Tanzania and Uganda have widened their lead over Kenya in the race for foreign direct investments (FDI) in the East African region, as lengthy licensing procedures and sluggish commercial dispute settlement turn multinationals away from Nairobi.

New data released by the United Nations Conference on Trade and Development (Unctad) shows Uganda topped the region in attracting FDI last year, followed closely by Tanzania, on the back of increased investments in the oil and gas sector.

FDI to each of the two countries was seven times larger than what Kenya received in 2012, a lag analysts blamed on heightened political tensions and delays in removing cumbersome licensing procedures.

In Uganda, most funds went into the oil, gas and mining sectors.

“Recent natural resource discoveries contributed to the increase in FDI inflows to East Africa. This includes investments in gas reserves in Tanzania and oil fields in Uganda,” said Unctad in the World Investment Report 2013.

Uganda’s inflows

Uganda’s FDI jumped by 92.51 per cent to $1.721 billion from $894 million in 2011, while Tanzania attracted $1.706 billion in 2012, a 38.81 per cent increase from the previous year’s $1.229 billion.

Meanwhile, Kenya’s FDIs dropped by 27.04 per cent to $259 million from $355 million.

Rwanda’s rose by 50.94 per cent to $160 million last year from $106 million, while Burundi, which lagged the five East African countries, attracted $1 million, a 66.67 per cent decrease from $3 million in 2011.

Thus, the EAC countries received a combined $3.9 billion in FDIs last year, a 48.71 per cent rise from the $2.6 billion registered in 2011.

Unctad said interest in the EAC economies among foreign investors is expected to gain fresh impetus in the remaining part of the year, helped by rising confidence in the economy.

In Kenya, a peaceful transition after the March 4 elections is expected to trigger more inflows in the second half of the year. But while it lost its grip on FDI inflows, Kenya remained the main investor to other EAC countries, especially in the service sector.

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“Among African investors, KCB was the largest in least developed countries. It announced a total of $300 million in investments over 2005 - 2012, with 31 projects in five African countries,” said Unctad. Kenya’s vibrant private sector, advanced infrastructure and skills base have been its main selling points.

READ: Kenya’s private sector best in EA

It is also the only country in the region that made investments in the other four countries in the region, for the second year in a row. Its investments in the rest of East Africa rose by 77.78 per cent to $16 million in 2012 from $9 million in 2011, mainly in the financial sector.

Diamond Trust Bank, Commercial Bank of Africa, Bank of Africa, African Banking Corporation, Fina, Equity, I&M, NIC, Co-operative Bank, CfC Stanbic and Imperial Bank have also invested heavily in Uganda, Tanzania, Rwanda, Burundi and South Sudan.

Last year, Kenya Airways and four lenders raised a combined Ksh25.6 billion ($301.1 million) through five rights issues, funds which were expected to be deployed into various investments in the region from this year.

Greenfield projects in LDCs from Kenya more than doubled and the value of investments rose to $700 million in 2012 from $200 million in 2011, led by two projects in air transport valued at $168 million each in Uganda and Tanzania.

Across the region, red tape, corruption and a restrictive labour market remain key drawbacks. FDIs are coming at a time when the region is struggling to strike a balance between making oil, gas and other mining laws that are investor friendly and at the same time beneficial to the countries as well as their residents.

The East African region has become a hot spot for the exploration of oil and gas particularly after Tullow Oil discovered oil in Uganda seven years ago, and in Kenya last year, with other multinational prospecting firms such as BG Group, Statoil and Ophir Energy announcing huge deposits of natural gas off Tanzania’s coast.

International firms such African Barrick Gold (ABG), Pacific Wildcat Resources Corporation and Base Titanium are also prospecting for minerals including gold, niobium and titanium in the region.

Already, some oil, gas and mining firms have announced plans to increase investments in the region.

“ABG is expecting capital expenditures of approximately $440 million in Tanzania this year, encompassing both sustaining capital as well as expansion projects aimed at bringing on-stream additional capacity,” said ABG.

ABG also expects to spend approximately $20 million on exploration, split between Tanzania and Kenya, while oil and gas exploration firm BG has budgeted $1.6 billion for exploration this year in at least eight countries which include the two East African countries.

READ: ABG mining to invest $445m in Tanzania

Cortec Mining Kenya Ltd, which is owned by the Toronto Stock Exchange-listed Pacific Wildcat in May this year announced that it would invest Ksh12.8 billion ($150.5 million) in a niobium and rare earth processing facility at Mrima Hill in Kwale County on Kenya’s Coast.

READ: Cortec invests $90m to mine niobium in Kenya

“FDI often follows natural resources due to the expected high returns. In the past one or two years, we have seen strong interest in Kenya,” said Moses Ikiara, managing director of Kenya Investment Authority (KenInvest).

In February last year, Tullow Oil signed two production sharing agreements with the government of Uganda. However, details of these contracts have remained confidential, raising fears that the benefits may not trickle down to the masses.

Kenya is currently revising its laws, with one of the major points of contention being whether extracting companies should be required to cede 35 per cent of their stake to locals. Cabinet Secretary for Mining Najib Balala, has said that the rule will be repealed to restore investor confidence in the sector.

READ: Kenya eyes more revenues from oil, gas explorers under proposed rules

Dr Ikiara said there was no exact science for finding the best resource-sharing formula.

“We need to look at best practices and keep monitoring what is working,” said Dr Ikiara, who added that changes in laws that reduced the local shareholding thresholds in the telecommunications sector should serve as an example.

As per the Unctad report, other extractive sectors such as cement manufacturing also benefited from the increasing FDIs in the region, with the $69.4 million acquisition of Rwanda’s cement manufacturer Cimerwa by South Africa’s Pretoria Portland Cement being ranked the second largest FDI M&A deal for which data on the transaction value exists.

READ: South African giant PPC breathes life into Cimerwa

Unctad said that in addition to extractive and heavy industries, Indian companies remained prominent in pharmaceuticals with projects valued at $5 million each, being announced in Uganda and Tanzania.

Health sector

Madras Institute of Orthopaedics and Traumatology from India announced a $40 million construction project in Rwanda, while Apollo Hospitals Group also from the same country, announced a $49 million construction project in Uganda, indicating that the health care sector continued being attractive.

FDI inflows were not just restricted to extractive industries as Aldwych International, from the UK, also disclosed that it had put $321 million into Tanzania’s alternative energy sector, creating an estimated 88 jobs in a 100MW wind farm project.

FDI inflows to Africa grew to $50 billion in 2012, a rise of 5 per cent over the previous year.

Globally, however, investments by foreigners fell by 18 per cent to $1.35 trillion with forecasts showing that this year’s figures could remain close to last year’s levels, with an upper range of $1.45 trillion, and then grow to $1.6 trillion next year and to $1.8 trillion in 2015.