Commencement of the AfCFTA. The landmark African Continental Free Trade Area (AfCFTA) is slated to go into force on July 1, 2020. When fully implemented, the trade agreement will eliminate tariff and non-tariff barriers, and substantially increase intra-regional trade to volumes worth over $3.3 trillion. Twenty-nine countries have deposited their instruments of ratification, and Eritrea remains the only African Union member state that has not signed the agreement. We will be watching the role that technology will play in lifting traditional barriers to entry and accelerating the creation of a well-diversified and inclusive regional value chain. This is especially true for the ease and transparency enabled by e-commerce and the growing trade in digital services.
Increasing the Bankability of Projects in Africa. One of the key issues on the continent in 2020—and in the decade ahead—that we will be watching is the need to increase the bankability of infrastructure projects in Africa. Critical to this effort is the need for development finance institutions (DFIs) and commercial banks to work together more cohesively to deliver innovative solutions for the continent. Consider the launch of the Africa Greenco project in Zambia. This project is designed to introduce a credit enhanced special purpose vehicle (SPV) to act as an intermediary power purchaser from independent power producers (IPPs) in the energy renewables sector, so that the direct risk of IPPs and lenders to national electricity companies is mitigated. This involves DFIs and commercial banks assuming different risk allocations in the SPV and adopting innovative strategies to manage their exposure to the relevant national electricity company. We will also be watching the continued development of standardization, most notably with the International Finance Corporation (IFC)’s Scaling Solar project (recently extended from Zambia to Togo) and KfW’s Global Energy Transfer Feed in Tariff (GET FiT) Programme, together with the standardization of documentation and regulation in other business sectors.
Additionally, as the global movement on climate change gathers momentum and issues of responsible sourcing come to the fore, we will be watching to see if there is a greater emphasis placed on Environmental Social and Governance (ESG) compliance in financing transactions with liability (for lenders and borrowers alike) for noncompliance. We expect that even more finance will go towards clean energy with financial institutions and governments committing more funds towards the achievement of the 7th (Clean Energy) and the 13th (Climate Action) United Nations sustainable development goals (SDGs). In the context of the African Continental Free Trade Area (AfCFTA) agreement, we expect to see an increase in the financing of transport infrastructure, particularly in connecting neighboring countries and regional trade corridors as more countries ratify the AfCFTA. There may well be an upswing in the financing of soft commodities on the back of reduced barriers to intra-Africa trade, which many hope will open up new markets closer to home for many of Africa’s agri-economies.
Climate Change. The 2019 UN Climate Change Conference COP 25 failed and Africa has the most to lose. Though Africa accounts for less than 4 percent of carbon emissions globally, it is extremely vulnerable to climate change scenarios above 1.5 degrees Celsius. The continent is vulnerable because Sub-Saharan Africa has 95 percent of rain-fed agriculture globally, and agriculture accounts for a large share of the region’s GDP and employment. In fact, the two most extensive land-based end-of-century projected decreases in rainfall occur over Africa: one over North Africa and the other over southern Africa. Finally, the capacity of African nations to adopt to climate change is relatively low given the effects of poverty, which reduces choice at the individual level. At COP 21 in 2015, parties resolved to mobilize USD 100 billion per year by 2020 to address the needs of developing countries. They also agreed to set a more ambitious financing target prior to 2025. We will be watching the investments made by industrialized countries to mitigate the most harmful effects of climate change in Africa.
Aligning Africa’s Digital Transformation Strategy with Enabling Regulations. The African Union Commission (“AU”) has put forward a bold vision to build a Digital Single Market in Africa by 2030. The Draft Digital Transformation Strategy for Africa (2020-2030) identifies specific actions to achieve this vision. Specifically, adoption of an AU convention on Cyber Security and Personal Data Protection is a top priority for this year. To achieve this, policy and regulatory reforms need to be harmonized across a widely diverse group of Member States with vastly different priorities. We will be watching these trends to determine whether advances in computing capacity, storage, and the protection of digital data help to build a vibrant digital ecosystem that accelerates economic integration and the development of the continent. We will also be watching to see if the regulations result in excessive costs, compliance requirements, and related barriers for African entrepreneurs and businesses.
Business and Human Rights. For companies doing business in Africa, there are three areas deserving of attention in the business and human rights space in 2020: (1) compliance with existing and emerging regulations, (2) enhanced due diligence in light of an increased number of enforcement actions related to forced labor, and (3) risk mitigation in view of creative lawsuits. As we reported in December 2019, the global regulatory and enforcement business and human rights landscape is evolving rapidly. A plethora of national and regional initiatives have emerged which require companies to either report on their human rights compliance measures or conduct substantive human rights due diligence in relation to their global supply chain, or both. Many companies doing business in Africa are subject to regulations like the California Transparency in Supply Chains Act, UK and Australian Modern Slavery Acts, and the French Duty of Vigilance Act, and must ensure compliance with these regulations.
In regard to enforcement actions, we saw a significant uptick in 2019 and expect to see additional enforcement actions in 2020. The United States Customs and Border Protection (“CBP”), for example, has significantly ramped up enforcement of the forced labor prohibitions contained in Section 307 of the Tariff Act of 1930. Whereas only 32 Withhold Release Orders (“WROs”) (which effectively seize goods destined for import into the United States) were issued in the more than 50 years between 1953 and 2015, 13 have been issued in the last four years alone, including seven in 2019. Recent actions taken to block imports from Africa include regional bans on gold mined in artisanal small mines in eastern Democratic Republic of the Congo (“DRC”), rough diamonds from the Marange Diamond Fields in Zimbabwe, and all tobacco from Malawi.
Finally, companies doing business in Africa must be cognizant of the creative human rights lawsuits being filed around the world. For example, lawsuits have been filed in the U.S. based on novel theories of companies aiding and abetting child labor. In the UK, a claim has been filed on behalf of children and parents from Malawi against British American Tobacco alleging unjust enrichment based on the harvesting of tobacco leaves for little compensation.
Anti-Corruption/Compliance: In 2019, we saw continued international anti-corruption enforcement efforts focused on conduct in Africa, including high-profile U.S. prosecutions of individuals involved in Mozambique’s “Tuna Bonds” scandal, UK Serious Fraud Office investigations in the mining sector, and an investigation by Norwegian authorities into the so-called “Fishrot Files” matter in Namibia. We also continue to see increased enforcement activity on the domestic front. For example, in Angola, we saw the first conviction for graft of a senior official under Angola’s president João Lourenço, with the sentencing of the former Transport Minister to 14 years in prison for charges of corruption and embezzlement of state funds. In South Africa, as the “State Capture” inquiry grinds forward, at the end of 2019 we saw a spate of high-profile arrests, some in connection with alleged bribery at state-owned enterprises.
Along with this trend of cross-border enforcement and local authorities stepping up enforcement efforts, we see continually heightening expectations from enforcement authorities for corporate compliance programs. Against this backdrop, we believe that companies operating in Africa should be carefully considering the business case for investing in their compliance programs and taking proactive steps to mitigate compliance risk.
Elections. There are 12 major presidential and parliamentary elections on the continent this year: Burkina Faso, Burundi, Central African Republic, Comoros, Côte d’Ivoire, Ethiopia, Ghana, Guinea, Niger, Tanzania, Seychelles, Sudan, and Togo. Given the anticipated impact on foreign investment, opportunities for positive economic growth, and fears of destabilization and international interference, we are paying special attention to Ghana, Côte d’Ivoire, Tanzania, Central African Republic, and Ethiopia. Ghana is a stable democracy and key to economic growth in West Africa. Though President Nana Akufo-Addo’s face-off with former president John Mahama appears to be a close race, Akufo-Addo’s incumbency and track record on positive economic growth may offer him an advantage. In Côte d’Ivoire, it is unclear whether President Alassane Ouattara will seek re-election (as he has until July to make his decision), but if he declines to run or is defeated, the country will experience its first transfer of power since the 2002-04 civil war. In Tanzania, although Magufuli’s party, Chama Cha Mapinduzi, has been in power longer than any other political party on the continent, Magufuli’s socially conservative laws and alleged human rights abuses may give room for opposition presidential candidate Edward Lowassa to make the election competitive. The control of rebel groups in Central African Republic has caused President Faustin Touadéra to seek military relief from Russian mercenaries. That, along with recent Russian disinformation election tactics in Africa, may affect CAR’s elections. For Ethiopia’s parliamentary elections, Prime Minister Abiy Ahmed’s democratic reform agenda is expected to increase economic growth and greater inclusive development as the country undergoes a number of political and legal reforms.
Trump Administration’s Policy: Russia, China, the UK, the EU, India, Turkey, and other nations are working hard to unlock Africa’s commercial potential. Last year the Trump Administration rolled out an Africa policy built around promoting more U.S. investment on the continent. The key pillars of the policy are Prosper Africa and the new U.S. Development Finance Corporation (“DFC”). We will be watching the implementation of both of these initiatives. Prosper Africa promises “deal teams” that will help American companies with everything from market intelligence to identifying potential local partners. The DFC was created to make equity financing available for projects that have a developmental impact. We will be watching how the Trump Administration implements Prosper Africa and the new DFC in support of U.S. companies in Africa.