Zimbabwe: Challenges Persist After Fall of Mugabe

Momentous events in Zimbabwe during the last two years inspired hope among many Zimbabweans that they would experience meaningful political change and sustainable economic growth in their lifetimes. In November 2017, former President Robert Mugabe—who ruled Zimbabwe for nearly 40 years—was ousted in a military coup and his former deputy President Emmerson Mnangagwa was installed as head of the transitional government and continues to rule today. Unfortunately, despite this change in the country’s leadership, the people of Zimbabwe continue to face pressing challenges, including political repression, hard currency shortages, power-cuts, an inadequate fuel supply, and spiraling retail prices. Is there room for optimism? Swift action is necessary on the key issues discussed below to make President Emmerson Mnangagwa’s promise that Zimbabwe is “open for business” a reality.

Political environment

Following the coup that ousted former President Mugabe, general elections to elect a new President and members of both houses of Parliament were held at the end of July 2018. The elections were peaceful, and had a 75 percent voter turnout. ZANU-PF, President Mnangagwa’s ruling party secured 50.8 percent support. Soon after the elections, demonstrators took to the streets claiming that the election results were a sham. They were shot by the Zimbabwean military with live ammunition, resulting in six deaths and dozens of injuries. Media and electoral observer reports subsequently confirmed that the general election, like elections during President Mugabe’s reign, were not free and fair. Observers from both the European Union and U.S. reported that there was voter intimidation, some of which was by the military at the direction of ZANU-PF.

Nelson Chamisa, the leader of MDC Alliance (Zimbabwe’s official opposition) challenged President Mnangagwa’s election victory in Zimbabwe’s Constitutional Court. The court dismissed Chamisa’s challenge, confirming President Mnangagwa’s election victory. Subsequently, Zimbabwe experienced several months of protests over inflation, currency depreciation, and the high costs of basic goods. In January, the government doubled the price of gasoline, leading to riots and a brutal crackdown by the military. On January, 22 2019, the Zimbabwe Human Rights Commission condemned President Mnangagwa’s government for deploying the military to enforce law and order in the country, and for allowing the military to use excessive force and military-style torture in the process. President Mnangagwa has called for a “national dialogue” and has promised to investigate the brutal crackdown.

Against this backdrop, Zimbabwe is facing significant and complicated economic woes, many of which have festered for decades.

Economic woes

Zimbabwe sought to court international investors after the fall of Mugabe with its “open for business” slogan and many potential investors were hopeful that an economic revival would flourish in Zimbabwe under Mnangagwa’s new Administration. New investments are slow, however, for three primary reasons: (i) sanctions; (ii) indigenization policies; and (iii) currency convertibility and repatriation.

Sanctions

Several western countries have imposed sanctions on Zimbabwe since 2002, largely because of human rights abuses and political repression. The U.S. imposed sanctions on Zimbabwe with effect from March 7, 2003 through a George W. Bush-issued Executive Order. Currently, there are U.S. sanctions on 141 entities and individuals, including President Mnangagwa.

Following the ousting of President Mugabe, many African leaders, including South Africa’s President Cyril Ramaphosa, called for the sanctions imposed on Zimbabwe to be lifted. However, in March 2019 President Donald Trump extended U.S. sanctions for an additional year on grounds that the new government’s policies continue to pose an “unusual and extraordinary” threat to U.S. foreign policy noting that the sanctions will remain in place until Zimbabwe’s laws restricting media freedom and allowing protests are changed.

Early in June 2019, the European Union, which initially imposed sanctions in 2002 but only continues them on Grace and Robert Mugabe and one defense company, kicked off political talks with the Zimbabwean government. Those talks, which are focused on economic development, trade, investment, rights, rule of law and good governance, could culminate in EU sanctions on Zimbabwe being lifted.

Indigenization Policies

Zimbabwe passed the Indigenisation and Economic Empowerment Act (IEEA) in 2008. The IEEA has been a source of consternation for foreign investors. The law limited foreign ownership interest in local businesses to 49 percent, thereby compelling foreign investors who wholly owned local businesses to dispose of no less than 51 percent of their equity interest in those businesses to Zimbabwean nationals. Divergent interpretations and inconsistent application of the law created uncertainty for investors. Amended in 2017, the law now only applies to equity investment interests in diamonds and platinum. It is a positive step in the right direction that the IEAA no longer applies to business interests in other minerals or other sectors of the economy.

Currency and economy

Zimbabwe adopted the RTGS (or real-time gross settlement) Dollar as its official currency in February 2019 as a “substitute” for the bond note. The bond note was introduced as the country’s official currency in October 2016. Upon launch, the bond note was pegged at par to the US Dollar; however, the bond note lost value rapidly and was trading at a huge discount to the US dollar. The RTGS Dollar was meant to serve as an interim measure to end the so-called “dollarisation” of the economy. The RTGS Dollar is represented by RTGS balances (i.e. bank balances and mobile money wallet balances), together with the physical bond notes and coins.

Unlike the bond note, the RTGS Dollar has been made subject to market forces, but like the bond note, the market rejected the RTGS Dollar causing it to rapidly lose value. The RTGS Dollar has no convertibility, and limits placed on investors’ ability to convert their RTGS Dollar reserves into US dollars has increased black market speculation. This ultimately caused the Zimbabwean government to outlaw the use of US dollar and other foreign currencies as legal tender effective June 26, 2019.

Inflation in Zimbabwe is a 10-year high of 75.86 percent, while fuel hikes in recent months have been in excess of 100 percent.

Knock-on implications

Zimbabwe’s political woes weigh heavily on the country’s economy. While the EU appears to be laying the groundwork for a normalization of relations, U.S. sanctions will remain in place for at least the next year. As long as these sanctions are in place, the country’s ability to attract substantial levels of foreign direct investment from responsible investors will be hampered. This in turn will limit the country’s growth prospects and exacerbate the country’s economic and financial challenges.

Public-Private Collaboration is Key to Building Africa’s Digital Future

Over the past four decades, three key barriers prevented most Africans from benefitting from the technology innovations and services that have changed the world. First, a failure of leadership led to mismanagement and theft of billions of dollars that should have built the healthcare, education, and other infrastructure and services critical to development. Second, Africa’s 54 countries have had highly fragmented trade regimes and weak distribution channels that made the continent an unattractive place to do business. Third, the historically prohibitive cost of access to information technology meant that during the first forty years of the personal computing and internet revolution, only the most privileged entrepreneurs could afford the on-premise hardware, networking, and other capabilities required to build a technology-enabled business. Even after cloud computing substantially reduced the cost of access to world-class IT infrastructure and services, access to the internet was still out of reach for most Africans.

A new and promising era for Africa

The ratification of the African Continental Free Trade Area, which creates a single market of over 1.3 billion African consumers, demonstrates a shared vision by African leaders on a complex policy initiative built on free market principles.

This initiative seeks to increase intra-African exports from a current average of 18 percent, to levels comparable to the 59 and 69 percent for intra-Asia and intra-Europe exports, respectively. As Africa builds a more interconnected and prosperous continent through trade, affordable access to modern technology will play a central role in empowering our young people in manufacturing, processing and the creation of value chains across all sectors.

The continent’s internet penetration is now at 36 percent, compared to the rest of the world’s average of 56 percent. While still low, this is a remarkable accomplishment considering it was achieved in the past 10 years. The African Union, with support from the World Bank Group, has set the goal of connecting every individual, business, and government in Africa by 2030, effectively lowering broadband cost by as much 90 percent.

As the world’s fastest-growing mobile region, GSMA estimates that Africa will reach 650 million unique mobile subscribers in the next five years. The mobile ecosystem alone is expected to add more than $150 billion in value to the continent’s economy by 2022. Increased connectivity and access to the cloud through mobile phones and other edge devices will connect us to infinite sources of information, analytics and expertise that enable African innovators and entrepreneurs to envision and shape a new reality.

As a result of these positive developments, governments and businesses from all around the world are rushing to strengthen diplomatic and commercial ties with Africa. The pursuit of new opportunities on the continent is amplified by the fact that leading platform companies are making huge investments to accelerate the digital transformation and the adoption of advanced technologies such as artificial intelligence and machine learning—all readily available through the cloud at a fraction of the initial cost of information technology.

The threat of cybercrime to Africa’s transformation

Cloud-based technologies and services are unrivaled in their ability to offer integrated storage and computing capabilities at economies of scale that substantially increase productivity, while lowering historical capital and production costs. But as we’ve learned with the alarming increase of cyberattacks, the more powerful the tool, the greater the potential to benefit or harm society.

Over 77 percent of the cyber-attacks launched in 2018 were successful, leading to trillions of dollars in economic losses suffered by civilians, companies, and governments. We’ve also seen that these advanced technologies can be misused by terrorists, companies, and governments intent on suppressing fundamental rights like privacy and freedom of expression.

The rising threat of cybercrime is galvanizing many of our clients to strengthen public-private collaboration on the development of enabling and harmonized regulations that affirm international norms on privacy, cybersecurity, and other critical policies and regulations “aimed at promoting an open, secure, accessible and peaceful ICT environment.”

Public-Private partnerships for harmonized and enabling regulations

Technology adoption is at the heart of Africa’s socio-economic transformation agenda at the African Union and other important forums like the Smart Africa Alliance where twenty four (24) African Heads of State, with the support of a talented Secretariat, are providing critical leadership to accelerate development through ICT.

The most effective way to ensure sustainable transformation is to create ecosystems of excellence that are governed by harmonized legal and regulatory frameworks that adhere to global standards. Given the rapidly evolving capabilities of new and advanced technologies, close collaboration between policy makers and the private sector is the key to striking the right balance between the protection of individual liberties, while helping governments obtain the electronic evidence they need to protect us from serious crime and digital terrorism.

Can the U.S. and Africa Prosper Together?


Prosper Africa, the core of the Trump administration’s policy, is a state of mind.

This is not a criticism.

The program is an ambitious effort to get every American political appointee, diplomat, and civil servant engaged on African issues to be on the look-out for commercial opportunities for American businesses and to help American companies capture those opportunities. Prosper Africa wants nothing less than to change the culture of American diplomacy in Africa so that the success of American business on the continent is as much of a priority as American security and Africa’s economic development.

This message, repeated last week at the Corporate Council on Africa’s U.S.-Africa Business Summit in Maputo, Mozambique, by Deputy Commerce Secretary Karen Dunn Kelley, USAID Administrator Mark Green, Assistant Secretary of State for African Affairs Tibor Nagy, and Commerce Under Secretary for International Trade Administration Gilbert Kaplan, among others. To those present it appeared to be well received by the presidents, vice presidents, ministers, and other senior African officials who came from more than 20 countries on the continent, and the more than 1,000 U.S. and African business leaders who participated in the summit.

Implementing Prosper Africa

The implementation of this new mindset will be challenging, to say the least.

A Prosper Africa website went live during the conference but, at best, it is a placeholder for things to come. Administration officials at the summit talked about creating “deal teams” in the U.S. and at U.S. embassies, yet few details were given about the make-up of the “teams” or how American businesses can engage them. One senior official mentioned that the Trade and Investment Hubs will be transformed into “multi-agency platforms” but little information was provided on what form that will take.

There is a Prosper Africa secretariat co-led by USAID and the Commerce Department but, again, information on that was scarce. And then there is the money, of which not much has been allocated to the initiative. USAID has budgeted $50 million for Prosper Africa, less than that devoted to Power Africa, and far less than one half of one percent of the $8 billion that USAID invests in Africa annually in its other programs.

Indeed, the success of Prosper Africa will be judged by its ability to increase the volume of commercial flows between the U.S. and Africa. Right now, though, some U.S officials say that they want to double U.S. trade and investment while others speak more cautiously about “substantially” increasing the volumes.

Despite the lack of detail, the Trump administration has generated momentum for its commercial policy in Africa. One welcome development was the announcement that a fourth Trade and Investment Hub will be established in North Africa, hopefully in Morocco. The passage of the BUILD Act and the creation of the $60 billion U.S. Development Finance Corporation (USDFC) set to open its doors on October 1, is a once-in-a-generation opportunity. The USDFC can make American companies competitive in Africa in a way they have never been before. Finally, at the summit, Commerce announced a reconstituted President’s Advisory Council on Doing Business in Africa (PAC-DBIA), a creation of the Obama administration, that has played an important role in identifying challenges for U.S. business on the continent. In May, the U.S. Senate voted to restore the full financing authority of the U.S. Export-Import Bank, with the confirmation of three new board members. These are important tools for boosting U.S. business in Africa.

Competition on all sides

When it comes to U.S. investment in Africa, the trend line has been positive. Not only does the U.S. have the largest stock of investment in Africa of any of the continent’s commercial partners, but that number has been steadily increasing. In 2017, U.S. investment was $50 billion up from $9 billion in 2001. During the Maputo summit, oil and gas company Anadarko announced a $20 billion investment for the construction of a Liquified Natural Gas (LNG) plant in Mozambique’s Offshore Area 1. According to Standard Bank, this is the largest investment ever in Africa. ExxonMobil is expected to soon announce an even larger investment to develop Mozambique’s natural gas resources.

It will be more challenging for the Trump administration to have success on the trade front. For one, the level of two-way trade was $61.8 billion last year. This was 57 percent less than its 10-year high of $142 billion in 2008 (Figure 1).

Figure 1. Two-way trade in goods with Africa

Source: United States Census Bureau.

Several factors explain the dramatic decrease. First, with the emergence of U.S. energy self-sufficiency, our historically high need for African oil is now zero. On the other hand, the long-term competitive issue for U.S. trade in Africa is the proliferation of the European Union’s Economic Partnership Agreements (EPAs). These agreements provide EU goods, services, and companies with tariff advantages with more than 40 African countries. As the United States Trade Representative (USTR) noted in its March 2019 National Trade Competitiveness report, the EPAs have “eroded” U.S. trade competitiveness with South Africa and the countries of the Southern African Development Community. This erosion will only intensify across the continent as the EPAs come into force, and as Africa implements the new Continental Free Trade Agreement.

Another challenge for the U.S. trade position in Africa is China’s tied-aid commercial policy that leverages debt onto African governments in return for their obligation to use Chinese goods, services, and labor for much-needed infrastructure projects. It is also worth noting that the U.S.-Africa Trade and Investment Summit coincided with the annual meeting of the African Export-Import Bank (Afreximbank) that was being held in Moscow and was opened by Russia’s Foreign Minister, Sergei Lavrov. Clearly, competition for market-share in Africa is rapidly intensifying, and not just from China and Russia.

It is difficult to see how the Trump administration’s desire to find a willing African partner with which to negotiate a “model” free trade agreement will be sufficient in scale and time of implementation to prevent a further erosion of U.S. trade competitiveness in Africa.

The Maputo bounce  

U.S.-African commercial relations were energized by the U.S.-Africa Trade and Investment Summit in Maputo, but the administration needs to keep that momentum going. The AGOA Forum in Côte d’Ivoire in August will be another opportunity for U.S. officials to show their commitment to the African continent and Prosper Africa. The Trump administration should also consider convening a third high-level U.S.-Africa Business Forum on the margins of the U.N. General Assembly in September. The previous forums, in 2014 and again in 2016, proved to be major catalysts to U.S. business success in Africa.

Witney Schneidman chairs Covington’s Africa Practice. Jay Ireland serves as a Senior Advisor to Covington’s Africa Practice. Mr. Ireland is the former CEO of GE Africa and Former Chair of the President’s Advisory Council on Doing Business in Africa.

Beyond The FCPA: New U.S. Regulator Enforcing Against Foreign Corruption

Yet another U.S. regulator is entering the foreign corruption space. The Commodity Futures Trading Commission is a civil agency that oversees commodity and derivatives markets in the United States. It enforces the Commodity Exchange Act, a set of statutes that are enforced criminally by the U.S. Department of Justice. The CFTC has authority to impose financial penalties in the many millions of dollars, and it has broad investigatory powers.

Earlier this year, the CFTC announced that, for the first time in its history, it is looking at foreign corruption that impacts commodity and derivatives markets in the United States. No charges have been brought so far, but the agency appears to be ramping up its enforcement efforts. As one indication, the agency recently issued an advisory directed at would-be corporate whistleblowers, explaining that individuals who report foreign corruption may qualify for financial awards.

In the initial announcement, the CFTC’s Director of Enforcement referred to multiple “open investigations” into foreign corruption. So far, only one has been publicly confirmed. Brazil’s state-owned oil company, Petrobras, revealed that the CFTC requested information relating to several companies’ involvement with “Operation Car Wash,” which involved the alleged payment of bribes to employees in Petrobras’ trading division.

The CFTC’s new focus has important implications for companies with international operations, particularly in the commodity-rich regions that span much of the African continent.

Drawing on our recent experience serving in the CFTC’s enforcement division and expertise counseling companies on anti-corruption compliance, we find the following points salient:

  • The CFTC has authority to investigate and bring enforcement actions in cases involving fraud, manipulation, and false price reporting, among other things, but not bribery itself. Foreign corruption is not explicitly illegal under the CEA. Thus, foreign bribes will be an aspect of these cases, but the CFTC will still need to prove all elements of a traditional fraud, manipulation, or false reporting charge. However, the CFTC will not need to establish an actual violation of the FCPA to support a bribery-based CEA charge.
  • The CFTC and DOJ are coordinating their efforts in this area. (The Acting head of the Fraud Section of DOJ’s Criminal Division even said that the CFTC’s new focus is “great news.”) This means that companies and individuals active in the extractives and commodities industries should expect that, in some instances, there will be overlapping civil and criminal investigations and enforcement actions, and the agencies will share information and coordinate investigative efforts.
  • The CFTC has promised to avoid “piling on.” The Director of Enforcement has said that, where the CFTC is investigating foreign corruption, it is the only U.S. civil regulator with jurisdiction—meaning that the CFTC is choosing to investigate cases where the SEC lacks jurisdiction under the FCPA. Unless that policy changes, the SEC and CFTC will not be bringing overlapping charges.
  • The CFTC’s international jurisdiction is broad, but it is not unlimited. The agency’s new overseas focus will undoubtedly present important and novel questions of the limits of its reach, and provide grounds for potential legal defenses.

As part of a comprehensive anti-corruption compliance program, companies that have involvement in U.S. commodities markets will want to take note of the CFTC’s new focus in this area. Understanding the reach—and limits—of the CFTC’s authority under the Commodity Exchange Act will be important in preparing for this new legal risk.

If you have questions about the CFTC and foreign corruption, please contact Laura Brookover at lbrookover@cov.com, Ben Haley at bhaley@cov.com, or Jennifer Saperstein at jsaperstein@cov.com. This article is intended to provide general information. It does not constitute legal advice.

Angola: Ramping Up the Fight Against Corruption

For the first time in 133 years, Angola has a new penal code. On January 23, 2019, the National Congress of Angola approved the new code, which will replace the one put in place by the Portuguese just after the Congress of Berlin, where the European powers divided Africa into colonial spheres of influence. The new code is one of the central pillars of President João Lourenço’s criminal justice reform program, and is supported by both the ruling MPLA and the main opposition party, UNITA. The law was approved by the Parliament with only one dissenting vote and will come into force 90 days after its approval publication.

The new penal code is being celebrated by the government as making important progress toward adapting the law to modern Angolan society. The new code proposes a structural change of the Angolan penal system and, particularly regarding the fight against corruption, it promotes more transparency consistent with the global trend to increase anticorruption enforcement, as we previously covered here and here. In this post, we outline the main changes promoted by the new penal code related to corruption and economic crimes and the implications for companies operating in Angola.

New Provisions Related to Corruption and Economic Crimes

Since he took office in September 2017, President Lourenço has taken concrete actions to promote economic stabilization, fight corruption, and attract foreign direct investment. In March 2018, the new administration created a specialized anti-corruption (“SCI”) unit within the executive branch tasked with preventing corruption-related crimes. Since then, there has been a significant increase in the number of investigations related to economic crimes, including cases involving ministers and public managers. According to the former Deputy Attorney General of Angola João Coelho, the most investigated areas are the banking sector and employees from the Tax General Administration (AGT). The SCI and the National Police of Angola have been also been cooperating internationally, including with partners such as Interpol.

Anti-Corruption Provisions of the New Code

Chapter IV of the code criminalizes “whoever offers, promises or gives” to public officials (article 360) or to judges or arbitrators (article 362) an undue benefit, either patrimonial or not; and the crimes of passive corruption, which penalizes the public officials (article 361) or judges and arbitrators (article 363) who “ask for, request, or accept, for himself or for third parties” any undue benefit or promise of benefit. Chapter IV also criminalizes other economic crimes, such as “influence traffic” (article 368) and the embezzlement of public assets (article 364) (“peculato”).

Anti-Money Laundering Provisions of the New Code

In an effort to protect the financial system and strengthen anti-money laundering measures, the code creates new limits on economic conduct and punishes crimes against consumers. One of the most significant changes is that article 470 limits cash transactions to prevent the circulation of large amounts of money outside the formal financial system. The limitation is three million kwanzas (8,522 euros) for citizens and five million kwanzas (14,285 euros) for companies.

Such limits were not covered by the previous penal code, nor by the Anti-Money Laundering and Countering Financing of Terrorism Law (Law 34/11). The new provisions will allow disciplining and punishing some practices that harm the financial market. According to the Deputy Attorney General Mota Liz, these changes also provide “greater security for the national currency” and assures more “fluidity to the national financial system.” These changes may create a more secured environment for investors in Angola, particularly in the banking sector.

Notable Arrests and Investigations

In addition to enacting new legislation, numerous government officials have been terminated or face legal prosecution for alleged corruption. One of the most significant cases involved Filomeno dos Santos, son of the former president. After being terminated from his position as head of Angola’s $5 billion sovereign wealth fund, Mr. dos Santos was arrested in September 2018 by Angolan authorities in connection with a fraud pertaining to a $500 million transaction out of Angola’s sovereign wealth fund and other crimes. On March 24, 2019, Mr. dos Santos was released from prison after the Attorney General’s Office announced that it recovered $2.34 million from banks in the UK and in Mauritius.

Isabel dos Santos, the former president’s daughter, was also fired by Lourenço from her position as the head of Sonangol, Angola’s state oil company, and there are indications that the Attorney General’s office will start an investigation against her. Other high profile individuals are under investigation by the Attorney General’s Office for alleged corruption, such was the former president of the Congress, Higino Carneiro, and the former vice president of Angola Manuel Vicente.

Looking to the Future

The anticorruption and anti-money laundering provisions of the new penal code reinforce the government’s commitment to far-reaching reforms. Although it is still too soon to assess the extent to which these provisions will be enforced, the approval of the new code is undoubtedly a sign that the Angolan government will take a more aggressive approach to combatting corruption and money laundering in the country. If fully implemented, the new code will increase the legitimacy of public institutions and help level the playing field for the private sector.

 

Juliana Rodrigues is an international associate in Covington’s New York office. Juliana received her bachelor and master degrees in law in her home country of Brazil before receiving her LLM from New York University of Law.

 

Ethiopia: Africa’s Next Powerhouse?

Ethiopia’s prime minister, Dr. Abiy Ahmed—the youngest African leader at 42 years old—has initiated a series of unprecedented economic and political reforms in his first 12 months in office. The core challenge that he faces is moving the economy from state-led to market-based growth while overseeing far-reaching political reforms. Success is far from guaranteed but his accomplishments so far have created an enormous sense of opportunity within the country.

Ethiopia has been one of the continent’s best economic performers, growing at a rate of 10 percent for the past 15 years. It has been a model of state-directed development with a government that permitted no political opposition but invested heavily in infrastructure, agriculture, education, and other sectors. Since Abiy’s emergence as prime minister, there has been a sweeping political opening with indications that economic reforms will be almost as significant. If Abiy is able to succeed with his reforms, Ethiopia will emerge as one of Africa’s undisputed leaders.

Reforming the economy

The prime minister has ambitious plans for the economy. According to the Ethiopian private equity firm, Cepheus Growth Capital, the government plans to fully privatize state-owned sugar plants, railways, and industrial parks. It will partially privatize the four crown jewels of the economy: Ethiopian Airlines, Ethio Telecom, Ethiopian Electric Power Corporation, and Ethiopian Shipping & Logistics Services Enterprises. With more than 60 million mobile and fixed-line subscribers, the government is also planning to publish tenders for two new operating licenses in the telecom sector, which inevitably will lead to competition in new financial and mobile-based services.

The one sector that does not appear to be opening in the near term is the banking sector. With 16 private banks that have averaged a shareholder return of 33 percent annually over the past decade, there appears to be little incentive to move quickly in reforming the financial sector. As the state-owned Commercial Bank of Ethiopia controls at least half of the sector’s assets, continued poor services and an inability to transfer funds between banks will be a constraint on the government’s reform efforts. Inevitably, there will be pressures to allow other African and international banks into this sector.

Ethiopia has been a pioneer in the creation of Chinese-inspired industrial parks to attract investments in light manufacturing, especially textiles and apparel, and stimulate exports. Currently, there are five government-built industrial parks that have created about 45,000 jobs for Ethiopians and four private industrial parks. In some instances, the industrial parks have performed well, such as the Bole Lemi industrial park outside Addis. Other parks, such as Hawassa, have experienced difficulties with labor, staff retention, and productivity. Ethiopia is aiming to create 30 industrial parks by 2025 in order to increase jobs, generate export revenue, and grow the manufacturing sector from 5 percent to 22 percent of the economy’s productivity. Such brands as Michael Kors, H&M, Children’s Place, and apparel giant PVH are already sourcing products from the country.

Abiy’s efforts have already led to results. The World Bank has provided Ethiopia with $1.2 billion in direct budget support, the largest loan ever to a country in sub-Saharan Africa and the first loan to the country in 13 years after lending was suspended in the wake of the disputed elections of 2005. An Abu Dhabi real estate developer plans to invest $2 billion in a mixed-use development in the capital city of Addis that will include the construction of more than 4,000 residences. More investment is likely to flow into the country as the privatization process moves forward.

The Peacemaker

Abiy wasted little time in normalizing relations with Eritrea after 20 years, a stunning development given the previous hostility between the two countries. He freed tens of thousands of political prisoners in his first months in office. Most recently, Abiy accompanied Somalian President Mohamed Farmaajo to Nairobi to meet with Kenyan President Uhuru Kenyatta in an effort to restore diplomatic relations between his two east African neighbors. Last May, Ethiopia announced that it would remove visa requirements for travelers from all African nations and last week the country became the 21st African nation to ratify the African Continental Free Trade Agreement.

While working to stabilize the perpetually unsettled region of the Horn of Africa, Abiy faces stiff political challenges at home. Last September, unrest in the capital forced him to cancel his trip to the opening of the United Nations General Assembly. The unrest culminated several years of protests and clashes in Oromia, Ethiopia’s largest and most populous state, and Amhara. As the International Crisis Group notes, a key source of frustration was the inability of the previous Ethiopian People’s Revolutionary Democratic Front (EPRDF) government to create the needed 2 million jobs annually and to ensure that growth in wages kept pace with the rising prices of staples and commodities.

In an effort to end intercommunal violence and to come to terms with the human rights abuses of the past, Ethiopia’s parliament has approved the creation of a reconciliation commission. Not only has there been an increase in ethnic violence, mainly between the Oromo community and other minority groups, since Abiy’s election, but Ethiopia’s security forces have long been accused of abuses against government opponents. The U.N. estimates that 2.4 million Ethiopians have been displaced by intercommunal violence.

One of Abiy’s key tests will be preparing for general elections in 2020. In the 2015 elections, the then-ruling EPRDF won all 546 parliamentary seats. The prime minister has taken an initial step in raising expectations for a credible poll by appointing Birtukan Mideksa, a former judge and opposition leader, as head of the National Election Board of Ethiopia, after persuading her to return from self-imposed exile.

The United States and Ethiopia

Ethiopia has become a priority country for the Trump administration. The President’s Advisory Council on Doing Business in Africa, led by Commerce Secretary Wilbur Ross, made it one of four stops on an Africa trip last June. On his first visit to Washington as prime minister, Abiy met with Vice President Mike Pence who praised his “historic reform efforts.” In December, the Millennium Challenge Corporation selected Ethiopia as eligible to develop a threshold program to reduce poverty and promote economic growth. It remains to be seen, however, what concrete support the administration is able to provide Ethiopia. In the wake of the deadly crash of Ethiopian Airlines’ new Boeing 737 Max 8, clearly hard questions will be asked about the relationship that has existed for six decades between the airline and the plane manufacturer. If there was ever a time for the U.S. to step up its support for a key African partner, it is now.

 

This blog was first published by the Brookings Institution, where Mr. Schneidman is a non-resident fellow, on Tuesday, March 26, 2019.

Tips for Commercial Success in Africa

With an emerging middle class of 400 million people, 10 of the fastest growing economies globally, and the most youthful population of any region, Africa is a continent of significant opportunity. There are also risks, as there are anywhere, including the challenge of combatting corruption, navigating opaque regulations and developing a skilled workforce. Below are tips for business success in Africa:

 

Build Personal Relationships: Most Western businesses are data driven and transactional in nature. Business in Africa is predicated on relationships. Developing personal relationships and trust with business counterparts and government officials is a key dimension to commercial success. Leaders in government and business on the continent will take time to understand what is being presented to them and ensuring that any transaction is genuinely win-win.

 

Engaging Government: The role of government in the African business environment is more pronounced than in most other regions. It is important to reach out to key decision-makers at various levels of government to keep them informed of broad commercial objectives. This can be done in a time effective and transparent manner.

 

Align Commercial and Development Objectives: Every African government has a national development strategy. Whether a company is making an investment in life sciences, ICT, energy or manufacturing, demonstrating how an investment is going to help the government achieve its development objectives in a particular sector is very helpful to commercial success.

 

Mitigating the Corruption Risk: Corruption risk varies greatly by country and sector, and companies that mitigate it successfully start with a thorough risk assessment and appropriately tailored compliance measures. They also treat compliance as a critical “business enabler,” and use a mix of compliance, government affairs, and commercial levers to mitigate risk.

 

Investing in Africa’s Talent: It is worth including a high-quality-skills-training program as part of any investment strategy. The appetite and capability of young African men and women to learn global best business practices cannot be overestimated. Hiring locally and investing in career development will pay significant long-term dividends.

 

Come with Solutions: Some of the most immediate market-entry challenges include the nascent consumer credit market, currency risk, and the need to bring financing for most projects. Products must also be tailored to market realities of affordability and infrastructure limitations.

 

Local Counsel: Finding the right local counsel in Africa’s 54 jurisdictions can be challenging, especially in smaller markets. Covington has worked on matters in virtually every jurisdiction in the region and can be helpful in identifying, engaging, and coordinating the work of well-qualified local counsel.

 

Top Ten Issues to Watch in Africa in 2019

  1. Africa’s Growth Prospects. Africa’s gross domestic product (GDP) is expected to grow at 3.8 percent in 2019, which is a significant improvement over last year’s regional growth rate of 2.6 percent. Excluding the continent’s largest economies (Angola, Nigeria and South Africa), which are growing collectively at an average of 2.5 percent, the aggregate growth rate for the region would be a healthy 5.7 percent. According to Foresight, about half the of world’s fastest growing economies are in Africa, with 20 economies expected to grow at five percent or more over the next five years. This includes Burkina Faso, Tanzania, Uganda, Kenya, Senegal, Benin, Cote d’Ivoire, Ethiopia, Ghana and Rwanda. We will be watching whether commercial debt, both from the issuance of Eurobonds and Chinese loans, starts to be a drag on growth. Good governance and transparency will also impact the economic performance across the region.
  2. African Continental Free Trade Agreement. While some of the world’s leading economies struggle to grow due to the implementation of protectionist trade policies, the leadership of the African Union (AU) is working to create the world’s largest free trade zone since the formation of the World Trade Organization. Concerns about an increasingly bureaucratic AU did not prevent 50 of the 55 African nations from signing the AfCFTA. To date, 18 of the required 22 countries have ratified the framework designed to eliminate tariffs on a large variety of goods and significantly boost intra-Africa trade. Non-tariff barriers to trade—including burdensome customs controls, high settlement payments, deficient distribution channels, and corruption—may prove to be the most difficult hurdles to a more prosperous Africa and deserve close scrutiny as the AfCFTA progresses toward implementation. Furthermore, collaboration between the private sector and governments will be critical in areas of intra-African trade infrastructure, trade finance, trade information, and logistics services for the AfCFTA to be successful.
  3. Enhancing Africa’s Connection to World-Class Computing. Africa’s economic growth in 2019, which will be accelerated by technological innovation across all sectors, coincides with global trends toward digital and shared economies. A growing focus on efficient and scalable utilization of assets will lead to innovative, high growth, and high impact opportunities in Africa. Critical to this transformation is the commitment by leading cloud computing companies to build data centers on the continent, which will enable broader access to advanced computing resources and services driven by artificial intelligence, machine learning, and the Internet of Things (IoT). Cloud computing resources will lead to more productive and knowledge-based economies and help Africa’s young and fast-growing population create innovative opportunities while addressing challenges in key sectors like healthcare, transportation, trade, and education. How African policy makers collaborate with the private sector to enact enabling and harmonized privacy, cybersecurity, and related policies and regulations that protect individual and institutional data is one of the key issues to watch in this space.
  4. Development Finance in Africa. Leveraging the power of the private sector through development finance is an increasingly popular complement to traditional foreign aid around the world. In October, the United States took steps to modernize its approach to development finance with the passage of the Better Utilization of Investment Leading to Development (Build) Act, which was signed into law by President Trump on October 5, 2018. The Act creates a new institution—the U.S. International Development Finance Corporation (USDIFC)—which will merge the Overseas Private Investment Corporation (OPIC) and several USAID facilities, including the Development Credit Authority (DCA), the Office of Private Capital and Microenterprise (OPCM), and enterprise funds. With $60 billion dedicated to USIDFC, the new entity will have twice the amount of money to invest as compared to OPIC’s current lending cap of $29 billion. OPIC’s president and chief executive was explicit about one of the primary motivations behind USIDFC: to be “a financially sound alternative to the state-directed initiatives pursued by China that have left many countries deep in debt.” It is estimated that China leverages $40 billion through is varied development finance institutions, monies implemented with no political conditionalities attached under the umbrella of China’s One Belt One Road initiative. According to the Washington-based Atlantic Council, between 2012 and 2016, projects in sub-Saharan Africa accounted for the largest share of DFI commitments ($14.2 billion), followed by East and South Asia ($10.5 billion), and Latin America ($10.2 billion). Monitoring the implementation of USDIFC, and assessing how its offerings affect China’s DFIs, if at all, will be of interest to corporations and public policy makers alike.
  5. A Continuing Trend of Anti-Corruption Enforcement. Last January, we noted that anti-corruption initiatives were on the rise on the continent, with 2018 declared the “African Anti-Corruption Year” by the African Union. If 2018 is any indicator, we expect that this trend will continue in 2019 and beyond. While the sheer volume of anti-corruption enforcement actions involving conduct in Africa in 2018 was not particularly significant, recent developments suggest that companies operating in Africa can expect heightened scrutiny from anti-corruption enforcers in the coming year. As we have previously described, France’s arrival on the international enforcement scene is likely to be particularly notable in this regard, given the large number of French companies operating in Francophone Africa. On the domestic enforcement front, in South Africa we will be watching developments in the sprawling “State Capture” matter, which is focused on allegations of widespread corruption and conflicts of interest in the government of former president Jacob Zuma. We can also expect U.S. enforcers to continue to be active on the continent, as evidenced by the successful prosecution of Chinese national Patrick Ho in a case involving alleged bribes on behalf of a Chinese energy company in Chad and Uganda, and the early 2019 indictments of a number of individuals in connection with Mozambique’s “Tuna Bond” scandal. Finally, as we have previously discussed, multilateral development banks will continue to play an important enforcement role in Africa. The World Bank, which has aggressively enforced its sanctions and debarment procedures for several years, initiated 28 investigations in Africa in its 2018 financial year alone, representing 41 percent of all new investigations. With this enforcement activity in the background, we expect that companies operating in Africa will need to continue to focus on developing and implementing effective anti-corruption compliance programs. In the coming weeks and months, we will be further analysing anti-corruption developments on the continent, and providing insights on how companies can best mitigate corruption risk in their operations in Africa.
  6. Project Finance. Based on the African Development Bank’s estimate that there remains a $68–$108 billion financing gap to meet Africa’s infrastructure needs, which is estimated to be in the range of $130–$170 billion annually, we expect to see continued growth in project finance projects during 2019. Lending from development finance institutions (DFIs) continues to play a crucial role in project finance across Sub-Saharan Africa, particularly in the infrastructure sector. Power projects will also be a key driver of project finance work on the continent. Today, an estimated 600 million people in Africa lack access to electricity. This power deficient on the continent coincides with the increasing interest and investment in renewable energy sources, and thus we expect to see more renewable energy projects on the continent in 2019. In particular, we anticipate a higher volume of smaller scale power projects due to the demand for less complex projects that can be implemented quickly.
  7. Climate Change, Energy, and Business. Climate change will remain a key issue for countries and companies in 2019, as we continue to see impacts globally from fires in California to a faster melting glaciers in Antarctica. The Intergovernmental Panel on Climate Change has declared Southern Africa a “climate change hot spot.” In 2019, we expect there will be more focus on types of fuel for new projects that are being developed in Africa. The financial impacts and outlook for renewable (wind, geothermal, hydro, and solar) and thermal (gas, coal, diesel, and HFO) energy will be impacted by improvements in technology as well as regulatory and economic issues. The handling of these issues (price, intermittency, base load, land rights, and tax incentives) will be key to financing these projects. There will be increasing pressure from the development finance institutions to finance more renewables projects, but economic factors will determine most fuel sources such as fuel availability, grid stability and strength, and overall project cost. All of this will add complexity and time for completion of these projects. Notably, there are potential wind and geothermal projects in Kenya and Ethiopia, while South Africa is likely to implement the next round of bids for the REIPPP wind projects.
  8. South Africa. With elections expected in May, the Ramaphosa government needs to deliver on economic growth which the World Bank indicates was 1.3 percent in 2017, rising only to 1.4 percent in 2018, due to high levels of unemployment, low business confidence, and policy uncertainty. While the issue of expropriation without compensation looms large, UBS, the world’s largest wealth manager, believes that the South African government will manage the land reform issue “sufficiently well.” Reform of key parastatals including, Eskom and South African Airways, is a pressing matter. The ongoing prosecution of Jacob Zuma and his former officials will be a constant reminder of the corruption and lack of transparency that characterized his tenure. On the positive side, Ramaphosa’s campaign to attract $100 billion in new investments in five years is starting to show results. The South African government is also hopeful that last year’s Job Summit will be a stimulus for the creation of over 10,000 jobs.
  9. Ethiopia. Perhaps the most exciting leader on the continent, 42-year old Dr. Abiy Ahmed has raised expectations that Ethiopia will become the next economic powerhouse on the continent. Not only is Ethiopia the second most populous country, with 100 million people, but it is the fastest growing economy in Africa with a GDP of 8–10 percent. Abiy’s unprecedented reforms include normalized relations with Eritrea after 20 years of hostility, the release of thousands of political prisoners, lifting the state of emergency, and cutting the number of ministries from 28 to 20 while ensuring half of all cabinet positions are filled by women. Some of the challenges that Abiy will face in coming months include managing the influx of refugees from Eritrea (which are arriving at an estimated 10,000 per month), decreasing ethnic tensions and competing factions within the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF), and preparing for local elections this year and national elections next year. The World Bank’s commitment of $1.2 billion in budget support is an important vote of confidence in Abiy’s reform process from the international community.
  10. Nigeria. When elected in 2015, President Buhari promised to realize 10–12 percent annually GDP growth, secure the territorial integrity of the nation, and combat corruption. However, for 2019 the World Bank forecasts 2.2 percent growth for Nigeria, the Boko Haram insurgency in the northeastern part of the country persists despite significant progress, and the country continues to score lower than average for Sub-Saharan African nations on the Corruption Perception Index. These three fundamental issues will frame the presidential election scheduled for February 16, 2019. President Buhari may have an advantage given the power of incumbency but Atiku Abubakar, who was Vice President under President Obasanjo, will present a stiff challenge given his strong ties to business across the country. With 91 political parties and 35 presidential aspirants, there could be a run off given the spirited campaigns of Professor Kingsley Moghalu (former Deputy Governor of the Central Bank), and Donald Duke (a successful former governor of Cross Rivers State), and others.

A version of this blog was first published by African Law & Business. If you have questions about Covington’s Africa Practice, please contact Witney Schneidman at wschneidman@cov.com.

 

Jay Ireland Joins Covington’s Africa Practice

New York, January 29, 2018 — Jay Ireland has joined Covington as a senior advisor in New York.

Mr. Ireland has nearly four decades of senior executive experience across a number of industry sectors, including telecommunications and media, healthcare, energy, financial services, and manufacturing. Most recently, he served as President and CEO of GE Africa, where he was responsible for expanding the company’s footprint across Sub-Saharan Africa in power generation, healthcare, transportation, oil and gas, aviation, and financial services. His efforts led to being named “International Business Leader of the Year” in both 2012 and 2013 by Africa Investor Magazine.

In addition, Mr. Ireland has held a number of executive positions outside of GE including as the co-chair of the U.S.-Africa Business Center at the U.S. Chamber of Commerce (2017-2018), a vice chair and member of the Corporate Council on Africa (2012-2018), and the chairman of the U.S. President’s Advisory Council on Doing Business in Africa (2013-2018). He currently serves as a board member of the MasterCard Foundation, a charity dedicated to promoting youth employment in Africa.

“For the last eight years Jay has been one of the top business leaders on the continent. He has a keen understanding of how business and policy intersect and how business can positively affect the development priorities of African nations,” said Witney Schneidman, chair of Covington’s Africa Practice Group and the former Deputy Assistant U.S. Secretary of State for African Affairs. “We are very fortunate to have someone with Jay’s experience and business acumen as part of our team and I know that our clients will benefit from his expertise across the continent.”

“I have deeply enjoyed my time living and working in Africa and have made the decision to join a firm that allows me to continue my efforts in helping local and international businesses succeed on the continent,” said Mr. Ireland. “Covington’s Africa Practice is just the sort of platform I had in mind. With the global expertise in government affairs, a strong sense of commitment to Africa, and a growing office in Johannesburg, I strongly believe the firm’s clients will be able to benefit from the team’s insights and experience.”

Mr. Ireland received a B.A. in Political Science at St. Lawrence University and serves as a member of its Board of Trustees.

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In an increasingly regulated world, Covington & Burling LLP provides corporate, litigation, and regulatory expertise to help clients navigate their most complex business problems, deals, and disputes. Founded in 1919, the firm has more than 1,000 lawyers in offices in Beijing, Brussels, Dubai, Frankfurt, Johannesburg, London, Los Angeles, New York, Palo Alto, San Francisco, Seoul, Shanghai, and Washington.

© 2019 Covington & Burling LLP. All rights reserved.

Throwing Doubts to the Wind: an Interview with Tebogo Movundlela, the CEO of Aurora Wind Power

Tebogo Movundlela is the CEO of Aurora Wind Power, which is operating the West Coast 1 wind farm in South Africa. Owned by a consortium formed by Engie and South African investors (Investec Bank Limited and Kagiso Tiso Holdings), Aurora Wind Power celebrated the commercial operation of its 94 MW wind farm in June 2015. Secured in the second bidding round of the Renewable Energy Independent Power Producer Procurement (REIPPP) programme organized by South African authorities, West Coast 1 is strategically situated in the Western Cape Province, 130 km north of Cape Town, where the quality of wind resource produces high quality of electricity. The wind farm is expected to offset an estimated 5.6 million tons of CO2 over the 20-year duration of its power purchase agreement (PPA). The estimated annual energy production represents the consumption of approximately 110,000 low income houses.

Tell us a bit about your involvement in the South African renewable industry?

I am currently the CEO of Aurora Wind Power, a role that I have held since 2017, previously being the CFO of the company. My role is to ensure the optimal operation of the plant under high health and safety standards. Aurora interacts with a diverse group of stakeholders (from lenders, shareholders, and Government authorities to the surrounding community). Through the multitude of agreements in place and through common goals, we are continuously engaged with these stakeholders to ensure that the project objective – to deliver clean, safe and reliable energy, in a socially responsible way – are achieved.

In parallel, I also hold the position of chairperson of the South African Wind Energy Association (SAWEA). The organization is concerned with advocating for the growth and sustainability of the wind industry in South Africa. The country is undergoing an energy transition and we would like to see wind well established in the energy mix, including activities across the value chain and in a manner that contributes to a just energy transition.

What challenges is Aurora Wind Power facing?

In spite of being a ring fenced entity, we are continuously looking for opportunities to maximize shareholder value, whether this is through operational efficiency or financial optimization. Aurora has also made socio-economic development commitments to the South African government where we have contractual obligations to expend a percentage of our turnover on community development programmes. South Africa has one of the highest Gini coefficients* in the world and therefore the need is substantial. Through relevant and targeted programmes, we hope to leave behind empowered communities after the end of our 20-year PPA.

How do you see the future of renewable energy in South Africa?

The signing of the 27 projects in 2018 was indeed a positive signal by the South African government after over 2 years of no activity in the REIPPP programme. Further the draft Integrated Resource Plan (IRP) 2018 indicates a notable allocation of 16,270 MW of renewables leading up to 2030, subject to ministerial determinations and periodic review of the IRP. The ruling party, the ANC, has also recently stated that it will “Continue to support the use of renewable technologies in the country’s energy mix to reduce the cost of energy, decrease greenhouse emissions, build the local industry through increased localization and create jobs […]”. The potential for renewables is diverse and ranges not only from utility scale power generation, but to mini-grids, off-grid, energy efficiency solutions to integrated grids, storage, hybrid models and the necessity for investment in additional transmission lines. My role at SAWEA is to contribute to the realisation of this potential.

* The Gini coefficient is a measure of statistical dispersion intended to represent the income or wealth distribution of a nation’s residents, and is the most commonly used measurement of inequality. It measures the inequality among values of a frequency distribution (for example, levels of income). A Gini coefficient of zero expresses perfect equality, where all values are the same (for example, where everyone has the same income). A Gini coefficient of 1 (or 100%) expresses maximal inequality among values (e.g., for a large number of people, where only one person has all the income or consumption, and all others have none, the Gini coefficient will be very nearly one).

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