Wednesday, 4 September 2019

The Madness of G20 Policy Matrices for Africa


African governments do not drive the preparation processes of the G20 summits despite their participation as observers during those events. Africa remains “on the table” of the G20 instead of sitting at the table for global agenda-setting and rule-making (Leininger, 2017)[1], although the AAG is co-chaired by South Africa (with Germany) and the UN Economic Commission on Africa (with ACET and the OECD) also participates in the Compact with Africa (CwA). Whether “countries are displaying ownership of the commitments made, unlike in the case of structural adjustment programmes that were externally imposed”[2] (Sidiropoulos, 2019)? Doubts are validated by a close look at the CwA policy matrices for each of the CwA countries.
The guiding principle of CwA policy matrices is: “Improve framework conditions for private investment (domestic and foreign)”. In reality, the African CwA partner countries have been subject to a bewildering array of government actions and specific targets required from them. The table below refers to the policy matrices of the early implementation phase of the Compact initiative. They are far from reflecting the comprehensive task load required from the governments in African countries participating in the Compact initiative.
Table: Required actions, targets and foreign institional partners in 1st CwA Policy Matrices
- numbers, early 2018 -

Ethiopia
Ghana
Senegal
Government actions
26
22
28
Targets
16
34
28
Foreign ´partners´*
26
32
23
* International and foreign bilateral development institutions. Multiple entries included.

The table picks three countries: Ethiopia, Ghana and Senegal. But the problem of bureaucratic overburden and quasi-colonial interference is general. For all twelve CwA partners combined, the total number of each required government actions and policy targets as well as involved foreign partner institutions easily sums up to 300 in early 2018. In many cases, the number of required actions, targets and partners has been rising with each update of the country matrix.
The proliferation of policy actions required from the twelve CwA partners in each of the country policy matrices can be blamed for the fact that CwA country governments have been confused and thus fail to own the compact initiative[3]. The CwA iniative is rather owned by multilateral agencies, especially the World Bank´s IFC. They push their themes and indicators without G20 leaders bothering about prioritisation nor considering the severely limited government management capacities of most CwA partners. Multilaterals struggle to obtain mandates. It is no coincidence that each multilateral organisation tries to push the work areas and indicators that they ´own´ into the CwA country policy matrices.
Clearly, the intentions and postulates of the 2005 Paris Declaration and Accra Agenda for Action have been forgotten and ignored. The old burden imposed by prolific donor missions and meetings on the administrative elite in Africa has been resurrected by the Compact. The imposition of government actions and policy targets may be perceived as benign from a Western perspective; yet they have a post-colonial taste.
What is listed below is biased toward quantifiable, monitorable targets in the initial policy matrix for Senegal. The table, far from being comprehensive is annexed here to provide some flavour. Yet little is discernible in the policy matrix that would support the need for structural transformation via sectoral, rural-urban or informal-formal shifts. Finally, it is also noteworthy to point to potential inconsistencies and policy conflicts.

  • Macro stability trumps social cohesion in the CwA design. But is this a sustainable reform sequence?
  • Post- tax business profitability is to be raised to attract private inflows. But how does this policy target rhyme with an increased “tax take” postulated to mobilise domestic resources?
  • The policy target to slim down Senegal´s bureaucracy sits uneasily with the overload of ´Government action´, ´Indicators and targets´ & “Partners’ support” (euphemism for international organisations and bilateral aid agencies) stipulated in the policy matrix.
  • To safeguard Senegal´s public debt sustainability can interfere with the required bond market development to attract institutional investors. Likewise, promoting PPPs (and other blending instruments, such as guarantees) to facilitate infrastructure lending to the private sector can undermine sustainable fiscal space through the build-up of public contingent liabilities




  • APPENDIX



    Senegal Policy Matrix 28.02.2018

    Government action
    Targets 2019
    Indicators 2019
    1. Macro
    Reduce fiscal deficit
    < 3% of GDP in 2019
    3.0%

    Ensure debt sustainability
    Reduce current account deficit
    Policy Support Instrument program with the IMF to support the PSE
    IMF: “Broadly satisfacory”
    - but (single) public tender issues,
    - two of the
    six structural benchmarks (SBs) set for the PSI 7th review missed: (i) delays in the payment of taxes via mobile phones; and (ii) limited progress in lower tax expenditures.

    Improved tax collection
    Tax ratio >20% by 2020/22
    20.4%

    SEZ law
    50-year income tax holiday replaced with a 15 percent tax rate with no exemptions
    Done. CIT rate of 15%, exemption from the CEL, from import taxes and duties.

    Performance of public services
    - Improve from 10th to 8th in the Mo Ibrahim Governance rank
    - Improve to at least 50 in all percentile rankings of the WB Governance Indicators
    - Still 10/54.



    Not reached. Slipping in gov´t effectiveness, inter alia.
    2. Business
    Investor protection & disputes resolution
    - Reduction of trade dispute resolution timeframe from 680 days to 500 days
    - Fully operating Commercial Court implemented by 2019
    - Fully operating Electronic Register of Guarantees by 2019
    - n.a.




    - Dakar Commercial Court established.


    -n.a.

    Project preparation & use of standard clauses in PPP
    Double the share of FDI: from 3% of GDP in 2015 to 6% in 2020
    Trend FDI/GDP remins flat. Last observation 2018: 2.6%.

    - Simplify land registration procedures and transfer of ownership
    - Simplify and harmonize taxes and charges levied by local authorities
    - Electronic payment of fees for the administrative acts and taxes
    - Strengthen competition policy and practices in key sectors (telecoms, agribusiness, etc.)
    - Improve from 142 (2017) to 132 (2019) in the Registering Property indicator in Doing Business
    - Improve from 144 (2017) to 134 (2019) in the Enforcing Contracts indicator in Doing Business
    - Improve from 174 (2017) to 150 (2019) in the Paying Taxes indicator in Doing Business
    - Review of national competition framework vis a vis UEMOA
    - Enhanced competitive practices in key sectors, opening up markets for private investment
    Registering Property: easier => Rank = 118.



    - Flat: Rank = 142.




    - Flat: Rank = 171.




    - The inability to meet the PSI ceiling on the share of public procurement using sole source suggests that procurement could bestrengthened.
    3. Financing
    Attract institutional investors
    Support to the regional pilot project for market development (in CFAF) for long-term bonds; adapt regulatory texts by 2019
    1/7/19: Baobab Senegal issues bond for a total FCFA 10 billion (€ 15.2 million) subscribed at 100%, at 7 years, with a coupon of 7.50% per annum.

    Create a risk mitigation fund by issuing bonds
    Fully functioning mitigation fund, with a USD *** million initial capital, by end 2018.
    ?

    Address structural issues impeding lending to SMEs
    Reforms to require data to be shared with credit bureau (drawing on example in Cote d’Ivoire) and make collateral easier to recover.
    ?
    Sources:
    https://www.doingbusiness.org/content/dam/doingBusiness/country/s/senegal/SEN.pdf


    [1] Jutta Leininger (2017),"On the table or at the table?" G20 and its cooperation with Africa, in: Global Summitry Vol. 3 (2), pages 193–205.
    [2] Elisabeth Sidiropoulos (2019), “South Africa’s Changing Role in Global Development Structures – Being in Them but Not Always of Them”, DIE/GDI Discussion Paper No. 4/2019, page 30.
    [3] ACET (2019), Independent Review by The African Center for Economic Transformation, Compact Monitoring Report, April

    Saturday, 17 August 2019

    Germany's FDI to Africa: still low


    Deutsche Bundesbank has recently presented its latest inventory of foreign direct investments (FDI)[1]. The publication contains data on German gross assets from active direct investment and, corrected for associated liabilities, also net assets. The key figures of the German companies investing in the target countries are also informative, i.e. number of firms, number of employees and turnover. Table 1 summarises Africa's role in German FDI for the last observation year 2017.
    Table 1: German FDI in Africa, stocks 2017

    bn Euro/number
    Share Africa/World, %
    Gross claims, € billion
    9.2
    0.6
    Net claims, € billion
    8.4
    0.8
    Number of companies
    849
    2.2
    Staff, thousand
    201
    2.6
    Annual turnover, € billion
    30.8
    1.0
    Source: Deutsche Bundesbank (2019)
    At the end of 2017, gross claims of German companies from active direct investments amounted to €1,568 billion worldwide; Africa's share amounted to €9.2 billion, or 0.6 per cent. In terms of net claims, Africa's share was slightly higher, 0.8 per cent. Explanation: Direct investments can be hedged against exchange rate risks by borrowing in the host country, which is why worldwide net claims amount to only two thirds of Germany's gross receivables. In Africa, however, local financial markets are less developed than in the rest of the world, which is why FDI made there is relatively less hedged by offsetting loans.
    Africa's share of the worldwide turnover of German companies with active direct investments was just one percent. Companies investing in Africa were relatively more numerous with a share of 2.2 percent. The proportion of people employed in Africa was relatively even more important, at 2.6 per cent of those employed in German companies worldwide. These numbers indicate that the German companies invested in Africa are smaller and more labour-intensive than elsewhere in the world. This means that their developmental contribution in Africa is likely to be relatively more significant than their percentage share of world investment stocks would suggest.
    The importance of even Africa as a whole for German direct investment is very low; however, it tends towards zero if North Africa, South Africa and the tax haven Mauritius (keyword Mauritiusleak) are excluded. German companies traditionally concentrate almost exclusively on North Africa (especially Egypt) and South Africa. Germany´s development bank KfW recently stated: "There are hardly any German companies between Cairo and Johannesburg. The companies of the other major industrial nations, France, Great Britain and the USA, have a broader regional base. The common language and the cultural proximity due to the African diaspora are important reasons for this"[2].

    Table 2: Geographical distribution of German FDI in Africa 2016, $ billion

    Germany
    France
    Italy
    UK
    USA
    North Africa
    3.7
    16.2
    18.2
    16.3
    28.4
    Subsahara
    1.8
    30.1
    2.0
    30.1
    23.9
    South Africa
    5.2
    2.0
    1.6
    19.7
    5.0
    Total
    10.7
    48.3
    21.8
    66.1
    57.3
    Source: Tim Heinemann, KfW

    The focus of German companies outside the OECD area, on the other hand, is on Asia and Eastern Europe. The level of direct investment in these regions is more than ten times higher than in Africa. In Eastern Europe, low-cost production was available close to the European sales markets. So far, Asia has attracted with a higher degree of industrialization and a larger middle class. Of course, the Maghreb is geographically close and Africa's middle class is growing - so an increase in German FDI in Africa can certainly be expected in the future. However, Africa's high unit labour costs act as a brake on direct investment in industrial manufacturing[3].
    As part of the ´G20 Compact with Africa´ (CwA), the German government has been trying since 2017 to boost German direct investment in twelve selected African partner countries. These include three promising emerging countries in North Africa (Egypt, Morocco, Tunisia), but also nine poorest countries south of the Sahara (Ethiopia, Benin, Burkina Faso, Côte d´Ivoire, Ghana, Guinea, Rwanda, Senegal, Togo). Companies can participate in the implementation of the measures within the framework of the current tendering and award procedures of bilateral development cooperation. Germany is now trying to develop further instruments and incentives of ´de-risking´ to complement the CwA, beyond  her 25(!) measures[4] (funding instruments, programs and other initiatives) already in existence meant to foster private investment.


    Table 3: German net FDI in Africa, 2016-18, € million
    Transaction values according to balance of payments statistics

    2016
    2017
    2018
    North Africa
    - CwA
    1.198
    1.037
    418
    -4
    1.445
    1.325
    Subsahara
    -CwA
    82
    23
    145
    8
    66
    15
    South Africa
    445
    553
    429
    Total
    -CwA
    1.725
    1.060
    1.116
    4
    1.940
    1.340
    Source: Deutsche Bundesbank, Balance of payments statistics, Xcel file, 14. August 2018
    Note: Transaction values may be negative; the positions listed are netted.

    Unpublished flow data[5] provided by the Deutsche Bundesbank record German FDI in individual African countries up to 2018. Morocco as an outlier received € 1,199 million in German net FDI in 2018, presumably due to construction investments for the Ouarzazate solar power plant[6], which had been initiated long before the CwA. Apart from the individual case of Morocco (and Ethiopia), the African CwA partners received less German FDI on balance over the past two years. So now we have it officially. So far the CwA ressembles a Potemkin village, with colourful displays in the form of declarations of intent and of many conferences.



    [1] Deutsche Bundesbank (2019), Bestandserhebung über Direktinvestitionen 2019, Statistische Sonderveröffentlichung 10, 30. April.
    [2] Tim Heinemann (2018), „Warum halten sich deutsche Unternehmen mit Investitionen in Afrika zurück?“, KfW Research Nr. 171, 27. December. 
    [3] Robert Kappel (2018), „Afrika braucht einen anderen Entwicklungsweg“, MAKRONOM, 29. May.
    [4] Deutscher Bundestag (2019), Bundestagsdrucksache 19/10272, 21.5.2019.
    [5] Deutsche Bundesbank (2019), Inländische Netto-Direktinvestitionen im Ausland, Transaktionswerte lt. Zahlungsbilanzstatistik, Xcel-Datei, 14. August.
    [6] Individual details are not published by the Bundesbank for reasons of confidentiality.