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AGOA moves forward: Reviewing last week’s reauthorization in the U.S. Senate

Posted in Corporate and Investment, Current Events, Public Policy and Government Affairs

On Thursday of last week and with a vote of 97-1, the U.S. Senate approved the “Trade Preferences Extension Act of 2015,” which includes reauthorization of the African Growth and Opportunity Act (AGOA). With this action, the Senate seeks to reaffirm the “centerpiece of trade relations between the United States and sub-Saharan Africa,” as well as enduring bipartisan consensus for stronger commercial ties with the region.

The legislation now goes to the U.S. House of Representatives. As this bill moves closer toward becoming a reality, it is important to review the specific changes that the Senate’s version of AGOA reauthorization entails for African beneficiaries and their counterpart in the U.S. Here, we briefly evaluate the key revisions of the program, broadly classified as the “good” and the “to be determined.” Importantly, opportunities still exist to modify AGOA reauthorization, and several amendments could strengthen the bill.

The “Good”

Long-term extension:  AGOA reauthorization extends the program until September 30, 2025—a 10-year time horizon, which crucially also includes continuation of the third-country fabric program for the same period. Together, these provisions stand as the longest extension the bill has ever received. Short-term extensions and an uncertain renewal process have been the largest obstacles to AGOA’s success. The Senate’s new reauthorization bill provides exactly the type of stability and predictability required for beneficiary countries to utilize AGOA more effectively and for companies to make long-term investment decisions in the continent.

Targeted and flexible eligibility reviews: The Senate’s version of the AGOA reauthorization provides increased flexibility with an advance warning for a country whose eligibility is in question. In addition to an annual review and request for public comment on whether beneficiary countries conform to the eligibility criteria, the president may now initiate “out-of-cycle” assessments. The president must also provide the country in question a 60-day warning if its preferences are to be withdrawn. Additionally, the U.S. government will have more flexibility in dealing with beneficiary countries not meeting the eligibility criteria. The Senate legislation provides for the “withdrawal, suspension, or limitation” of duty-free treatment. This gives the president a more targeted way to penalize violations. For example, if this new approach had been in place during Madagascar’s 2009 coup, which led to the country’s exclusion from AGOA from 2010-2014, the U.S. may have been able to preserve the several thousands of jobs that were lost (largely by women), while pursuing more focused actions against the interests of those perpetrating political instability.

A focus on agriculture and women: This AGOA renewal recognizes the critical role of the agricultural sector and specifically mandates support to “businesses and sectors that engage women farmers and entrepreneurs.” According to the World Bank, agriculture employs about 65 percent of the region’s overall labor force, with particularly significant incorporation of female workers. This hortatory language is important, but the Senate’s version of AGOA reauthorization also takes action to provide the type of technical assistance needed to help African agribusinesses gain access to U.S. markets. In particular, the legislation lifts the cap on the number of countries that can receive American trade capacity-building support and urges the Department of Agriculture to increase the number of Foreign Agricultural Service personnel assigned to staff these important programs to 30. The Senate’s leadership on this issue is commendable, but the fulfillment of these provisions will ultimately hinge on the performance of the federal agencies involved in providing trade capacity building and, unfortunately, history is not the best guide. For many years, the U.S. Commerce Department’s Foreign Commercial Service on the African continent was understaffed, and this trend only recently changed under the leadership of Secretary Penny Pritzker.

Movement toward reciprocal trade agreements: AGOA provides unilateral access for African imports into the United States. While this continues to be a stimulus for economic development and U.S. investment, there is a need to begin to move to a more mutually beneficial trade relationship with Africa, especially as many African countries have initiated reciprocal trade preference programs (the Economic Partnership Agreements) with the European Union. Sub-Saharan Africa remains one of the only regions in the world where the United States lacks any type of comparable free trade agreement (FTA). The Senate legislation appropriately requires the Office of the U.S. Trade Representative (USTR) to report on plans for negotiating such agreements within a year and to notify Congress of any African country that has expressed an interest in an FTA. While this is a very positive aspect of AGOA reauthorization, the USTR reports should be issued more frequently than every five years, as presently provided for in the Senate legislation.

Publishing utilization strategies: Despite success in key areas and important improvements, AGOA-eligible countries have struggled to utilize their preferential access to U.S. markets. The AGOA reauthorization seeks to address this issue by requiring participating countries to develop and publish “utilization strategies,” which designate the sectors in which each country believes it can be competitive and how it plans to take advantage of this potential. This is a welcome initiative. Not only will it give more focus and content to the annual AGOA forums, but it will provide businesses, from Africa and the U.S., more opportunities to engage governments on how to take advantage of the program. USTR is also required to submit an AGOA utilization report to Congress on a biennial basis. These new reports could support increases in the use of the program, especially if the private sector and civil society are actively involved in the discussion.

The “To Be Determined”

The role of South Africa: The ongoing dispute over U.S. poultry exports to South Africa has been one of the most significant obstacles to AGOA reauthorization. Lawmakers ultimately compromised over the issue by including a provision on the AGOA reauthorization that requires the president to commission a review of South Africa’s participation in the program within 30 days of the AGOA extension. In many respects, this is the best outcome given the others that reportedly were being considered, such as excluding South Africa altogether or extending the benefits for only three years. Given South Africa’s FTA with the EU and the growing number of U.S. companies filing complaints to USTR about barriers to accessing the South African market, Pretoria and Washington need to use this moment to forge a blueprint for a more mutually beneficial trade relationship.

Support for regional integration: AGOA reauthorization seeks to support Africa’s regional integration agenda through improved rules of origin provisions, but more could be done to back the region’s ambitious efforts to enact a continental free trade agreement by 2017. While many remain skeptical about the timeline for this initiative, leaders of the East African Community, the Southern African Development Community, and the Common Market for East and Southern Africa are expected to sign a “Tripartite Free Trade Area Agreement” on June 10, 2015, which will incorporate half of the African Union’s member countries overall, with a combined population of 600 million people and an integrated domestic product of almost $1 trillion. More integrated African economies could be a “game changer” for the region, and AGOA could still provide a better articulation of what the United States could do to support this process and align U.S. trade policy with the region’s goals.

Import sensitivities and tariff rate quotas: Perhaps the most impactful provision of an AGOA reauthorization would be to expand product eligibility for AGOA beneficiaries. Import-sensitive sectors like sugar and cotton are areas where Africa could gain the most in terms of expanded trade with the U.S. In fact, in August of last year, USTR identified 316 specific tariff lines as priorities for possible inclusion in an AGOA renewal, but this call to action does not seem to have resonated in Congress yet. A 2013 brief from our colleagues at the Brookings Institution concludes that full duty-free, quota-free access to U.S. markets would increase African exports by $72.5 million, while costing the U.S. only $9.6 million. A similar Brookings brief highlights many areas where more could be done in terms of allocating additional quotas for agricultural exports to AGOA-eligible countries. As feasible, legislators could still consider these areas as measures to improve AGOA.

Next steps

The Senate’s move to reauthorize AGOA is a major milestone for the program, but it is still far from certain that bill will ultimately pass. There are indications that the House of Representatives will move to vote on the Trade Promotion Authority before AGOA, leaving the bill in a somewhat precarious position leading up to President Obama’s trip to Kenya in July. In the interim period, most proponents of the program will likely continue to concentrate their energies on urging Congress to take quick action. While the focus on AGOA continues, U.S. legislators have taken other important actions to improve U.S. investment policy in Africa. Last Thursday, Senator Richard Durbin (D-IL) filed an amendment to the Senate’s version of the Trade Promotion Authority, which would require the president to establish a strategy to increase U.S. exports to the region. This amendment builds on Senator Durbin’s previous bill, “Increasing American Jobs through Greater Exports to Africa Act of 2012,” (with parallel action taken in the House by Representative Chris Smith (R-NJ)), which also called for a “Special Africa Export Strategy Coordinator” to be placed in the White House and act as a principal lead on implementation of efforts to support U.S.-Africa trade. The American legislators who voted overwhelmingly to support AGOA last week should take a serious look at this amendment as they consider the TPA before the Memorial Day recess.

Witney Schneidman is a nonresident fellow at the Africa Growth Initiative in the Global Economy and Development program of the Brookings Institution. This piece was first posted on Brookings’ Africa in Focus blog.

Going to Kenya is an important undertaking, Mr. President

Posted in Current Events, Public Policy and Government Affairs

Dear Mr. President:

Recently, the distinguished Harvard professor, Robert Rotberg, made the argument that your planned visit to Kenya in July is a “dumb” idea.

I couldn’t disagree more, and here is why:

One of Professor Rotberg’s central points is that your visit will exacerbate ethnic tensions in the country, as your father was a Luo, and Luos largely backed President Kenyatta’s opponents in the 2012 elections.

This is a misreading of Kenyan politics. While there are ethnic rivalries in Kenya, as in many African countries, the country is increasingly defined by its multi-ethnic private sector. In fact, in the 2013 elections, the private sector undertook an aggressive and comprehensive peace-building campaign that contributed significantly to a fair and free outcome. Given that you are going to Kenya to participate in the 2015 Global Entrepreneurship Summit, the first time it will be held in sub-Saharan Africa, your visit will be an important boost to Kenya’s private sector and its contributions to the country’s development.

Professor Rotberg is also critical of the fact that you will be hosted by President Uhuru Kenyatta, who was indicted by the International Criminal Court (ICC) for allegations of crimes related to the 2007 elections. While the ICC indictment is a serious matter, you already hosted Kenya’s leader, along with 50 other African heads of state at the White House last August during the Africa Leaders Summit. Reciprocating the visit does not break new diplomatic ground. More importantly, your inclusive approach to summit participation was an important turning point for U.S.-African relations. We need to engage virtually all African governments on issues where we both agree and disagree—and specifically engage on contentious ones such as human rights, press freedoms, and transparency. You should not pull back from this approach.

Rotberg also argues that, since Kenya is “wildly corrupt,” your visit there will only undermine the United States’ efforts to promote the rule of law worldwide. True, 36 of the continent’s 54 countries, including Kenya, are ranked in the bottom half of Transparency International’s Corruption Perceptions Index 2014. Thus, by this reasoning, the U.S. engagement on the continent would be quite limited indeed. Moreover, it also follows that your two visits to Myanmar—which ranks lower than Kenya on TI’s index—should have been avoided.

There is no question that corruption is a significant problem in Africa, especially in undermining inclusive economic growth and discouraging U.S. investors. However, exporting American business practices to the continent contributes to combating the scourge of corruption, as the vast majority of American countries comply with the Foreign Corrupt Practices Act. African leadership and a commitment to transparency and accountability in all sectors is the most important response to fighting corruption, and the U.S. can contribute to this effort.  This will be an important message to convey at the Global Entrepreneurship Summit.

Perhaps most salient are Rotberg’s concerns about your security, given al-Shabab’s siege on the Westgate mall in 2013, and, most recently, the atrocious attacks at the University of Garissa. While your security is paramount, we must have confidence in the ability of U.S. security officials, working with their Kenyan counterparts, to lock down and secure the venues where you will be speaking. Anything less would be a victory for those who rely on terror to advance their objectives.

Where I agree with Professor Rotberg is in his encouragement for you to visit other African countries (although, again, not at the expense of Kenya). Nigeria is also deserving of a visit given General Buhari’s impressive electoral victory last month, and President Jonathan’s concession to Buhari. Ethiopia is an increasingly important partner on a range of security and commercial issues and would benefit from a visit. Hopefully an address to the African Union, based in Addis Ababa, is on your agenda before you leave office. Your participation in a summit of the International Conference on Great Lakes would be valuable in achieving a resolution to one of the continent’s most protracted conflicts in the eastern Congo.

Professor Rotberg is a long-time, dedicated Africanist as well as a friend and colleague. Yet, he does not seem to appreciate the historic aspect of your visit to Kenya.

In fact, Mr. President, the parallels between your visit to Kenya and President Kennedy’s visit to Ireland in June 1963 are unmistakable. At the time, Ireland had not quite been independent 40 years. Kenya has been independent just over 50 years. Ireland was a poor country in the early 1960s, a generation away from its era as a Celtic Tiger that, unfortunately, was short-lived. Kenya is poised for economic growth above 6 percent for the next several years, but only ranks 147 out of 187 countries in the 2014 U.N. Human Development Index. And both countries deeply value their relationship with the U.S.

For President Kennedy, the first Catholic to become president of the United States, his visit to Ireland was a true homecoming and a chance to revitalize the bonds between the U.S. and Ireland as well as all Irish in the diaspora. Indeed, President Kennedy described his visit to the predominantly Catholic Irish Republic as “the best four days of my life.” In President Kennedy, the Irish saw their future.

The same will be true for you, Mr. President. Your visit will inevitably strengthen and elevate a part of the world that has been overlooked by the U.S. for too long. And, in you, virtually every Kenyan, and many Africans across the continent, will see a link to and future with the United States, given your strong family ties to the nation. The reality is that many in Africa and the United States have been waiting for this visit since the day you were inaugurated. Given our competitive and challenging world, and Africa’s emerging importance in it, your visit to Kenya is quite significant. Safe travels.

Witney Schneidman is a nonresident fellow at the Africa Growth Initiative in the Global Economy and Development program of the Brookings Institution. This piece was first posted on Brookings’ Africa in Focus blog.

Burundi: “Third Term-ism” and the Threat to Democracy

Posted in Current Events

On Tuesday morning, weeks of violent protests in the East African nation of Burundi ratcheted up considerably when Major General Godefroid Niyombare attempted to overthrow President Pierre Nkurunziza.  At the time of the announcement, President Nkurunziza was in Tanzania attending a Heads of State Emergency Summit that the East African Community (EAC) had convened to discuss the escalating situation in Burundi.  Although the President Nkurunziza reportedly has returned to the country and coup leaders have conceded defeat, uncertainty prevails as to the situation in Burundi and its implications for the region as a whole.

At the root of the conflict is the decision by the ruling party CNDD-FDD to designate President Nkurunziza as its candidate for the June 26 election.  President Nkurunziza already has served two terms in office and his eligibility to seek a third term turns on the party’s interpretation of Article 96 of the Burundian constitution.  This Presidential term limits provision reads: “The President of the Republic is elected by universal direct suffrage for a mandate of five years renewable one time.”  President Nkurunziza and his party assert that he is eligible for a third term because he was appointed to his first term by Parliament rather than “elected by universal direct suffrage.”

Opponents of President Nkurunziza’s bid for a third term note that the ruling party’s creative constitutional interpretation comes a little more than a year after it tried — and failed by a single vote — to amend the constitution in order to, amongst other things, remove presidential term limits altogether.  Furthermore, the interpretation contravenes the 2000 Arusha Peace and Reconciliation Agreement, which is the delicate power-sharing agreement that ended the country’s long-running civil war.  Although the Agreement states that the President “shall be elected for a term of five years, renewable only once,” it then continues on to state explicitly that “[n]o one may serve more than two presidential terms.”  All of these machinations by the ruling party have been regarded as part of a larger effort to flout the Agreement and shore up and entrench the ruling party’s power.

The Constitutional Court of Burundi officially has agreed with CNDD-FDD’s interpretation and cleared President Nkurunziza to run.  However, the court’s vice-president Sylvere Nimpagaritse has claimed that “most of his colleagues thought the third-term bid was unconstitutional, but they were under pressure to change their minds.”  He fled the country rather than sign on to the ruling.

The situation remains fluid.  There are yet no indications that the Burundian government will postpone the elections but the EAC Heads of State, the African Union, and the international community all have agreed that elections should not be held in this climate.  It is imperative that these words translate into actions that safeguard the Burundian people’s right to free and fair elections.  More so, the handling of this situation will set a critical precedent for the region particularly with respect to the elections set to be held in the Democratic Republic of Congo and Rwanda in 2016 and 2017 respectively.  In both countries, the sitting president has reached his constitutional maximum term limit but there are warning signs that third terms may be sought.

Global Financing Facility Looks Beyond the Millennium Development Goals to Bolster Africa’s Private/Public Healthcare Systems

Posted in Corporate and Investment, Public Health, Public Policy and Government Affairs, Uncategorized

Earlier this week, the Corporate Council on Africa’s Health Working Group hosted a World Bank presentation of The Global Financing Facility (GFF), a broad $4 billion facility that aims to promote reproductive, maternal, newborn, child and adolescent health (RMNCAH) in low- and middle-income countries.  The GFF–which was announced in September 2014 and currently consists of front-runner initiatives in Kenya, Tanzania, Ethiopia and the Democratic Republic of the Congo (DRC)–will be formally launched this July at the Third International Conference for Financing for Development.  The World Bank’s presentation emphasized the important role that the private sector can play in achieving access to healthcare in the world’s poorest nations, long after the Millennium Development Goals (MDGs) expire at the close of this year.  Over 50% of healthcare services in Africa are provided by the private sector.  Consequently, facilities such as the GFF offer significant opportunities for actors in Africa’s private healthcare and pharmaceutical sectors to shape the trajectory and quality of their industry alongside domestic and international partners.

The GFF consists of financing from the GFF Trust Fund (currently funded at $800 million), the Bank’s International Development Assistance (IDA), and the International Bank of Reconstruction and Development (IBRD).  Sixty-three low- and middle-income countries have been identified for GFF Trust Fund support, which will be combined with domestic financing and strategic services delivery from sources such as the private sector.  Each country selected will receive between $10-60 million in financing, which may take the form of grants, loans, and credits, in addition to more creative forms of support such as health bonds and buy-downs.  The Bank estimates that at the close of 2030, this funding will have mobilized over $57 billion (including domestic resources), prevented between 24-38 million deaths, and improved the efficiency of funded-countries’ health systems by 15%.

During this week’s GFF presentation, Dr. Monique Vledder, co-leader of the GFF Business Team, repeatedly emphasized the untapped potential of the private sector to participate in GFF-funded initiatives at the national level, particularly in the areas of service delivery, supply chain management, medical technology and access to financing for family-care health services providers.  As explained in the GFF Concept Note, the GFF aims to support private healthcare providers and to promote the quality and efficiency of their services through a number of measures, including regulatory harmonization between countries to promote market entry for essential medicines, the reform of overly cumbersome licensing and registration regimes that result in informal private sector operation, the promotion of private healthcare provider associations, and the facilitation of private-public sector dialogue concerning healthcare services and medical supply chains.

Dr. Vledder noted that actors in Kenya’s private healthcare sector worked together to strongly influence the shape of the Kenyan GFF program, thus signaling the significant opportunity presented by facilities such as the GFF to address private sector interests and capacity.  When the Facility is officially launched in July, other countries will have a similar opportunity.  As African healthcare providers look towards a post-Ebola, post-MDG reality, they would be well advised to consider internationally-funded initiatives such as the GFF, and to fully engage with the private-public alliances that are likely to impact their industry over the next two decades.

Global Infrastructure Investment — Getting Investors Off the Sidelines

Posted in Corporate and Investment

Power shortages in India, transportation costs in Africa, the poor grades given to US infrastructure, pollution in China, and the devastation to old and sub-par infrastructure in places like Nepal when disaster strikes are clear reminders that the world needs more and better infrastructure.   Infrastructure is the talk of governments, of bodies such as the G20 and international organizations including the World Bank, the OECD and the IMF.  The need is real and there is enough cash in global markets to make it happen.  Yet, private investment in infrastructure has fallen despite calls to ramp it up as a way to spur inclusive growth, productivity and job creation.  So, why isn’t it happening and is help on the way?

Experts estimate the shortfall in global infrastructure debt and equity investment to be at least US$ 1 trillion per year.  Governments (which typically fund  infrastructure) do not have the financial headroom, and infrastructure projects are complex to manage  and prone to corruption and failure.  That is especially true where competition and capacity are weak, and laws and regulations not geared to ensuring that such investments succeed over their life-cycle — a.k.a. in most of the world.  Sovereign risk is a key predictor of infrastructure investment.  Global infrastructure needs cannot be met without private capital and know-how.   Insurance and pension funds have invested less than 1% of their $80 trillion in assets in infrastructure, mostly in advanced economies.   Private investors — including long-term investors such as pension funds, insurance companies and sovereign wealth funds — say they are hard-pressed to find bankable projects in which to participate.

Despite unmet and fast-growing demand for infrastructure services, the high transaction costs, poor capacity, political and governance risks, and policy and regulatory barriers found in most emerging markets make investment returns too low to attract private investment.   The pipeline of well-prepared projects is small; there is a lack of appropriate financial instruments of sufficient liquidity (e.g. project bonds) to mobilize global investors;  daunting inconsistencies persist in contracts, concessions, bidding documents,  procedures and purchase agreements  (e.g. fuel and power) and critical underlying cost recovery and cash flow challenges plague sectors that need private investment.  So billions of people go without reliable access to basic services such as electricity, clean water and transportation; and investment fails to materialize while global growth remains slow and uneven.

A number of international initiatives have been launched to get global capital and private investors off the sidelines and into infrastructure investment.   In October 2011, the MDB Working Group on Infrastructure (which is comprised of the African, Asian, European, Inter-American, and Islamic Development Banks as well as the World Bank Group) submitted an Infrastructure Action Plan to the G20.   It focused on specific initiatives to unlock private funding with technical assistance and targeted financial support (including for regional projects) and to make multilateral banks procedures more amenable to public-private partnerships.  Key among its recommendations were the need to improve the transparency and success of infrastructure procurements and projects, including by ramping up the number of countries supported via the 2008 Construction Sector Transparency initiative (CoST) and launching the global Infrastructure Benchmarking Initiative (IBI) to assess the quality and performance of infrastructure spending.

Building on this work, in the Fall of 2014, the G20 and the World Bank launched the Global Infrastructure Facility (GIF) with the support of major asset management and private equity, donor governments and other prominent multilateral institutions for a three-year pilot.   It aims for formal collaboration via an Advisory Council made up of international institutions, governments and private investors to prepare and structure complex projects involving public-private-partnerships (PPPs) transparently and efficiently.   Up to $200 million in downstream co-financing resources for the GIF is envisioned once the upstream work has taken hold.  The GIF is also expected to identify and help to improve legal, regulatory and institutional conditions, to provide new risk mitigation and credit enhancement tools and to help mobilize and finalize financing packages.   It is to provide a comprehensive approach with operational activities in both Washington DC and Singapore to develop a diverse portfolio of projects with complexities that might otherwise deter investment, but with a high potential to leverage diverse investors and lasting development impacts.

The G20 and their business advisors, the B20, also agreed in November 2014 to establish a Global Infrastructure Hub in Sydney, Australia to help advance the G20’s infrastructure goals, including to drive increased consistency in project documents and processes, to promote more transparent procurement practices, to highlight global best practices and important challenges,  to establish a data base to help match investors (including pension funds and insurance) with projects and to identify and encourage innovative financing models.   It also envisions work to provide more efficient ratings of infrastructure projects in particular country and regional contexts (e.g. enforcement risks,  policy and regulatory risks, transaction costs, counterparty risks).

The OECD and World Bank are also working on a joint checklist for key steps and best practices on Public-Private Partnerships and Project Preparation.   A major G20/OECD project analyzing government and market-based incentives for long term investment financing (such as the new tax credits for infrastructure being discussed in the U.S. Senate) is ongoing.  It aims to examine a wide range of options and instruments to facilitate institutional investors participation in infrastructure projects, and to focus on new forms of investment – e.g. partnership and co-investment models between banks and institutional investors –  as well as on risk mitigation mechanisms.  The aim is to create an agreed framework of instruments and incentives to facilitate the development of infrastructure as an asset class, so as to leverage private capital.   The IMF and OECD will also continue work to ensure efficient sovereign debt sustainability and crisis management, which also is key to mobilizing infrastructure investment.

Recognizing infrastructure as a critical need and an opportunity to build its global presence and prestige, China launched a new Asian Infrastructure Investment Bank (AIIB) in Beijing in October 2014.  Despite questions raised by the United States, Japan and others about the governance and efficiency of the AIIB, some 58 countries (including 18 European countries, most of the G20 and the majority of the Asian economies) have already signed up as founding members.  The World Bank and Asian Development Bank plan to work cooperatively with the AIIB, which is expected to be fully established this year with up to $100 billion in capital.  Although the United States has yet to sign on to the AIIB, President Obama said last week that he is “all for” the AIIB, if it maintains high standards and adopts best practices.  Japan, which also has yet to join, this week announced at the annual meetings of the Asian Development Bank an initiative on “quality infrastructure” investment, while the ADB also rolled out plans to streamline project approvals and increase flexibility to draw from various capital sources to finance regional infrastructure.

This year will be critical to whether international efforts to assess creatively and de-risk, facilitate and co-finance private investment in much-needed infrastructure can begin to produce efficient investment and help to spur growth and job creation.  Like the so-called “natural resource curse”, there is an infrastructure “curse” that also requires transparency, capacity and independent monitoring finally to unlock private investment.   This may be the year it finally happens.

Anatomy of a Nigerian Oil Scandal: Audit of National Oil Company Fuels Momentum for Sectoral Reform

Posted in Energy and Natural Resources, Public Policy and Government Affairs

After months of speculation and mounting pressure, it’s finally here: the government of Nigeria has released the long-awaited PricewaterhouseCoopers (PwC) forensic audit of the Nigerian National Petroleum Corporation (NNPC), the country’s national oil company. It’s not often that the release of a highly technical accounting report makes the headlines—much less grabs the attention of millions—but this isn’t just any audit, either. The allegations that the report examines cost the central bank governor of Nigeria his job, and may even have played a role in unseating President Goodluck Jonathan this past March.

A little background is in order. In late 2013, then-Central Bank Governor Lamido Sanusi accused NNPC of failing to remit tens of billions in oil revenue to the Nigerian treasury—revenue sorely needed for the country’s macroeconomic stability. President Jonathan brushed off the claims and rapidly sacked Sanusi. This move was widely condemned, especially given Sanusi’s track record on combating corruption and in steering the country through its 2009 banking crisis. To quell growing public outcry, the government commissioned PwC in June 2014 to carry out a forensic audit of the state oil company. PwC submitted its final report in February 2015, but the Jonathan administration had until now chosen not to make it public, releasing only a one-page summary. The government fended off calls to release the full audit report, with Petroleum Minister Diezani Allison-Maduekwe claiming the report would not be released so as not to politicize the elections. Regardless, Major General Muhammadu Buhari handily defeated the incumbent president in late March, capitalizing on the electorate’s frustration with the Boko Haram insurgency and the perceived rampant corruption plaguing Nigeria—and still, the report was not released. Finally, after President-Elect Buhari stated last week that his administration would make the report public when he took power, President Jonathan relented and released the full audit on April 27.

The now-public report provides a bleak depiction of NNPC’s operations, and even then does not reveal the full picture. PwC was blocked from accessing the data and people it needed to conduct a full audit, and so, in an unusual move, the accounting firm warned that it could not vouch for the reliability of its report, which was not conducted in line with generally accepted auditing standards. Overall, however, PwC’s main conclusions are in line with Sanusi’s allegations of at least serious mismanagement. (The audit does not mention the role of corruption in getting the NNPC to these dire straits, but many Nigerians believe corruption is an endemic problem in the institution.) The audit found that NNPC owed at least $1.48 billion to the treasury  as a result of accounting and computation errors. The report also cautions in uncharacteristically strong language that NNPC had been given a “blank cheque to spend money without limit or control,” warning that its operations are unsustainable and need to be urgently remedied. Over the January 2012 to July 2013 period covered by the audit, nearly half of the oil proceeds went to covering NNPC’s operational costs and on kerosene and oil subsidies; these latter subsidies, while nominally pro-poor, have long been seen as a wealth transfer to kerosene retailers instead. With oil prices tumbling dramatically over the last year, PwC warns that if the state oil company continues on the same spending trajectory, it would be unable to cover its own costs, much less remit anything to government coffers.

While PwC’s report is proving to be political poison for President Jonathan’s administration—most recently with the Minister of Finance distancing herself from the audit—it further strengthens President-Elect Buhari’s mandate to reform the oil sector. The Major General has indicated his priorities upon taking office on May 29 would be to end fuel subsidies, crack down on corruption, and reform the NNPC, while tax reform for the oil sector would take a back seat. The incoming Buhari administration may also provide the necessary momentum to get the long-pending and controversial Petroleum Industry Bill passed, which would establish a fiscal, legal, and regulatory framework for the sector. International oil companies have been keenly watching the taxation provisions of the pending bill. Uncertainty over the taxation of the sector has allegedly caused billions of dollars of foreign investment to be withheld, and Buhari’s signaling that oil taxation will not be a policy priority is likely to only increase this uncertainty. But one thing is clear: Buhari is inheriting a petroleum sector in crisis, and the effectiveness with which the President-Elect tackles the problem will determine not just the trajectory of the Nigerian oil industry for years to come, but the success of his administration as well.

The Healthy State of Medical Tourism in Sub-Saharan Africa

Posted in Corporate and Investment, Public Health

Well-known as a destination for experiencing some of the world’s most breathtaking natural assets, the Sub-Saharan African region is making progress in staking a larger claim to the multibillion dollar medical tourism industry and is the fastest growing region for wellness tourism.  Strategic trade and investment policies have played a significant role in these advancements.

With its speedy, high quality and low cost health services sector, South Africa indisputably is the continent’s leader.  By entering into bilateral health agreements with approximately twenty other African countries, South Africa has greatly facilitated travel to the country for medical reasons.  Nearly 80% of the country’s medical visitors come from other African countries and, as a more general matter, medical tourism “is one of the few industry areas where intra-Africa trade surpasses that of countries outside the continent.”

Looking to leverage its close geographic proximity to Europe and North Africa and become a regional medical hub, the Tunisian government has put in place a range of measures to attract both investors and medical visitors.  These incentives include “tax exoneration on medical equipment and devices and a 50% tax break on all investments related to medical institutions and infrastructure.”  The Tunisian government also has undertaken the construction of a $50 billion dollar Tunisia Economic City, a mega-project that will “devote[] a significant portion of its space” to hospitals, clinics, research institutions and other health and wellness facilities.

However, Morocco also is trying to establish itself as the region’s medical hub.  Although the country enjoys “many of the same advantages” as Tunisia, Morocco “also benefits from a full open skies agreement with the [European Union] and, as a result, from the availability of numerous budget airline flights destinations throughout the country from airports across Europe.”  In a move that has been described as “a game changer,” earlier this year Morocco liberalized its healthcare sector by passing a legal framework under which “individuals who are not doctors as well as financial investors (both local and international) will have the right to own a clinic.”  Another key development is the recent announcement by Tasweek Real Estate Development and Marketing (of the United Arab Emirates) that the company will invest $3 billion to “create advanced ‘Healthcare Cities’ in Tangiers, Agadir and Casablanca.”

Kenya and Rwanda are in their own competition for regional dominance of East Africa’s medical tourism industry due to “[a] diverse set of forces, including favourable economic factors, a supportive regulatory environment, and a high disease burden.”  The East African Community (“EAC”) has recognized Rwanda’s efforts by selecting the country to serve as “the region’s center of excellence in e-health, biomedical engineering, health vaccines and immunization logistics.”  Its responsibilities in this role will include providing “‘e-health solutions like storage of medical records using high technology,’ […] engineering knowledge for medical equipment like scanners and teaching how vaccines are efficiently procured and stored.”  The EAC has selected Kenya to be responsible for creating a center of excellence in the field of urology.

Each of these markets demonstrates the various opportunities for private investors to become involved in the alive and thriving medical tourism industry in Sub-Saharan Africa.

Competing smarter: Assessing the report from the President’s Advisory Council on Doing Business in Africa

Posted in Corporate and Investment, Current Events

One positive outcome of last year’s U.S.-African Leaders Summit was the creation of the President’s Advisory Council on Doing Business in Africa (DBIA), whose purpose is to make recommendations on how to strengthen U.S. commercial engagement on the continent. The council, a group of 15 seasoned business leaders with a genuine understanding of Africa’s business environment, recently issued its first report and set of recommendations.

Important proposals are put forward, such as strengthening healthcare infrastructure as well as the perishable supply chain in order to reduce post-harvest food losses. Another critical recommendation is for strong advocacy for African governments to seize global leadership in bringing the World Trade Organization’s (WTO) Trade Facilitation Agreement into force prior to the December 2015 WTO ministerial in Kenya, the first such session to be held in Africa.

The entire report deserves careful consideration and is a welcome addition to the increasingly useful policy debate on how to increase economic ties between the U.S. and Africa. However, several key aspects of the U.S.-African commercial equation were neglected within the report and should be essential parts of any conversation about how to make American companies more competitive across the continent.

Lingering questions and important omissions

Notably, there is only one reference to the African Growth and Opportunity Act (AGOA), the cornerstone of the U.S. commercial relationship with Africa, and it is an easily missed expression of “trust” that Congress will renew the legislation this year.

A full-throated endorsement by the council of AGOA’s renewal for 15 years, as the Obama administration has called for, would have been important not only as a strong signal of support from these respected business leaders and companies, but also in setting a clear context for the group’s recommendations. In fact, this omission, as well as the report’s equally passive call for Congress to fund the Export-Import Bank, reflects a more fundamental dilemma of the document: Is this a Commerce Department report or a document whose recommendations aim to strengthen a “whole of government” approach to doing business in Africa, inclusive of the nearly 12 federal agencies involved in the DBIA campaign? On this, the lines are blurry.

A key recommendation of the council is the creation of a “forward-deployed” and “business-driven” U.S.-Africa Infrastructure Center. The purpose of the center would be to “align business resources with government resources to identify, vet, prioritize, and develop a unified approach to compete for critical projects.” This is a timely and creative proposal. Given the caution of U.S. companies, the complexity of Africa’s investment environment, and China’s dominance in this sector, there is a compelling need for coordinated support from all relevant U.S. agencies to help American companies win African infrastructure projects.

What is not clear is who would “own” the U.S.-Africa Infrastructure Center. Would it be State, Commerce, USAID, the private sector, or a hybrid of agencies? Moreover, how would this center align with the efforts of the administration’s new Trade and Investment Hubs whose mission was also recast at last year’s summit to help U.S. companies capture market share on the continent?

The report addresses the critical issue of access to “reliable” capital and makes the important recommendation that the Commerce Department develop a public-private partnership with institutional investors in an effort to reduce risk and increase investor confidence. It would have been helpful to have mentioned the Overseas Private Investment Corporation (OPIC) in this context given the influential role the agency plays in risk-mitigation across the continent. Despite its successes and indeed the net revenue it generates for the U.S. Treasury, OPIC remains understaffed and subject to key regulatory constraints.

There is also useful discussion of an “Investor Toolkit” in the report, building on the knowledge of the U.S. Foreign Commercial Service (FCS), to help U.S. companies identify and vet local partners and gain local market intelligence. The FCS, under Secretary Prizker’s leadership, has only recently increased its presence in Africa after more than a decade of downsizing. Partnerships with dynamic local organizations such as the Kenya Private Sector Alliance in Nairobi, the American Chamber of Commerce in Johannesburg, and LCF Advogados in Luanda would add significant value to the development and maintenance of these FCS-led toolkits.

Going further to reinforce U.S. government coordination

Perhaps the most salient recommendation that the council makes is to encourage the administration to establish an interagency committee to coordinate U.S. trade facilitation and to engage recommendations from private sector organizations. This is consistent with bipartisan legislation, first introduced in 2013 and again in February 2015, that calls for a special coordinator in the White House to “ensure government agencies are working in tandem,” maximize support for U.S. businesses entering African markets, and increase U.S. exports to Africa.

A special coordinator could also help to guide the “Steering Group on Africa Trade and Investment Capacity Building,” which was established at last year’s summit and tasked with making recommendations on a “comprehensive approach” to expanding the region’s capacity for trade and investment. The Steering Group was supposed to have issued its report to the president through National Security Advisor Susan Rice in January; however, the group has yet to impact the dialogue on these issues.

With the administration preparing for President Obama’s participation in the Global Entrepreneurship Summit in Kenya in July, it is essential for the White House to clarify who in the administration is in charge of the U.S. commercial engagement in Africa. Clearly, there is growing recognition that the White House needs to enhance its leadership in this area.

Finally, the report acknowledges the Commerce Department’s role in leading the U.S.-East African Community (EAC) Commercial Dialogue, which is the “central platform” for public-private sector engagement under the Trade Africa initiative.

This is true.

What is not mentioned is that the U.S. also has a U.S.-EAC Trade and Investment Framework Agreement (TIFA) led by the U.S. Trade Representative that has as the goal, “to strengthen the United States-EAC trade and investment relationship.” The optimal recommendation would be to integrate the Commercial Dialogue and the TIFA, to be co-chaired by the Secretary of Commerce and the U.S. Trade Representative, and joined by a robust private sector delegation. In short, there is a compelling need for a genuine Team USA approach that lessens the time and resource demands on all sides while enhancing the priority and urgency of deepening trade relations with Africa.

As far as advisory council reports on Africa are concerned, it is one of the most relevant and thoughtful reports ever released—and in a relatively short period of time. However, the report is also notable for what it omits, and significant work remains to be done to fully realize the potential of a robust U.S.-African commercial relationship.

 

Note: This piece originally appeared on the Brookings Africa Growth Initiative’s blog Africa in Focus.

European Parliament Divided on Conflict Minerals Regime

Posted in Current Events, Energy and Natural Resources, Public Policy and Government Affairs

Background

On April 14, 2015, the Committee on International Trade (INTA) of the European Parliament adopted amendments (by 22 votes to 16, and 2 abstentions) on the European Commission’s proposal for an EU conflict minerals regime published in March 2014. The INTA vote followed a compromise reached among three of the main political groups of the Parliament, namely the center-right (EPP), the Liberals (ALDE) and the ECR led by the UK Conservatives. See our previous blog post for further information on the context and on the Commission’s proposal.

Outcome of the vote

The main highlights of the INTA vote are as follows (as the consolidated report is not yet available, the information provided below could be subject to change):

  • The INTA Committee decided to beef up the Commission’s proposal by making it compulsory for EU-based smelters and refiners to be EU-certified as responsible importers. However, the INTA members decided to keep a voluntary approach for the rest of the supply chain. At the same time, members adopted a proposal for a “European Responsible Supply Chain Label” for companies willing to exercise due diligence.
  • In addition, INTA members maintained the focus on tin, tungsten, tantalum, and gold as proposed by the European Commission by rejecting amendments that aimed to include additional minerals.
  • They also agreed on the geographic scope of “conflict-affected and high-risk areas” as in the Commission’s proposal although MEPs reportedly did not provide guidance on how to determine which countries/regions will fall under the scope of the EU regime.
  • The INTA Committee excluded recycled/reclaimed materials.
  • Finally, the amendments adopted by the INTA Committee also include a two-year review clause.

Next steps

However, the Socialists and the Greens vehemently criticized the outcome of the INTA vote as they are determined to make the EU’s due diligence self-certification system compulsory for the whole supply chain including all downstream operators, rather than only for smelters and refiners. Left-wing MEPs are expected to mobilize forces in favor of a mandatory approach ahead of the adoption of the European Parliament’s position in the next plenary (i.e., by the full Assembly) on May 18-21. No doubt that a number of NGOs will join forces with the same aim in mind. The EP’s “first-reading” position will then serve as the basis for discussions with the Council, which is likely to favor a voluntary approach as proposed by the Commission.

At this stage, the discussion in the Council only took place at the expert level in several sub working groups; one to address the customs issue, the other to try to find a definition for “conflict affected high-risk area”. At a higher level, the working group for trade matters prefers to wait for the result of the debate in the EP before addressing the mandatory/voluntary issue.

Member States are, as the EP, under strong pressure from NGOs asking for mandatory reporting obligations from the end-users but they are also sensitive to the Commission’s arguments about the negative effects that an “EU Dodd Frank regime” would have on the local population, i.e., to completely stop the legitimate mining in Eastern Congo.

This Year’s IPA Award Showcases Capital Innovations

Posted in Corporate and Investment

This week, the African Innovation Foundation (“AIF”), an organization whose purpose is to “to increase the prosperity of Africans by catalyzing the innovation spirit in Africa,” announced the finalists for its annual Innovation Prize for Africa (“IPA”) award.  Started in 2011, the IPA award serves to “honour[] and encourage[] innovative achievements that contribute toward developing new products, increasing efficiency or saving cost in Africa.”  Two of this year’s finalists have developed innovations that take on the issue of access to capital, the lack of which continues to be one of the most significant challenges to sustainable development on the continent.

Developed by Alex Mwaura Muriu, Farm Capital Africa is a crowdfunding investment platform that “identifies, screens and shortlists full-time farmers with small holdings and helps them devise farming plans to attract potential investors who earn profits over time.”  Smallholder farmers are responsible for the vast majority of farming activity on the continent but private commercial banks and other lenders have proven reluctant to extend financing to these potential borrowers.  The reasons for this reticence include geographic inaccessibility, a dearth of financial as well as vital records for establishing a credit history, and a lack of collateral.  Expanding the financing options for smallholder farmers is critical to the African agricultural sector which, in the coming decades, will play a pivotal role in the region’s socioeconomic development and global food security.

Leveraging the explosive growth of mobile technology on the continent, Kyai Mullei has developed M-changa.  Also a crowdsourcing platform, this mobile application  “allows users to solicit support for a cause, track contributions, and withdraw funds using their mobile phones without relying on internet connectivity.”  The app allows people to source funding for business enterprises but also medical treatment, educational services and other causes that span the range from personal to small-scale to broad-based impact.  This model addresses what The Bill and Melinda Gates Foundation, Kenya Financial Sector Deepening, and other experts have observed about the financial lives of the poor which is that “access to the right financial tools at critical moments can determine whether a poor household is able to capture an opportunity to move out of poverty or absorb a shock without being pushed deeper into debt.”  This app has the potential to make the difference between managing poverty versus creating wealth.  It also is no coincidence that the app is known as E-harambee.  The official motto of Kenya, harambee is a Swahili word that translates to “All pull together.”

Muriu, Mullei and the other finalists have done impressively well to be selected from a record pool of over 900 applications from 41 countries.  The award ceremony will be held on 12-13 May in Morocco, which is a partner, host, and patron to this year’s IPA award and itself is quickly becoming one of the region’s innovation hubs.  Regardless of who ultimately receives the three cash prizes, the IPA award is an important platform for showcasing the indigenous innovation capabilities across the continent.