General Practice, Solo & Small Firm DivisionMagazine

International Law and Practice

African Commercial Legal Reform Program Strikes a Timely Chord

By JoAnn C. Sparacino

Recent trade and investment in Africa make it clear that an African economic renewal is under way. U.S. exports to Africa grew 20 percent last year, and foreign direct investment flows to sub-Saharan Africa reached $4.5 billion. Many sub-Saharan African nations have registered increased growth rates, economic reforms, and democratization. A recent task force sponsored by the Council on Foreign Relations reported that the United States exports more to Africa than to Eastern Europe and Russia combined and that Africa will become an increasingly important market because more than one third of U.S. economic growth results from exports.

Commercial Legal Reform in Africa Program. The June 1997 panel discussion, co-sponsored by the ABA and the Center for Strategic and International Studies, provided a forum for debate on the need for commercial legal reform projects in Africa as an essential component of creating a friendly environment for domestic and foreign trade and investment. Among the panelists were the chairman of the International Law Institute, the vice dean of Harvard Law School, and the chief counsel for Africa at The World Bank. With the support of multilateral, bilateral, and local donors, commercial legal reform projects are expected to continue to grow in Africa. Such projects have already taken root in Zambia, Uganda, Tanzania, Kenya, Mozambique, Namibia, and Ghana. Two major regional reform efforts are under way: the Harmonized Investment Code for the West African Economic and Monetary Union (UEOMA) and the Treaty of the Organization for the Harmonization of Business Law in Africa (OHADA).

Comprehensive Interdisciplinary Reform. The overriding concensus of the panelists is that piecemeal reform, without the input of local stakeholders, merely results in disregarded laws. To be effective, a commercial legal reform project must be comprehensive, interdisciplinary, and deeply rooted within the local society. A commercial legal regulatory reform project should address areas that directly affect the private sector, such as laws governing commerce, corporations, contracts, property, and taxation. It should also cover those interconnected areas that support the legal environment, including the recording and dissemination of laws, regulations, and court decisions; the training of lawyers and government officials in new laws and legal concepts; public education about the role of law in a market economy; and the creation of efficient judicial and alternative dispute resolution mechanisms.

The panelists agreed that techniques for implementing commercial legal reform projects should be broad based. In addition, there should be interministerial support for a legal reform project, not just the support of a single agency, such as the Ministry of Justice. The legal reform process should be an interdisciplinary effort involving economists, bankers, business people, law schools, and the legal community. The process should include legal education, the establishment of information systems, and the social marketing of the new laws. International support should be minor.

Criticism of Foreign Investment Codes and the "One-Stop Shop." The "foreign investment code" was one of the earliest methods used to structure trade and investment regimes in Africa. However, many of the codes were so strict and complicated that they actually discouraged investment. The panelists recommended that African nations should not reform existing foreign investment codes, but instead should adopt clear, workable laws in all areas affecting investment, which would offer incentives to everyone.

Cumbersome red tape, numerous checkpoints, licensing requirements, and voluminous forms involved in the investment process have always been a major deterrent to investors. Moreover, the "one-stop shop" established for foreign investors by many African nations has not worked because all of the administrative powers of the various ministries and agencies must be delegated to the shop, which requires each agency and ministry to have a knowledgeable delegate at the shop. The best solution is to solve the problem at its source by addressing every underlying component of the investment process that is burdensome.

Specific Areas of Law to Target. Panelist Judith O’Neil, a partner at Reid & Priest suggested that a national constitution be used as a vehicle for instituting change. In Zimbabwe, for instance, the freedom of expression equivalent in their constitution was used to declare the monopoly of the telephone company unconstitutional. The Restrictive Trade Practices Act or competition law has been used as a price control law that, in many cases, needs to be expanded.

For public-private partnerships, laws governing corporations may need to be changed, as stringent controls placed on a government may not be acceptable to a private partner. Central Bank laws may also need to lower oppressive reserve limits to more realistic levels that are more appealing to an investor. Insurance and fiduciary laws may need reform, because although pension plans and insurance companies are often the most likely and desired investors, they have been prohibited from investing more than 10 percent in the private sector in countries with centralized economies. Finally, bankruptcy laws should provide an escape hatch, because a perilous and high-priced exit deters the investor.

The Role of the Foreign Legal Advisor. Lawyers in the U.S. should serve primarily as a sounding board, according to Theodore Parnall, a resident legal advisor in Africa and other developing regions. Parnall stated, "If the reform is to be deep rooted and sustainable, it’s got to be nationally, not internationally, based.... To think that a transplanted system can take root real quickly without very significant efforts to make sure it becomes a national effort is a little troublesome." O’Neil’s view was that "the nationality of the law firm is completely irrelevant. What is relevant is the ability of the legal team involved to not have a national chauvinistic approach." Don Wallace, chairman of the International Law Institute, commented that "we are the law-making power house of the world and are available to those who want to use us."

National Resource Projects: Protecting the Environment and Maximizing Revenues. There is a need for legislative and contractual provisions when regulating natural resource development in African nations to prevent costly environmental damage and to enable African governments to maximize the revenue they collect from mining and timber projects, according to David Smith, vice dean of Harvard Law School.

Transnational companies should consider comparative environmental costs among a number of developing countries when considering investment options. In Smith’s opinion, the establishment of a U.S.—Africa regional resource fund would enable the United States to take the lead in helping African nations to benefit from their resources in an environmentally sound manner.

Governments often fail to maximize the revenues they can obtain from mining and timber resources for a variety of reasons, including the instability of world mineral prices, the inability to monitor company pricing transactions, excessive incentives, or a failure to structure an appropriate tax regime. African countries can deal with the instability of world mineral prices by creating their own stabilization funds, in which a portion of mineral or timber income is placed in a special account to be drawn on when prices decline or for use in diversifying the economy.

Governments should also carefully monitor the pricing of goods and services from affiliated companies within a corporate system through tax authorities experienced in dealing with transnational companies. In addition, Smith believes a government can have greater control over a natural resource venture through legislative and contractual regulation rather than through equity ownership. Governments should devise legislation and organizational frameworks that allow enterprises to operate efficiently, with accountability, and in the public interest. More emphasis should be placed on preventive approaches in dealing with corruption by discouraging or making it more difficult through a system of checks and balances, such as adequate salaries and requirements for government and state enterprise officials to declare their privately owned assets.

JoAnn C. Sparacino is co-chair of the Section’s Sub-committee on African Trade and Investment and President of Alexis International, Inc., a company focusing on the promotion and facilitation of trade and investment in Africa.

 

- This article is an abridged and edited version of one that originally appeared on page 6 in International Law News, Fall 1997 (26:4).

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