Fi­nanc­ing Africa’s mas­sive projects

In­no­va­tive bankrolling gains pop­u­lar­ity and raises high hopes among key coun­tries

Africa Renewal - - Contents - By Kings­ley Igho­bor and Bu­sani Bafana

It is an au­da­cious $4.8 bil­lion project un­der­taken by one of the world’s poor­est coun­tries. At the con­struc­tion site in the Ben­is­hangul re­gion of Ethiopia near the Su­danese bor­der, some 8,500 work­ers are labour­ing tire­lessly ev­ery day to build the gi­gan­tic Grand Ethiopian Re­nais­sance Dam. When com­pleted in 2017, the dam will gen­er­ate 6,000 megawatts of elec­tric­ity for do­mes­tic con­sump­tion and ex­port.

On the sur­face, the 558 ft tall dam — Africa’s big­gest hy­dropower project — be­lies Ethiopia’s fi­nan­cial mus­cle. The GDP per capita in Ethiopia is only $475. The late Prime Min­is­ter Me­les Ze­nawi, who laid the foun­da­tion stone in 2011, said the dam would be built with­out beg­ging for money from donors. Since then, con­struc­tion has pro­gressed steadily us­ing money from lo­cal taxes, do­na­tions and gov­ern­ment bonds. Ethiopi­ans abroad and at home con­trib­uted the first $350 mil­lion, with gov­ern­ment work­ers con­tribut­ing amounts equiv­a­lent to a month of their salaries.

Se­meg­new Bekele, an Ethiopian con­struc­tion en­gi­neer work­ing on the dam, told The Guardian, a Bri­tish news­pa­per: “Or­di­nary peo­ple are build­ing an ex­tra­or­di­nary project.” De­vel­op­ment ex­perts now showcase the dam as proof of an in­no­va­tive ap­proach to project fi­nanc­ing. “Ap­prox­i­mately $450 mil­lion has been raised from Ethiopi­ans to help build the dam and I think the tar­get is prob­a­bly a bil­lion dol­lars,” says Zeme­deneh Ne­gatu, man­ag­ing part­ner at Ernst & Young Ethiopia, a fi­nan­cial con­sult­ing firm.

Ethiopi­ans, pri­vate com­pa­nies and even other coun­tries such as Dji­bouti are buy­ing bonds. In ad­di­tion, the Ethiopian Elec­tric Power Cor­po­ra­tion, a state-owned util­ity, is in­vest­ing its own rev­enue and the money it is bor­row­ing from state-owned banks. Econ­o­mists warn that us­ing pri­vate sec­tor fi­nance to pay for the dam could slow Ethiopia’s eco­nomic growth in the fu­ture. But the gov­ern­ment coun­ters that this will be off­set by sell­ing elec­tric­ity to coun­tries in East Africa, a re­gion with im­prov­ing eco­nomic growth.

Ethiopia’s recipe for fi­nanc­ing the dam from bonds and taxes is be­ing touted as a model for other African coun­tries. This East African coun­try uses a com­put­erised sys­tem to track and col­lect taxes, mak­ing eva­sion dif­fi­cult. The gov­ern­ment reg­u­larly car­ries out aware­ness cam­paigns to ex­plain tax­a­tion and pub­li­cize what col­lected taxes are fund­ing such as the dam.

Dis­man­tling tax havens

Ethiopia’s fi­nanc­ing ap­proach, in­clud­ing taxes, is just one of the emerg­ing ways of fund­ing projects in Africa. Other coun­tries on the con­ti­nent are work­ing to­wards sim­i­lar ini­tia­tives. Africa cur­rently col­lects about 27% of its GDP in taxes, which is in­suf­fi­cient to fund in­fra­struc­ture such as roads, bridges, schools and hos­pi­tals.

At the Ninth African De­vel­op­ment Fo­rum in Mar­rakesh, Morocco, last Oc­to­ber, Prime Min­is­ter José Maria Pereira Neve of Cape Verde ex­plained that Africa could re­ceive more tax rev­enues with “good gov­er­nance and trans­parency in the man­age­ment of pub­lic fi­nances.” Many of the 700 del­e­gates at the con­fer­ence, which was or­ga­nized by the UN Eco­nomic Com­mis­sion for Africa (ECA), in­clud­ing some African heads of state, pri­vate sec­tor and civil so­ci­ety rep­re­sen­ta­tives, dis­cussed in­no­va­tive ways of fi­nanc­ing Africa’s projects. They urged African gov­ern­ments to laser-fo­cus on tax havens where some multi­na­tional com­pa­nies keep their money.

Tax havens, which are places where taxes are markedly low, are a part of the broader prob­lem of il­licit fi­nan­cial flows (IFFs) from Africa, an is­sue that has lately drawn scru­tiny. In 2013, for in­stance, Ac­tionAid, an in­ter­na­tional non-gov­ern­ment or­ga­ni­za­tion fo­cus­ing on poverty, launched a global cam­paign to stop Bar­clays, a Bri­tish bank, from pro­mot­ing tax havens in Africa. By “help­ing your clients set up op­er­a­tions in tax havens like Mau­ri­tius, you are part of a sys­tem that

is drain­ing vi­tal pub­lic funds out of the con­ti­nent each year,” Ac­tionAid warned the bank. Bar­clays de­nied it en­cour­ages business set-ups in tax havens.

Mag­nets for in­vestors

Africa loses be­tween $50 bil­lion and $148 bil­lion an­nu­ally to IFFs, ac­cord­ing to a 2013 ECA re­port ti­tled: The State of Gov­er­nance in Africa: The Di­men­sion of Il­licit Fi­nan­cial

Flows as a Gov­er­nance Chal­lenge. Track­ing and stop­ping “il­licit fi­nan­cial flows is not just a moral im­per­a­tive, it is a good in­put for trans­for­ma­tive poli­cies,” said Car­los Lopes, ECA’s ex­ec­u­tive sec­re­tary, in an in­ter­view with Africa Re­newal held at the con­fer­ence. IFFs in­clude un­der-in­voic­ing, over-pric­ing, dou­ble du­ties, dis­guised prof­its and the use of tax havens.

In tones that were at times ur­gent and angry, some speak­ers at the Mar­rakesh con­fer­ence main­tained that while Africa could still ac­cept aid and en­cour­age for­eign di­rect in­vest­ments, th­ese should not be the main sources of fi­nance. Africa’s vast nat­u­ral re­sources such as gold, plat­inum, di­a­monds, chromite, cop­per, coal, cobalt, iron ore and ura­nium — 12% of the world’s oil re­serves and arable land and forests — will con­tinue to be mag­nets for in­vestors. The rate of re­turn on in­vest­ment in Africa to­day, even ad­just­ing for real and per­ceived risks, is higher than in any other de­vel­op­ing re­gion, ac­cord­ing to an ECA re­port.

Pri­vate eq­uity firms for­age

Mr. Lopes is op­ti­mistic about Africa’s pri­vate sec­tor in­vest­ment prospects. “Africa might have fi­nally found a way to whet the ap­petite of pri­vate eq­uity in­vestors,” he says, adding: “The re­al­ity is that Africa can­not rely on de­vel­op­ment aid for its trans­for­ma­tion agenda, so its ap­petite is mov­ing to­wards pri­vate in­vest­ment and do­mes­tic re­source mo­bi­liza­tion.” The mes­sage sounds good ex­cept that, again, tax loop­holes are span­ners in the works. In re­sponse, Mr. Lopes is ar­gu­ing for an African common mar­ket to har­mo­nize dis­parate reg­u­la­tory sys­tems and dis­cour­age com­pa­nies from ex­ploit­ing both the loop­holes and the tax havens.

Pri­vate eq­uity fund­ing, which is when rich in­di­vid­u­als or in­sti­tu­tions in­ject cap­i­tal into a company and ac­quire eq­uity own­er­ship, can be life­lines for com­pa­nies gasp­ing for cash. Yet, ten years ago, it wasn’t even well known in Africa, ac­cord­ing to the ECA. But in the sec­ond quar­ter of 2013 alone, 164 firms se­cured $124 bil­lion pri­vate eq­uity cap­i­tal, ac­cord­ing to Pre­qin, a firm that tracks pri­vate eq­uity trends.

The African De­vel­op­ment Bank (AfDB) states that be­tween 2010 and 2011, in­vest­ment deals in Africa in­creased from $890 mil­lion to $3 bil­lion. In 2012, in­sti­tu­tional in­vestors in­jected $1.14 bil­lion in Africafo­cused pri­vate eq­uity funds, ac­cord­ing to African Pri­vate Eq­uity and Ven­ture Cap­i­tal As­so­ci­a­tion, an or­ga­ni­za­tion that pro­motes pri­vate in­vest­ments in Africa. For ex­am­ple, Ethos Pri­vate Eq­uity, a South African firm, alone re­ceived $900 mil­lion from eq­uity funds.

The AfDB has also jumped on the pri­vate eq­uity band­wagon, launch­ing a pan-African fa­cil­ity to support the de­vel­op­ment of women fund man­agers. Geral­dine Fraser-Moleketi, the bank’s spe­cial en­voy on gen­der, told Africa Re­newal that the idea is about look­ing at “in­no­va­tive poli­cies be­cause cur­rent mod­els are not in­clu­sive.” Africa’s ap­prox­i­mately one bil­lion pop­u­la­tion and a com­bined con­sumer spend­ing power that will rise to over $1.3 tril­lion by 2020, ac­cord­ing to McKin­sey, a global man­age­ment con­sult­ing firm, makes the con­ti­nent a tan­ta­liz­ing prospect for pri­vate eq­uity fun­ders.

Pen­sion funds pool money from work­ers to be paid upon re­tire­ment and are par­tic­u­larly use­ful for long-term in­vest­ments. Dur­ing tough fi­nan­cial times, pen­sion funds can be handy to aug­ment in­fra­struc­ture ex­pen­di­ture, fi­nan­cial ex­perts be­lieve. David Ashi­ag­bor, a con­sul­tant with the AfDB’s “Mak­ing Fi­nance Work for Africa” project, says Africa’s pen­sion funds cur­rently hold $380 bil­lion in as­sets, thanks to a decade of eco­nomic growth. Even then, only very few coun­tries, in­clud­ing South Africa, have pen­sion sys­tems that are broad-based, rel­a­tively trans­par­ent and pro­tect ben­e­fi­ciary rights. Another prob­lem is that many pen­sion funds lack cred­i­bil­ity due to poor ser­vices to ben­e­fi­cia­ries and mis­man­age­ment of funds, ac­cord­ing to 27four, a South African firm that con­sults on man­ag­ing re­tire­ment funds. Con­se­quently, not ev­ery African coun­try can rely on pen­sion funds for projects.

Grow­ing in­vest­ments at home

De­spite Africa’s so­cioe­co­nomic chal­lenges, Mr. Lopes re­mains op­ti­mistic. “I am also a re­al­ist,” he says, iden­ti­fy­ing three me­ga­trends in Africa’s favour. “The first is the de­mo­graphic one. It is true the rest of the world is ag­ing and Africa is get­ting younger. The sec­ond is the hard com­modi­ties in Africa once you take out oil and gas. The third is Africa’s reser­voir of pro­duc­tiv­ity through un­used arable land.”

Cristina Duarte, Cape Verde’s fi­nance and plan­ning min­is­ter, who has an­nounced her can­di­dacy for the AfDB’s pres­i­dency, says Africa must keep try­ing to grow in­vest­ment at home, adding: “How can we con­vince oth­ers to invest in our con­ti­nent and in our de­vel­op­ment if we are not do­ing the same to the full ex­tent of our abil­ity?” Still, the cur­rent project fi­nanc­ing pic­ture in Africa is mixed: Ethiopia’s fast-mov­ing dam con­struc­tion is a suc­cess story com­pared with a trans-West African high­way that is yet to be com­pleted 40 years after it was con­ceived. At the Mar­rakesh De­vel­op­ment Fo­rum, how­ever, the pal­pa­ble feel­ing was that Africa is en­ter­ing a new dawn of in­no­va­tive fi­nanc­ing.


An artist’s im­pres­sion of the Grand Ethiopian Re­nais­sance Dam.

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