed. Could you enlighten us on the proposals?
We feel that government needs to go back to the drawing table because we should not have such a legal framework. For example, the definition of what constitutes an investment, especially in view of foreign investments, should be refined to adopt an enterprise-based definition which defines an investment as being real and substantial investment. This will help to exclude foreign investors such as Koreans, Turkish, Indians and Chinese that set up small shops to sell shoes, clothes, operate bakeries like the indigenous business men.
Capital requirements for foreign as well as domestic investors should be increased. However, Small and Medium Enterprises (SMEs) should not be looked at as investments and they should not be required to register with the Uganda Investment Authority (UIA). They should register with Ministry of Trade under the Directorate of MSMEs. Only large Ugandan owned enterprises should be included in the definition of domestic investors given that the definition of domestic investors now includes other EAC partner states.
One of the most controversial topics in investment deals is with incentives. What does the civil society think about the current policy?
Currently, when an investor is applying for an investment license, he/ she is also requested to indicate if or not he/ she needs incentive. Incentives are good, but they are not sufficient determinants/ factors an investor will base on making his/her investment decision. Therefore, incentives such as tax incentives should be given to facilitate business continuity not at commencement of operations. They should be awarded to investors, at least five years after the investment has been operating. Hence, prior to award of the tax incentive, an investment should be subjected to an appraisal for tax incentives to determine if it has, for example, been tax compliant, employed/ procured from locals, or whether it has facilitated skills and technology transfer, among others. This would determine the investment’s eligibility for a given tax incentive.
Who awards these incentives at the moment?
The Minister of Finance awards tax incentives as provided for under the Public Finance Management Act. Other incentives such as land concessions are given by UIA, among others.
However, our proposal as civil society is that that provision should be amended to give this power to Parliament. However, the provision should also include that the process should be consultative.
The criteria for granting incentives should be realigned to minimise revenue loss the country continues incurring through tax incentives.
Do you think Uganda needs incentives to attract foreign investors?
Yes, it is a global and regional reality. Countries world over are competing to attract investments. However, this should be followed with strict performance requirement measures to such investors.
It is also important to note that Uganda is endowed with a number of resources, a substantial labour force, which are all key factors that attract investors.
How would else would Uganda attract foreign investors without handing them incentives?
Guaranteed market access attracts investors. The country is part of a number of regional free trade arrangements including the EAC, COMESA, EAC-COMESA-SADC Tripartite and most recently, the Africa Continental Free Trade Area. The government should, therefore, market the country basing on these opportunities. Uganda also has a substantial labour force.
However, the government needs to invest more in skills development in the country’s labour force that has skills which will provide the much-needed skill for the investors.
Anything else you wish to add?
The Investment Code should ring fence certain sectors for locals to ensure that they thrive in the midst of economically stronger and more competitive foreign investors.