Business
Ethiopia provides Africa with a blueprint to finance massive infrastruture projects without donor support
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 organised 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 organisation focusing on poverty, launched a global campaign to stop British bank Barclays 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.
Magnets for investors
Africa loses between US$50 billion and US$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. 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 percent 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 is higher than in any other developing region, according to an ECA report.
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 mobilisation.” The message sounds good except that, again, tax loopholes are spanners in the works. In response, 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, 10 years ago, it was not even well known in Africa, according to the ECA. But in the second quarter of 2013 alone, 164 firms secured US$124 billion private equity capital, according to Preqin, a firm that tracks private equity trends.
The African Development Bank (ADB) states that between 2010 and 2011, investment deals in Africa increased from US$890 million to US$3 billion. In 2012, institutional investors injected US$1.14 billion in Africa-focused 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 US$900 million from equity funds.
