Conduits of Capital

To some extent, policymakers also need to be aware that
building regional financial centres may be a zero-sum game
where a new centre might be seeking to compete with
existing centres in providing some services to some of the
possible users. It will not always be possible to create new
centres simply on new activities.
Yet, there are some fairly obvious prerequisites that can
be identified for a new financial centre to be established.
In today’s world, connectivity is vital. These include travel
links to the outside world and in particular to other centres
of commerce. They also include communication links that
enable entities in that centre to have systems that are
compatible with international markets. A certain critical
mass of economic activity is generally also necessary.
Beyond that, there is a need for quality infrastructure and
welcoming living standards such that high calibre staff can
be attracted. In today’s competitive world, companies are
loathe to simply use financial inducements to move people
to new locations. That being said, there are ways to attract
foreign staff if attractive personal tax rates or high quality
living standards can be provided. In certain cases, the
employers will devise their own ways to attract staff. These
can include bearing some of the burden of local taxes or
providing assistance with local living costs or possibly cost
of education for children.
To be attractive to private companies, new centres should
offer a stable political environment, adequate regulation
and an effective and functioning rule of law? In some cases
favourable tax or financial incentives may be used to attract
companies. Such policies were used in jurisdictions such as
Ireland where very favourable tax treatment attracted many
corporates and financial companies. Many administrative
financial centres such as Cayman Islands and possibly
Mauritius have used ‘tax neutrality’ 1 to attract certain types
of activities to their country. However, in the past some
centres also used less robust diligence and regulatory
standards to attract business.
Offshore centres have been criticised for being ‘tax havens’
for permitting major international companies, or investment
funds, to avoid paying taxes in countries in which they
operate; or worse to be hosts to illegal activities such as
money laundering. Tax evasion was typically enabled by
secrecy and lack of disclosure. As a result, many donors
that participate in funds or financial vehicles domiciled
in such jurisdictions have sought out other locations for
their activities or required higher standards of diligence
and transparency.
In summary, financial centres are much more than just
domiciles of investment funds. In fact the most successful
financial centres (e.g., New York and London) thrive without
being the physical location of capital. Financial centres
develop on the back of increasing commercial activity and
business opportunities for providers of financial services.
This will give rise to local firms and attract international firms
if the opportunity is sufficiently attractive. For all successful
centres this has been assisted by policymakers providing
a conducive environment with the explicit goal of building
a financial centre. Governments can engage proactively
with the financial sector in raising finance or executing
privatisations or other corporate finance transactions. This
can catalyse broader activity in the economy. In many
developing countries, donors can play a role in advocating
the benefits of efficient capital markets in developing
a stronger private sector. They can make targeted
interventions using training to overcome skills gaps or more
broadly they can help execute initiatives that allow local
markets or local entities to engage with the international
markets more effectively.
We envisage that that we will see in Africa the development
of a series of local financial centres as individual countries
benefit from economic growth. However, there is the
potential for a few larger financial centres that service not
only the host country but also neighbouring countries and
potentially play a role across the continent. Our hypothesis
is that such centres are most likely to be in countries that
have the highest levels of growth or highest levels of
GDP and where the host governments build an enabling
environment. So centres such as Johannesburg, Lagos,
Casablanca and Nairobi are the ones that come most readily
to mind. Currently, Mauritius fills the role of Administrative
centre for Africa. Whether these functions can be readily
brought ‘onshore’ will depend on the ability of one or other
centre to offer a competitive environment and possibly
some supportive policies from the host government. The
possibility of turning Mauritius into a fully transparent
financial centre that is aligned with the interests of donors
ought to be considered as well.
1
No taxation for intermediating finance flows.
Conduits of Capital – Onshore Financial Centres and Their Relevance to African Private Equity
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