Conduits of Capital

services industry. However, recent pressure has meant that
Switzerland and other European centres (e.g., Liechtenstein)
have been encouraged to adopt more transparent
standards. The issue of tax avoidance is also one that
can often be tackled by recipient countries of investments.
Switzerland was forced to abandon its secrecy laws through
a concerted effort by the US and European countries.
African countries too have the means to ensure tax leakage
is minimised. Kenya, for example, has recently entered
into an information sharing agreement with Mauritius that
enables it to enforce the collection of capital gains taxes. 3
In general many of these ‘offshore’ centres are fairly small
economies with few other significant sources of income.
They found that hosting the administrative functions of
many financial activities was an area that had relatively low
barriers to entry provided they could offer an attractive tax
regime to encourage financial institutions and investors to
use them.
For example, the Cayman Islands have built local expertise
in setting up financial vehicles and in administering
their activities. In the case of private equity funds, this
generally means fund administration and legal services. As
noted above, there is little evidence that centres such as
Mauritius and Cayman have tried to, or have succeeded in
becoming host to the actual private equity fund managers
(i.e., the teams that carry out the actual fund investment
management). Most of the largest private equity companies
and their staff are located in the largest global or regional
financial centres. In some cases, they will locate staff and
build offices in regions where they are investing capital. In this
context, many of the managers have actually located staff in
Africa. Currently their choice of location also reflects other
factors such as quality of infrastructure and living standards.
As a result, cities such as Johannesburg and Nairobi (both
of which also serve as regional airline hubs) are favoured
over others.
This has implications for the developmental impact that the
financial activities can have for the local economy. Clearly it
is preferable to attract not only the administrative functions
but also the mainstream banking and fund management
activities. This will mean that the financial centre will attract
a larger cross section of high quality professionals and will
be host to many of the value-added activities. Such an effect
is even evident in global centres such as London.
4. PREREQUISITES FOR
CREATING FINANCIAL
CENTRES
As we have seen, financial centres come in different shapes
and sizes. They vary in the range of services they offer and
hence in the level of activity that effectively takes place
within them. This complicates the picture for policymakers
and in particular for external policy advocates that are
seeking to influence certain factors with a view to catalysing
the creation of these centres in specific locations. That said,
there are certain factors that make cities more attractive as
prospective financial centres.
At a macro level, the centre must offer a stable financial
and legal environment. This has several important aspects
to it. The most important one is the need for effective and
transparent rule of law. This needs to encompass amongst
other issues effective property rights, effective contract law
and the basics of creating business entities that operate
in an internationally recognisable manner. The legal
framework should follow international principles and law
firms from different countries should feel comfortable in
dealing with it. There needs to be a degree of comfort that
disputes can be resolved in a fair and transparent manner
without interference from local vested interests.
Additionally, the economy should have accounting
standards, disclosure requirements and a regulatory
framework that are in line with international best practice. In
particular the regulatory framework for the financial system
should be robust and transparent. The financial regulatory
framework will most likely include the central bank, the
stock exchange and any other regulator with responsibility
for the financial sector.
Ideally the political system is democratic and there are free
elections but these points can be debated in the case of
Singapore, Dubai, Hong Kong and certain other financial
centres. But it would be true to say that economic and
political stability are a prerequisite for attracting financial
services companies. We cannot overemphasise the
importance of a predictable regulatory and legal regime for
the choice of legal jurisdiction of capital. Investors do not
need ideological adherence to any political system; political
3
Of the three main types of taxes, income tax, withholding tax, and capital gains tax, the latter was most frequently circumvented by structuring investments
through offshore financial centres. With information sharing in place, countries such as Kenya and Tanzania are now empowered to set the level of
taxation they deem appropriate, and to collect these taxes in-country.
Conduits of Capital – Onshore Financial Centres and Their Relevance to African Private Equity
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