Business24 Newspaper- July 10, 2020 by Business24 Online

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FRIDAY JULY 10, 2020

COVID-19 freezes US$4.7bn worth of oil projects Tullow credits advance planning for limited virus impact on operations BY EUGENE DAVIS

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1.78

GOLD $/TROY OUNCE

1,765.05

CORN $/BUSHEL

329.50

COCOA $/METRIC TON

2,386.00

COFFEE $/POUND:

+5.70 ($108.30)

COPPER USD/T OZ.

220.15

SILVER $/TROY OUNCE:

17.07

NEWS/EDITORIAL

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EDITORIAL

Wash your hands 2

Cover your cough 3

Covid-19 management in the upstream sector - Tullow Ghana deserves praise Tullow Ghana deserves some credit for putting in place measures to curtail the novel coronavirus disease from spreading to its offshore rig and staff in the upstream exploration sector. According to Operations Director of the oil company, Anthony Pearce, the early adoption of a Covid Response Committee contributed to the firm increasing its production even as the pandemic raged. Indeed management of the company could have not formulated a strategy to reduce the risks at no better time than now, which they also maintain has ensured stable operations during the coronavirus outbreak.

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LIMITED Copyright @ 2019 Business24 Limited. All Rights Reserved. Editorial Team Dominic Andoh: Editor Eugene Kwabena Davis (Head of Parliamentary Business & Commodities) Benson Afful (Head of Energy & Education) Patrick Paintsil (Head of Maritime & Banking) Nii Annerquaye Abbey (Online Editor) Marketing Alexander Lartey Agyemang (Business Development Manager) Ruth Fosua Tetteh (Dept. Business Development Manager) Gifty Mensah (Marketing Manager) Irene Mottey (Sales Manager) Edna Eyram Swatson (Special Projects Manager ) Events Evelyn Kanyoke (Snr. Events Consultant) Finance/Administration Joseph Ackon Bissue (Accountant)

Among some of the strategies the company highlighted was on employee safety and community safety, maintaining essential health services without affecting operations. There seems to be no end in sight given that the super powers of the World from America, UK,China and Europe are all racing to secure a vaccine. All hands on deck approach can go a long way to mitigate the impact the covid-19 has already caused.

COVID-19 freezes US$4.7bn worth of oil projects (…CONTINUED FROM COVER )

Wear a mask

The advance planning and preparation to manage the impact of the virus is clearly the way to go, given that it behooves on organisations in the oil and gas sector to be proactive and not wait to be reactive in times of crisis. As they say in Public Relations parlance; Crisis management public relations can make or break your company during a crisis event. By working with an experienced PR firm or management formulating strategies before an event occurs, you can substantially improve your ability to minimize the impact of a crisis or negative publicity on your business.

project was expected to nearly double that output by 2023 if it went ahead on schedule. According to Mr. Faibille, an additional US$324m worth of projects relating to companies carrying out exploration and appraisal activities have also been put on hold. “The companies were due to undertake various drilling campaigns, acquisition and interpretation of seismic, geological and geophysics data. The Eban 1X exploratory well of Eni, Nyankom 1X and Kyenkyen-1X appraisal programme of AGM, Afina -1X appraisal programme of Springfield, exploratory well drilling campaigns of Amni, Eco Atlantic and GOSCO have all been postponed,” he said. Supply chain disruptions The Petroleum Commission chief stated that the pandemic has revealed weaknesses in the local supply chain relating to manufacturing, construction and the industrial base. The border restrictions imposed as a result of Covid-19 have led to the unavailability of critical spares, goods and materials in the industry. “The compelling need to fly in expatriate specialists required for critical maintenance works on offshore installations in the midst of the pandemic has contributed to delayed

schedules. The rude awakening of this pandemic should afford the industry the opportunity to invest in local supply chains as well as training and development of indigenous Ghanaians,” he said. He added that, as the industry regulator, the commission is assessing the potential that can be exploited in the current challenges and the risks posed to local firms in the industry.

“We should also adhere to the discipline of finding the optimal balance between sourcing globally and locally to ensure business continuity. The big difference now, however, is that our calculus for optimisation of local content must take into consideration new values and cost drivers related to the risks associated with pandemics and their impact on business continuity,” he said.

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Tullow credits advance planning for limited virus impact on operations BY EUGENE DAVIS

Tullow Ghana is crediting its ability to maintain stable operations during the coronavirus outbreak to its advance planning and preparation to manage the impact of the virus. According to Operations Director of the oil company, Anthony Pearce, the early adoption of a Covid Response Committee contributed to the firm increasing its production even as the pandemic raged. Mr. Pearce was speaking during a webinar on “Covid-19 Response Strategies in Africa’s Oil and and Gas Industry” organised by the think tank Africa Centre for Energy Policy (ACEP). “Through all this, both of our production facilities have probably had the best production records for the past two years. In the last month we have not seen a production trip on our facility,” he said. “What is making that happen is that we have reduced activity to a sensible level—everyone’s

awareness is heightened, everyone gets the gravity of the situation.” He said the company is learning from the pandemic and is convinced that by the next six months, a lot of lessons will have been learnt to make things better. “It is interesting how Tullow Ghana has achieved the best oil production so far in this dire Covid-19 era. Maybe the pandemic has helped companies like Tullow to focus on what is really important.” Hedge cushion Another critical factor that has helped the company overcome operational challenges, according to Mr. Pearce, is its hedging philosophy, which has proved helpful given the extremely low crude oil prices, particularly during March and April. Tullow has previously said the impact of reduced crude oil prices is mitigated by a robust hedging strategy, whereby 60 percent of its 2020 sales revenue is hedged at a floor price of US$57 per barrel (/ bbl) and 40 percent of 2021 sales revenue is hedged at a minimum

Most of Tullow’s production comes from the Jubilee and TEN fields in Ghana.

price of US$53/bbl. For January and February, the company’s realised oil price was US$62/bbl, and following the price drop, hedging receipts of US$30m were forecast for March alone. According to the company, underlying operating costs remain less than US$12/bbl, with operating

costs in Ghana at US$9/bbl. It said its hedging policy together with expected output of 70,00080,000 barrels per day results in a free cash flow breakeven oil price of US$35/bbl for the rest of the year.

GACL, Kotoka Airport not for sale—Aviation Minister reiterates BY DOMINICK ANDOH

Aviation Minister Joseph Kofi Adda has debunked allegations that government plans to sell part of its stakes in the state-owned airports manager, Ghana Airports Company Limited (GACL), and the country’s main international airport, Kotoka. At a news conference in Accra on Thursday, Mr. Adda said the allegations, which led to a demonstration by the staff union of the GACL on Wednesday, were unfounded and without merit. He, however, confirmed the signing of a Memorandum of Understanding (MoU) with a consortium, TAVSumma, to assess a proposal for private capital injection and a partnership with GACL. “We have discussed all kinds of ideas of what we want to do; and yes, we have signed an MoU—but that is not enough to engage them in any formal negotiation on any proposal. That has not been done,” he said. “In terms of the executive approval [to engage the consortium], as the

Minister, I have written to the [GACL] board chairperson for the board to look at it. Where we are now is to get the [local negotiation] team to sit down and see what we have to do, and that has not happened. The team has not written back to the TAV-Summa consortium about their EoI [Expression of Interest] yet. There has not been any attempt or effort to sell GACL, privatise it or to sign an agreement,” Mr. Adda stressed. Possible areas for collaboration with TAV-Summa, which were outlined by the Aviation Minister in a concept note he submitted to the GACL and other stakeholders, include: a soft loan with longer tenor for GACL, reconstruction of the Kotoka International Airport (KIA) runway at an estimated cost of US$40m, a multistorey car park at Terminal 3, and construction of a light rail system for the KIA enclave to connect the three main terminals and facilitate movement within and into the area. Others include the construction of an airport green park—an eco-

friendly recreation area with various facilities—to generate revenue while maintaining about 60 per cent of the greens on the stretch between the KIA airport roundabout and the Hajj Village. Additional airside developments, investment in systems and technology, a budget transit hotel, and other ideas were captured in the Minister’s concept note sent to the GACL for discussions. GACL’s debt burden now US$300m Mr. Adda confirmed that the GACL is currently heavily constrained due to loans contracted for the construction of Terminal 3 and is unable to undertake major new projects. He said the debt stock of the GACL currently stands at about US$300m. Summa, a member of the consortium, carries out top-quality operations in 14 countries around the globe. It is currently partnering the Senegalese government to complete the construction of the stalled AIBD international airport and jointly operate it for 25 years.

TAV, on the other hand, operates airports in Turkey, Tunisia, Saudi Arabia, and Croatia, and manages the duty-free areas of the George Bush Intercontinental Airport, USA. The company is partly owned by French airports group Aéroports de Paris.

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Africa must strengthen resource mobilisation to fast-track return to growth—ACET BY PATRICK PAINTSIL

The Africa Centre for Economic Transformation (ACET), a think tank, has said that African nations must eliminate tax exemptions, close tax loopholes and enact innovative policies that enhance resource mobilisation to fast-track their return to economic recovery and growth post-Covid-19. “In spite of all the growth that has been discussed on the continent, the talk of Africa Rising and all that, [the] tax to GDP ratio in sub-Saharan Africa only rose by 2 to 3 percentage points over the last two decades. And in at least 10 countries, it remains below 15 percent,” said Executive Vice President of ACET Mavis Owusu-Gyamfi during a webinar on the theme, “Priorities for Africa’s Recovery, Growth and Transformation”. “We can’t depend on a bailout from somewhere; we need to look in-house and think through our potential solutions.” Given the expected economic contraction of the continent in the wake of the pandemic, resource mobilisation and management will become critical, she said,

referencing the consultancy McKinsey’s 2019 report which suggested that if Africa could enhance its tax performance and tariff by closing tax loopholes, its revenue could be increased by 2 to 3 percent of GDP. “How do we look at that as a quick win for nation states in terms of looking at policies to increase resource mobilisation? Could we look at digital technologies to create more efficient tax systems, especially at a time that we desperately need resources for the continent?” As part of its 10-point priorities that it has identified to drive Africa’s economic rebound in the aftermath of the pandemic, ACET also called on African governments to improve investment policies in key sectors and make doing business easier. To encourage entrepreneurship, the think tank said governments need to crowd in venture capital for entrepreneurs and support an innovative ecosystem through the development of a comprehensive innovation policy. There will also be the need to improve public expenditure

Ms. Mavis Owusu-Gyamfi, Executive Vice President of ACET

management, eliminate overlapping policies, and revisit national development policies, it said. President and Founder of ACET, K.Y Amoako, said African economies must grow beyond their reliance on key commodities, which in most cases disappear when the external environment becomes difficult.

“How do we measure transformation and track progress? Does the fact that growth has gone up mean that the African economy is growing? We need to go beyond growth driven by commodities and along the key metrics of diversifying the production of exports and goods as well as increasing competitiveness in external markets,” he said. There is also the need to boost productivity across sectors, upgrade their technologies and improve human wellbeing through higher per capita income, Mr. Amoako added. “The question for us is: what policies do we need to put in place now that will address the short-term challenges inherent in most African economies and at the same time position them to rebound more quickly onto the growth path. The social contract is absolutely important. In a crisis, the need to build trust and transformational leadership is critical. We the technical people can put out various reports, but when it comes to implementation, you’ll need transformative political leadership.”

As governments lift lock-down measures, Ethiopian announces resumption of regular service Ethiopian Airlines, Africa’s largest airline is resuming service to Dubai further to the ending of the lock-down and its opening for leisure travelers effective July 8, 2020. Djibouti has also announced that it will end lock-down on 17th of July. As a result, Ethiopian will resume normal service to Djibouti on July 17. These resumptions will bring the total number of destinations to be served by Ethiopian with enhanced safety measures to 40. As countries continue to openup their airports for passenger arrival, Ethiopian is also expected to announce a list of these destinations in due course. The airline in a statement said “Esteemed Customers are kindly informed that Facemasks will be mandatory for travel and are requested to satisfy destination entry requirements such as health certificates and fill health declaration forms if required. “As countries continue to open their borders and relax travel restrictions, Ethiopian is

ready to increase frequencies to accommodate the demand by focusing on the wellbeing of customers and staff. Ethiopian is happy to welcome back business and leisure travelers to these destinations.” Up to date destination entry requirements can be found on our website using the link https:// www.ethiopianairlines.com/aa/ travel-updates.

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BUSINESS OUTLOOK SERIES (PART IV)

Preparing your business for funding: what should businesses do? • CDC CONSULT

In our last edition (Part 3) of the Business Outlook Series, we focused on what investors look out for when financing a business. We mentioned that investors look out for the Legal Structure of the Business; Business Model; Profile of Owners, Board and Management Team; Market Availability; Competition; Supply Chain; Current Level of Investment by Owners; Financial Health; Business Strategies; Compliance and Business Culture. In this edition (Part 4), we will focus on what businesses must do to meet investors’ expectations. Landing an investment can be a tedious and frustrating exercise for a business, especially those of small and medium scale. This is mostly due to the fact that businesses do not prepare to be investor ready. They usually apply for funding only to realize they do not meet the funding requirements. The frustration and disappointment can be minimized if business managers make a conscious effort to prepare the business towards investorreadiness. This may take some time, but indeed, true businesses that withstand the test of time are built over a considerable period of time. Patience and commitment to build a credible business is almost a pre-requisite. The following are recommendations on what businesses can do to meet investors’ requirements for funding. • Think Like an Investor: Ask yourself a basic question; if you were the investor, would you place your money in this business? This question must be answered with objectivity and sincerity. The investor is highly sensitive to risk and expects an equally measured return. Being risk sensitive is not same as being risk-averse. It only means that investors look out for what risks they assume for investing in your business and for what returns? In thinking like an investor, identify the major risks faced by your business and put in place mitigation measures to minimize the impact if the risk event occurs.

•

Be Prepared for Enhanced Due Diligence: The assurances you give to the investor would not suffice. Investors would conduct operational, financial and legal due diligence to ensure the safety of their investment. Ensure your owners, board members and key management personnel are in good standing with the law. Where they are politically exposed, take steps to ensure they do not present political liabilities. Ensure your operations are devoid of money laundering, adverse social impact, adverse environmental impact etc. Also ensure that your financial statements reflect the true and fair performance and positions. Understand the Regulatory Environment and Comply: Businesses in food processing, alcoholics & beverages, banking, insurance, pensions, mining, oil and gas etc. operate in highly regulated environment. It is unacceptable for the business to be ignorant of or non-compliant with the laws and regulations applicable to the business. Ensure you are fully aware of the laws/ regulations and the changes thereof. Most importantly, ensure full compliance with all applicable laws and regulations. Improve Records Keeping and Financial Reporting: Records keeping is a crucial component of good business management practice and even more so if the business intends to access funding externally. The basis for timely and accurate preparation of financial reports of a business depends on the availability of financial records, their completeness and reliability. The analysis of the financial performance through trend analysis of key financial indicators such as profitability, liquidity, gearing and investment position cannot be undertaken without preparing a financial report. Preparing periodic management accounts is essential and having the annual financial statements audited on timely basis is critical. Ensure therefore,

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that there are knowledgeable persons and adequate resources (such as accounting software and/or excel models) for records keeping, analysis and reporting. Ensure also that your auditor is duly licensed by the Institute of Chartered Accountants, Ghana and declared to be in good standing. Ensure that the audit is conducted on time and in accordance with applicable laws. Enhance Governance and Internal Controls: The system of checks and balances that works towards a set of objectives based on accountability must be instituted and entrenched in any business irrespective of its size. The process requires leadership and commitment of management to ensure that the business’s mission is fulfilled and its interests

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including that of external stakeholders are protected over time. Ensure there is a well-composed board with diverse expertise relevant to the business. Ensure the board has the relevant subcommittees to facilitate its work. Ensure the board performs its duties by giving board members Terms of Reference and evaluating their performance over time. Furthermore, it is important to put in place adequate policies and procedures and internal controls that facilitate the attainment of the organization’s mission and vision. Be Willing to Share Control: The fear of losing control of the business to investors are legitimate as many businesses have suffered this risk. It

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should however be noted that all forms of funding (both equity and debt) come with control and restrictions. For example, equity investors come with ownership and board representations. Debt investors come with covenants and restrictions on subsequent funding and business activities. These measures are aimed at minimizing the risk for the investor. However, most often than not, investors do not stay in your business forever. Yes, even equity investors exit at some point and if wellmanaged, the business or its original owners could buy back their control (though difficult). Businesses should therefore understand and be willing to share the control and ensure they have strategies for redeeming control. This is best managed when investment agreements are carefully reviewed and properly negotiated. The alternative is to remain small and operate a growth strategy that is based on internally generated funds. Demonstrate Business

Viability: Any business seeking funding must demonstrate viability, which is to say the business idea or project when implemented effectively will be sustainable, has the potential for growth and expansion and profitable as well. Business owners and managers could demonstrate this through the development of a business/ strategic plan. The business plan must be as precise as possible with projected financial statements and analysis for at least the next three (3) years though others may prefer a five (5)year financial projection. It is critical to remember that, the basis or the underlying assumptions used for the financial projection is what will be evaluated first when reviewing the financials and so they must be realistic and clear enough with sufficient details. Most importantly, ensure the business plan has an implementation strategy that clearly outlines the key objectives, actions to achieve the objectives, responsible persons for the actions, resources to execute the actions and timelines for

executing those actions or attaining the objectives. â&#x20AC;˘ Demonstrate Capacity: Business owners and managers must also develop the structures that will assure any investor or funding institution that, the business has or is capable of acquiring and installing the human and technical capacity to utilize the financial resources they are seeking. This capacity should be considered and developed over time. In conclusion, it should be recognized that positioning a business for investment can take some time (usually not less than 2 years). Businesses are advised to organize and run the business with future investment need and the investor in mind. At some point, to achieve reasonable growth, a business may have to open itself to investment (be it equity, debt or hybrid). Investors and funding institutions have their own expectations and are not in a rush to place funds irrespective of how urgent your funding need might be. As mentioned in Part 3, investors have options on where to place their funds. While your business might have made some mistakes or perhaps ignorant of investors requirements, it is

better late than never. Therefore the advice is to START NOW and Watch Out For The Next Edition

Remember to wash your hand under running water, wear your nose mask when going out and never forget to comply with the social distancing protocol. For more information and targeted services in financial management and investment advisory services, training and recruitment, market solutions and organizational development, and research, kindly contact CDC Consult Limited through info@cdcconsult.org, babilo@ cdcconsult.org. You can also call 055332030/0244683042

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The African Continental Free Trade Area unfolding changes BY CHIJIOKE ODO

he agreement establishing the African Continental Free Trade Area (“the Agreement” or “AfCFTA”) is arguably the most discussed economic subject out of Africa. Now the largest free trade agreement (FTA) since creation of the World Trade Organisation (WTO), it is easy to understand the attention. Considering how long Africa has unsuccessfully attempted to set-up a pan-African economic community, recent steps towards developing a working FTA have surprisingly advanced very quickly. This progression has moved many businesses to quick thinking, as they look to align their business models with trade patterns that could evolve as a result of the Agreement. However, several businesses have indicated a significant challenge with putting together a robust response to the AfCFTA. They explain that so much has been said about the Agreement but very little clarity is being disseminated about its workings and its impact on businesses. Whilst some countries have done impact assessments, these assessments have failed to provide the visibility that these businesses need to plan around the Agreement. This write-up provides some background to the AfCFTA, reviews its current state and attempts to predict what businesses should expect in the short to long term. Background The AfCFTA, which came into force on 30 May 2019, is the culmination of several years of deliberations and negotiations around the economic integration of Africa. It is the outcome of a process that started as a long term African vision. The founding fathers of the Organization of African Unity (which has now metamorphosed into the African Union (AU)) strongly believed that Africa would only be truly independent with greater economic integration among the member states. That belief still holds true today, with the AU predicting that Africa would be wealthier and less vulnerable to external vicissitudes, if member states traded more with each other.

Against this backdrop, AfCFTA is designed to be a legal instrument which would foster economic integration by creating a single market for goods and services, vide progressive elimination of tariff barriers (TBs) and non-tariff barriers (NTBs) (Eg. permits, national protectionist policies) to trade and investment. Is removal of TBs and NTBs the single bullet that automatically integrates the African region? Absolutely not! The current regional infrastructure is not built for intra-Africa trade, visa restrictions still create problems, and Africans still need to move beyond historical biases. So there are still other challenges to overcome and they need time. However, a platform that removes TBs and NTBs in international trade is always a sweetener, which without doubt has the ability to get businesses in Africa looking inwards for solutions. Based on its structure, AfCFTA addresses six (6) broad areas, divided in two phases: Phase 1: What goods are covered and how will they be liberalized? What services are covered and how will they be liberalized? How would disputes be resolved? Phase 2: How would intellectual property rights be protected? How will intra-Africa investment be increased and/or facilitated? How would competition be promoted? Whilst work on Phase 2 is still at

its infancy, work on Phase 1 is well advanced, with the expectation that final details would be completed ahead of the start date. What goods are covered and how will they be liberalized? The most important thing to understand when attempting to use an FTA is the ‘Qualification Criteria’. What qualifies any good for preferential treatment within the trading bloc? Step 1: Are your goods among those being liberalized? As currently conceptualized, each Regional Economic Community (REC)1 within the AU is expected to participate in a ‘request and offer’ negotiation process to designate goods that are subject to liberalization. The outcome of this negotiation process is a listing of tariff lines that would be liberalized and those that would not. This listing will be contained in what the AfCFTA calls the Schedule of Tariff Concessions. Based on current negotiations, 90% of all tariff lines will be subject to linear liberalization over a period of time. At the moment, it is envisaged that liberalization will occur over five years for developing countries (DCs) and ten years for least developing countries (LDCs). The remaining 10% will be divided into two: 7% will be designated as sensitive and be subject to a longer

liberalization cycle i.e. ten years for DCs and thirteen years for LDCs, while 3% will be designated as excluded from liberalization unless reviewed during the fiveyear review cycle. Step 2: Do your goods originate from the trading bloc? The AfCFTA has been set up to make this determination based on the Rules of Origin (RoO), which has been divided into the general product RoO and specific product RoO. As the name goes, the general RoO will apply to all goods classifiable under liberalized tariff lines that do not have specific RoO. The general rules are binary, and consist of the ‘wholly obtained criteria’ and ‘substantial sufficient transformation criteria’. Article 6 of the Agreement outlines the products that may be considered as wholly obtained, whilst Article 7 outlines the rules for substantial/sufficient transformation. At the moment, the substantial/sufficient transformation criteria are incomplete as negotiations on the specific RoO and value addition are still ongoing, with the expectation that final details will be completed before trading starts. ii.) Which services are covered and how will they be liberalized? Whilst traditional tariffs do not apply to services, NTBs do and are the primary focus of the AfCFTA. The AfCFTA therefore has at its bedrock, the liberalization of restrictions on market access and national regulations that protect local service industries. Step 1: What services are covered? AfCFTA attempts to liberalize five of the twelve service sectors categorized by the WTO. These five sectors are business services, communication services, financial services, tourism and travel, as well as transport services. It is understood that liberalization may only happen in specific subsectors. Step 2: How would the services be liberalized? At the moment, this aspect is vague. However, in line with WTO’s General Agreement on Trade in Services, it is understood that member states would interalia, be required to: • Make commitments to grant market access to other member states in these five sectors. Examples of these commitments could be a

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member state committing to remove quota restrictions on the employment of non-nationals by a service provider. Another could be the removal of restrictions on the ownership structure of service providers. Make commitments to accord a ‘formal identical’ or ‘formal different’ treatment to services and service providers of another member state. In this regard, a formal different treatment would only be acceptable if it does not skew competition in favour of a service provider from the home member state. Work together to design a framework for AfCFTA creates a dispute settlement body (DSB) that will administer all issues relating to disputes. According to AfCFTA, the DSB will have the powers to: establish dispute settlement panels and an appellate body; adopt panel and appellate body reports; maintain surveillance of implementation of rulings

and recommendations of the panels and appellate body; and authorize the suspension of concessions and other obligations under the Agreement. It is important for businesses to note that if they are of the view that a member state has breached an obligation, they should simply appeal to their countries to take up the dispute with the DSB. The DSB would be meeting as often as possible to ensure disputes are quickly settled. It is understood that the DSB would be up and running as soon as trading starts. Impact on businesses On the basis that not all goods and services will be liberalized, it goes without saying that the impact of the AfCFTA on any business would depend on the outcome of ongoing negotiations. For instance, liberalizing certain products could immediately break existing local monopolies or create continental ones. The driver of this outcome may not necessarily be tariff elimination (which would be linear anyways

and should not have an immediate impact on trade patterns) but the removal of NTBs. It is expected that whilst some businesses would not be directly impacted once negotiations are complete and trading starts, all businesses would be impacted in the medium to long term-whether or not their business activities are the subject of liberalization. For instance, the industry of a specific business may not be liberalized, but the industry of its suppliers may be liberalized. If the competitive landscape of a supplier is fiercer, the business could benefit from lower costs. Whilst all these structural adjustments are going on, there could be potential job displacements i.e. losses in one market and gains in another, but an overall continental job gain due to the potential movement of capital and accompanying jobs to Africa. That being said, it is expected that these adjustments would be slow. This is in part due to the gradual liberalization process being negotiated by member states, but importantly due to the absence of critical regional infrastructure

needed to build the regional value chains. For instance, it may still be quicker and/or cheaper to import from Asia than from acontiguous member state – even after factoring the removal of tariffs. Many C-Suite executives have asked what the impact of the AfCFTA would be on their business. The response would be – follow the conversation, evaluate the impact of ongoing negotiations, petition your country’s negotiators if necessary, and importantly plan to conquer the new market.

Chijioke Odo Global Trade Advisory Lead, Deloitte Tel: +234 (1) 904 2100 Email: codo@deloitte.com.ng

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Who is a Politically Exposed Person (PEP) BY RICHIESON GYENI-BOATENG, CAMS

once had a customer who wanted to close his bank account just because he got to know that the bank had classified his account as a Politically Exposed Person (PEP). This was because he thought the bank perceived him as a corrupt politician. After explaining the meaning of who a PEP is and why the bank classified him as such for its internal processes, he appreciated it and continued to do business with the bank. I believe many people (especially the politician) can associate with the behavior of the customer illustrated above? This article is aimed at highlighting the meaning and dynamics of a PEP and the risk of money laundering and terrorist financing associated with the PEP. Also the article will touch on how companies can identify PEPs and how to treat them to avoid regulatory sanctions. There is a regulatory sanction for not putting in place appropriate risk management systems to determine whether a potential customer or existing customer or the beneficial owner is a PEP when performing Customer Due Diligence (CDD) procedures. Therefore, essential to the identification process is having a definition of PEPs. Unfortunately, there is not an internationally agreed definition for a PEP. But in Ghana, according to the BoG/FIC AML/CFT (P) guidelines, July 2018, a PEP is individual who is or has been entrusted with prominent public function both in Ghana or in foreign countries and people or entities associated with them. PEPs also include person who are or have been trusted with a prominent functions by international organization. Example, if you find yourself in any of the following category of people, then you will be classified as a PEP: • Heads of State or government • Ministers of State • Politicians • High ranking political party officials • Senior public officials • Senior Judicial officials • Senior military officials • Chief executives of state owned companies/ corporations • Traditional Rulers The following other categories are

also considered as PEPs because of the degree of influence the PEP has over or on them: Family members and/ or close associates of PEPs (including domestic staff ) An artificial politically exposed person (an unnatural legal entity belonging to a PEP) As the definition of PEPs might differ from one country to another, companies should institute measures to able to identify PEPs from other countries as they also pose money laundering risk as the domestic ones. Companies should also identify Financial Exposed Persons (FEPs), as they pose the same AML/CFT risk as PEPs. FEPs are those individuals who hold executive management and/ or board positions in large organizations and control financial resources of these organizations. We should note that all PEPs are FEPs but not all FEPs are PEPs. Although public officials and bureaucrats are not by definition corrupted, they are placed in a vulnerable position as they have the capacity to control or divert funds and to award or deny largescale projects for illicit enrichment Although public officials and bureaucrats are not by definition corrupted, they are placed in a vulnerable position as they have the capacity to control or divert funds and to award or deny largescale projects for illicit enrichment Although public officials and bureaucrats are not by definition corrupted, they are placed in a vulnerable position as they have the capacity to control or divert funds and to award or deny largescale projects for illicit enrichment Although PEPs/ FEPs are not by definition corrupted or corrupt, they are placed in a vulnerable position as they have the capacity of control and/ or divert funds and to award or deny large scale projects for illicit enrichment and also embezzlement of public funds. There is this argument which suggests that once the PEP leaves office for a number of years, he or she should not be considered as a PEP again because he or she does not have control over public funds. This argument is correct in some countries but majority of the countries, especially African countries, hold a different view, which is “once a PEP, always a PEP”, because of the influence and control the PEP will still have. The handling of a client who is no longer entrusted with a prominent public function should be based on an assessment of risk and not on prescribed time limits. Companies should assess the risk based on the following factors:

The level of “informal” influence that the individual could still exercise; the seniority of the position that the individual held as a PEP; or Whether the individual’s previous and current function are linked in any way (e.g., formally by appointment of the PEPs successor, or informally by the fact that the PEP continues to deal with the same substantive matters). Once the PEP has been identified, the company need to put measures in place to manage the relationship established so as to minimize the risk exposure the PEP possesses. One way companies, especially financial institutions, can manage the money laundering and terrorist financing risk associated with PEPs is by first identifying them during the KYC/ CDD procedures. Companies should have or subscribe to a database of PEPs, both foreign and domestic. Any customer’s name should be run through the database. Also asking the necessary questions can help identify the PEP. After identifying them, the PEP should be risk rated as high risk with the needed Enhanced Due Diligence (EDD) procedures conducted on the customer. The EDD procedure on the PEP is to help the company get enough information about the customer to reduce the risk exposure. When conducting ongoing due diligence of the business relationship with the PEP, it is important for companies to ensure that the level and type of transactions are consistent with the institution’s knowledge of the PEP’s information. Getting senior management approval as to whether to establish or continue a business relationship with a PEP helps to manage the relationship to ensure that senior management are aware of relationships with PEPs and that the company do not in any circumstance undertake business relationships with them in the absence of adequate controls. The senior management person(s) giving the approval should have a deep knowledge of the institution’s AML/CFT programs (i.e., the internal control programs), and a strong understanding of the potential or existing customer’s ML/TF risk profile. Additionally, the senior management person(s) should have active involvement in the approval process of the institution’s AML/CFT policies and procedures. The approval or refusal of the PEP relationship should be in writing. Another way to manage the risk of money laundering and terrorist financing associated with a PEP is

for the company to take reasonable measures in determining the source of wealth and source of funds of the PEP. Source of wealth and source of funds are two different concepts but are used interchangeable. The source of wealth refers to the origin of the PEP’s entire body of wealth (i.e total assets or properties). This information will give an indication as to the volume of wealth the customer would be expected to have, and a picture of how the PEP acquired such wealth. Although companies may not have specific information about assets and/or properties not deposited or processed by them, it may be possible to gather general information from commercial databases and/ or other open sources. The source of funds, on the other hand, refers to the origin of the particular funds or other assets which are the subject of the business relationship between the PEP and the company (e.g., the amounts being invested, deposited, or wired as part of the business relationship). The information (normally, easy to know or obtain) should be substantive and establish the origin and/ or reason for having been acquired. The above requirements are preventive in nature and should not be interpreted as meaning all PEPs are involved in criminal activities. When though PEPs possess high Money laundering and Terrorist Financing risk to almost every company in the world, they provide good source cheap deposit for financial institutions in Ghana. PEP accounts and transactions should be managed well to mitigate the risks they possess and at the same time benefit from the cheap deposits. Would you mind doing me a favor? Share this article with someone so that the awareness of money laundering and terrorist financing could be spread to avoid being use as a conduit by criminals. If you require further information on this article, please contact Richieson @richieson.gyeniboateng@gmail.com

FRIDAY JULY 10, 2020

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What Will COVID-19 Do to Banking? BY XAVIER VIVES

The COVID-19 crisis has revealed banks to be not part of the problem for a change, but part of the solution. They have so far proven to be resilient, mostly as a result of the stricter capital and liquidity requirements imposed on them following the 2007-09 global financial crisis. Today, many governments are using banks to channel funds to households and firms hit by the pandemic’s economic fallout. Furthermore, governments have granted banks a temporary moratorium on implementing tougher regulatory and supervisory standards, in order to reduce the potential pro-cyclicality of measures introduced in the last two decades and avert a credit crunch. As a result, banks now have an opportunity to reverse the reputational damage they suffered in the financial crisis. But they are not out of trouble, in part because the crisis will sharply increase the volume of nonperforming loans. Moreover, as a recent report that I co-authored points out, the pandemic will accentuate pre-existing pressures – in particular, low interest rates and digital disruption – on bank profitability. Digitalization will now advance rapidly, because both banks and customers have realized that they can work and operate remotely in a safe and efficient way. The resulting increase in informationtechnology investments will render many banks’ overextended branch networks obsolete sooner than they expected, particularly in Europe. That will necessitate a deep restructuring of the sector. Medium-size banks will suffer because they will find it difficult to generate the cost efficiencies and IT investment needed in the new environment. Although consolidation could offer stressed banks a way out, political obstacles to cross-border mergers will likely arise in several jurisdictions as governments become more protective of national banking systems. In Europe, for example, where banking nationalism has been running high (with the exception of the United Kingdom), domestic consolidation seems more likely. In addition, banks may face renewed competition from shadow banks and new digital entrants that were already challenging the traditional bank business model before the pandemic. In the United

States, financial-technology firms, or fintechs, have made important inroads in mortgages and personal loans. And in emerging markets, “BigTechs” – large digital platforms, such as Alipay in China – have come to dominate some market segments such as payment systems. The rapid digital shift resulting from lockdown measures to combat COVID-19 suggests that the pace of change in the banking sector may take everyone by surprise. That acceleration may in turn also hasten the adoption of different forms of digital currencies, including by central banks. By further reducing entry and exit barriers in the financialservices market, digitalization will increase competitive pressures and constrain incumbent banks’ profitability in the short run. But its long-term impact is more uncertain, and will depend on the market structure that eventually prevails. One possible outcome is that a few dominant platforms – perhaps some of the current digital giants, plus some transformed incumbents – control access to a fragmented customer base that inhabits different financial ecosystems. In this case, customers would register their

demands on a platform, and financial-services providers would compete to supply them. The degree of platform rivalry and level of customer service would depend on the costs of switching from one ecosystem to another: the higher they are, the less competitive the market will be. Bank regulators have already adapted to the postpandemic world by relaxing the implementation timetable for capital requirements. In addition, digital disruption will require them to balance fostering competition and innovation with the need to safeguard financial stability. In order to do so, regulators must ensure a level playing field, and coordinate prudential regulation and competition policy with data policies. This will require navigating complex tradeoffs among the system’s stability and integrity, efficiency and competitiveness, and privacy. The pandemic and its fallout will test the resilience of the financial system and of the regulatory reforms introduced after the 2007-09 crisis. The first report by IESE Business School’s Banking Initiative last year concluded that these measures had made banking sounder, but that some work remained to be done, particularly concerning shadow banking.

The response to the current crisis will stretch the limits of centralbank intervention – especially in Europe, where sovereign-debt sustainability may become a more salient issue over the medium term. Furthermore, the crisis will test the eurozone’s banking union, which remains incomplete without common deposit insurance. Banks have a chance to improve their battered public image by playing a constructive role in mitigating the current economic crisis. But with COVID-19 set to accelerate the sector’s digitalization and restructuring, their future could soon become more uncertain.

Xavier Vives, Professor of Economics and Finance at IESE Business School, is co-author (with Elena Carletti, Stijn Claessens, and Antonio Fatás) of the report The Bank Business Model in the Post-Covid-19 World. Copyright: Project Syndicate, 2020. www.project-syndicate.org.

FRIDAY JULY 10, 2020