NEPAD OECD 2011 Dakar Conference publication by Rohit Juneja

Investment for Development in Africa Infrastructure: Building from ground up

Agriculture: Sowing the seeds of growth

Taxation:

Transparency in the context of tax and development

For distribution at the Dakar Conference April 2011

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CONTENTS The Comprehensive Africa Agriculture Development Programme (CAADP) is Africa’s policy framework for an agriculture-led socio-economic growth and development agenda. Implementation of the CAADP agenda, centered on country-led processes, Dr. Ibrahim Assane Mayaki, is characterized by the key NEPAD CEO principles and values of our broad NEPAD vision. These include partnership, local ownership, collective responsibility and mutual accountability. Basic food security and poverty alleviation are the main targets. Over forty countries are already embracing the CAADP agenda. Twenty-five of these have already gone past the CAADP compact milestone. Eighteen countries have drafted CAADP investment plans, and most underwent external technical reviews. Twelve countries have agreed on a financing strategy for their investment plans. In a number of countries, incremental financing has already been committed, and work has been initiated to secure the committed financing and to guide implementation of the proposed investments. Across the value chain – broadly encompassing production, access to markets, and processing – food security and natural resource management are two critical issues identified in almost all the national investment plans. These are key national priorities for agriculture development. With a focus on results and impact, financing is important; deliberate efforts to reinforce private sector contributions are being exerted. Africa’s development lags behind the rest of the world. Average annual GDP per capita in Africa is estimated around $1,700, as opposed to $7,000 for Latin America, and $2,600 for South Asia. Africa’s continued economic marginalization is largely attributed to two principal economic growth deflators: the high cost of transport and energy, and their under-development. A study of 24 countries in sub-Saharan Africa shows that lack of key infrastructure reduces growth by 2 percentage points annually, and business productivity by up to 40%. How can these obstacles be overcome? Africa’s partnership engagement should focus on improving trade and investment through regional infrastructure development. Improved partnership dialogue and global rebalancing of capital flows will benefit Africa by promoting sustainable infrastructure investments. Because many African economies are too small to generate the economies of scale required to foster regional trade and investment, a number of multi-country infrastructure initiatives have been instituted under the African Union and its NEPAD Program. Such initiatives help to mobilize domestic, international and private resources for infrastructure development, with the support of G8 member countries and other partners. The recently adopted PIDA program provides an integrated continentwide vision, strategic framework and agenda for infrastructure development. African leaders have the political will to address the infrastructure gap. A few months ago, the Presidential Infrastructure Champion Initiative was established to help sponsor catalytic regional infrastructure projects, and unblock systemic challenges associated with cross-border infrastructure projects.

4 Investment African attractions �� 4 Food & Agriculture Sowing the seeds of growth �� 6 Dakar Conference Agenda Overview �� 12 Infrastructure Building from ground up �� 14 Taxation Transparency in the context of tax and development �� 18 Country Focus Update on Tunisia �� 22 Editorial coordinators Said Kechida Christopher Fodor (Mediaside SARL) Contributors Karim Dahou Mike Pfister Dambudzo Muzenda Roberto Schatan Art Director Rohit Juneja Advertising sales Dany Laloum, Mediaside SARL (contact@mediaside.biz) Printed in France by Imprimerie Baron, Paris NEPAD/OECD 2 rue André Pascal 75775 Paris Cedex 16 Tel + 33 1 4524 8504 said.kechida@oecd.org

Mediaside 77 rue du Faubourg St Denis 75010 Paris Tel + 33 1 4483 9337 contact@mediaside.biz This publication was prepared by Mediaside SARL (www.mediaside.biz) in collaboration with NEPAD-OECD. This publication is distributed as part of the background documentation for the Ministerial Conference of the NEPADOECD Africa Investment Initiative. The views contained within do not necessarily represent those of NEPAD, the OECD or their member governments. Unless otherwise specified, all currencies are US dollars.

Investment

African attractions Five-fold growth of FDI in eight years is no meager achievement. Credit goes to African governments for sound policies and investment environments. Yet this glass is only half-full: there is vast space for yet more FDI growth.

4 Dakar Conference Magazine | Spring 2011

Although Asian investment in Africa predominantly targets the energy sector, there are important investments in the

Double-dip growth 35

FDI outward flows from OECD countries to Africa

30 25 20 15 10 5

08 20

07 20

06 20

05 20

04 20

03 20

02 20

Although the natural resources sector is traditionally a major recipient of FDI flows to Africa, high-value activities in services and manufacturing have recently attracted important investments. In addition, the food crisis has stimulated foreign interest in Africaâ&#x20AC;&#x2122;s arable land. The agricultural sector has faced scant investment leading to low productivity in the past, despite the backdrop of rapidly increasing global and domestic demand. At this crucial juncture, the continent now presents itself as a new frontier for FDI.

An important new development in FDI flows to Africa over the past decade is the increase of investment from non-OECD countries, especially from Asia and Africa itself, including countries such as South Africa, Egypt and Morocco.

For FDI to contribute fully to economic and social progress in Africa, host-country governments need to create a policy environment that enables them to maximize development returns on investment. Governments should thus develop a set of policies that are not only focused on investment promotion, but also address issues such as human capital, infrastructure and enterprise development, which instead of are likely to increase FDI spillover effects and contribute to economic diversification. This is all the more important since FDI in Africa remains small compared to flows among industrialized and major emerging countries. Africa still only captures only about 5% of global flows.

As for the regional distribution of FDI within Africa, the North, West and South of the continent attract the bulk of foreign investment. Much of this investment is driven by the large regional reservoirs of natural resources such as gas and petroleum.

Foreign investors provide many benefits to African economies. In addition to bringing more capital, tax revenues, exports and export diversification, foreign investors can also inject new technologies and corporate know-how into the local economy by developing and fostering close linkages with local suppliers. This knowledge transfer is critical to ensuring the long-term sustainability of industrial, agricultural and infrastructure projects.

After a record high in 2008, the continent saw its FDI inflows fall by 36% in 2009 (see box on the impact of the financial crisis). This marked the end of six consecutive years of increases in FDI flows to Africa. As a single example, FDI flows from OECD countries to Africa reached a record level of $32 billion in 2008, compared to about $4 billion in 2002 (see chart).

($ billions)

ver the past two decades, foreign direct investment (FDI) has become a vital source of economic development for the African continent. Growing from $9 billion in 2000 to $18 billion in 2004, and then $88 billion in 2008, FDI is a major financial source for Africaâ&#x20AC;&#x2122;s development. This is particularly striking when considering that Overseas Development Aid (ODA) flows to Africa reached $44 billion in 2008, only half of FDI inflows.

Source: OECD FDI database

Investment

Investors outpace donors FDI and ODA flows to Africa

80 70 60

$ billions

50 40 30 20 ODA 10

FDI

Policy challenges and opportunities

Another encouraging sign is that African countries have resisted adopting protectionist policies and the policy environment has remained conducive for FDI. Even so, the recent drop in FDI

Financial crisis did some harm The global economic crisis led to a decrease in demand, and a subsequent drop in export revenues, which adversely affected Africa’s commodity-based economies. In addition, remittances showed a marked decrease, whilst investors have been more risk averse and investment prospects are less bright. At the beginning of the crisis, FDI inflows to Africa were hardly affected, but the figures for 2009 show a drop of about 39% over 2008. This decline is partly due to the decrease of cross-border merger and acquisitions, which are a major driver of FDI on the continent. Least Developed Countries absorbed the bulk of the impact, as the drop in demand for commodities had a negative effect on FDI flows to those economies, based on natural resources. Without going into details of FDI distribution by sector, this decline has reduced government revenues, exports, employment and African companies’ access to capital, new technology and corporate knowhow. Nevertheless, investment policy reforms have helped mitigate the crisis’ consequences and should enable the continent to take full advantage of the recovery.

telecommunications and real estate sectors. New investors are also active in areas that are particularly important to Africa’s development agenda, such as infrastructure and agriculture. A great share of foreign investment in agriculture is undertaken through sovereign wealth funds (SWFs), yet the implications of this development have yet to be fully understood. Moreover, even though the media have recently highlighted ‘land-grabbing’ by foreign investors in Africa, thorough analysis of the matter is needed to assess the potential benefits and drawbacks that foreign investment could bring to Africa’s agriculture.

0 Source: OECD and UNCTAD (IMF for projections)

inflows necessitates an effective response on the part of African governments. This might include using export surpluses in oil-rich countries to diversify and steer the economies towards higher value-added activities. Host government policies should also continue to promote domestic linkages, particularly in sectors like agri-business and services. In addition, implementing a sound policy framework for Public Private Partnerships (PPP) can help attract FDI for public utility and infrastructure projects, for example in water treatment or transport infrastructure.

Outlook and prospects

Although it is difficult to predict the FDI outlook for Africa with certainty, we can expect foreign investment in agriculture to continue increasing. First, Africa’s inward FDI stock in agriculture accounts for just 7% of the total stock in developing countries – compared to 78% for Asia and Oceania, and 15% for Latin America and the Caribbean. This clearly illustrates the potential for increasing the investment rate in a sector in which global FDI tripled from $1 to $3 billion a year, as a result of rapidly rising demand and prices, land and water shortages in some emerging economies and increasing demand for biofuel. To make the most of agricultural investment for Africa’s development, strong policy action is needed from both home countries and host states. It entails implementing international standards for responsible business conduct, while also enhancing host-country policy frameworks. Such an effort would complement other policy priorities like improving the overall business climate, diversifying FDI sources and attracting foreign investment to high value-added activities. Africa should thus quickly overcome the crisis and sustain its course for social and economic progress. ● For further information, please see the NEPAD-OECD knowledge base: www.nepad.org/fr/knowledge-base Search for ‘FDI’ Dakar Conference Magazine | Spring 2011 5

Food & Agriculture

Sowing the seeds of growth Agriculture has traditionally been the poor cousin within the African investment family. The sector’s perspectives could be quite bright… if the proper conditions are put together.

frican agriculture is caught between a rock and a hard place. The tough reality of the rock is unrelenting population growth: world population is expected to grow by 2.3 billion between 2009 and 2050. In Africa, it is predicted that population levels will double over the same period. The hard place is increasing water scarcity, difficult conditions for land use, which make sustainable farm production challenging. Against this difficult background, feeding the growing urban population while also adopting more sustainable production methods will become a challenge. For decades, the continent has suffered from under-investment in agriculture, leading to stagnant productivity and poor growth in the sector. On average, African countries allocate only 4% of their budgetary expenditures to agriculture, compared with up to 14% in Asia. In addition, Foreign Direct Investment (FDI) and Official Development Assistance (ODA) for the sector have long remained very low. However, with 60% of the world’s remaining uncultivated farmland, Africa has recently started to attract large-scale foreign investments geared towards new ‘frontier territories’ for agricultural production. This trend has been driven mainly by emerging markets with increasing food needs, land and water shortages, and growing demand for biofuel. These new investments have also included land acquisition deals, which are commonly referred to in the media as ‘land-grabs’. As it is caught between rapidly rising regional and global demand and limited supply capacity, Africa’s agriculture needs to make the most of these new opportunities and mitigate their possible adverse effects. On the one hand, such large-scale international investments can supply infrastructure, create employment, increase public revenues, and bring technology and skills to local farmers. On the other hand, they can also threaten food security, lead to the eviction of local land users and loss of access to land for indigenous groups, as well as generate competition for vital resources among local populations.

6 Dakar Conference Magazine | Spring 2011

HE Mr. Laurent Sedogo, Minister of Agriculture Burkina Faso

Since the early 90s, Burkina Faso has launched a wide range of reforms in order to strengthen the foundations of its economic and social development. Employing more than 86% of the workforce and contributing at least 30% to the formation of the wealth of the nation, the agriculture sector was one of the first areas of application of this reform effort.

Burkina Faso possesses an important agro-pastoral potential which remains undervalued. Agriculture continues to face several challenges that limit the capacity of the country to benefit fully from the potential. The performance of rural sector development remains constrained by issues of access to land and to finance, inputs and equipment, upgrading of infrastructure as well as inadequate supervision of rural and natural resource degradation. The current international context, marked by recurring food crises and the problem of large-scale acquisition of agricultural land, reminds us of the importance of implementing coherent and responsible policies to increase investment in the rural sector. Recently, Burkina Faso has undertaken promising initiatives in this direction. The National Program for the Rural Sector (Programme national du secteur rural - PNSR), currently being finalized, translates the country’s commitments into figures for public investment in agriculture. In this sense the different stakeholders in the rural development process were engaged in intense consultations aiming at developing a common vision. The organization of the “états généraux de l’agriculture et de la sécurité alimentaire” (General Congress on Agriculture and Food Security) is also another step in the process of strengthening the dialogue to establish the necessary conditions for successful implementation of the PNSR. All these efforts must be coordinated and integrated into a framework conducive to promote agricultural private investment in order to fully contribute to the development objectives of Burkina Faso. It is for this reason that the Government has developed the Accelerated Growth Strategy for Sustainable Development (SCADD), which represents the overarching framework for all sectoral policies.

Food & Agriculture

considered by any government interested in creating an attractive environment for investors, and in enhancing the development benefits of investment to society, especially the poor. In this way, the PFI aims to advance the implementation of the United Nations Monterrey Consensus, which emphasized the vital role of private investment in effective development strategies.

African governments are fully aware of the importance of enhancing both the quantity and quality of agricultural investment throughout the continent. Among the ambitious goals established by the New Partnership for Africa’s Development (NEPAD) in its Comprehensive Africa Agriculture Development Program (CAADP), is a commitment to raise agricultural productivity by at least 6% per year. Achieving this goal would require a massive increase in the current levels of public and private investment. In order to attract private investment while also meeting national development goals, African governments need to consider a whole set of measures in a wide range of policy areas. This may necessitate a well-coordinated approach that could take advantage of an integrated policy framework for investment in agriculture.

Proposals for a new policy framework

Africa has long had difficulties gathering up the investment steam for its agriculture. Yet tools to help African governments do exist. Since 2006, the OECD has offered its Policy Framework for Investment (PFI), developed by 60 OECD and non-OECD countries. The PFI aims to support countries in mobilizing private investment for steady economic growth and sustainable development. The PFI provides a checklist of policy issues to be

Third engine of economic growth Change in real GDP - Sector share

25% 24% 20% 15%

13% 12%

10%

10% 9% 6% 6%

5% 5% 2% 2%

ta Ag il r po icul tu rt, re te le M an com uf s ac tu rin g F Pu ina n bl ce ic ad m Co in ns . tru ct io Re n al es ta t To e ur ism Ut ilit Ot he ie s rs er vic es

Tr a

& le

ur c

Percent growth from sector

30%

Source: McKinsey Global Institute

As a flexible instrument, the PFI can be adapted and applied to specific sectors. Given the importance of the agriculture sector for Africa’s development, the NEPAD-OECD Africa Investment Initiative, the OECD Sahel and West Africa Club (SWAC) and the Office of the Special Adviser on Africa (OSAA) of the UN Secretary General have thus started to develop a draft policy framework for investment in agriculture. Following a request from the Government of Burkina Faso to the OECD, a first draft was prepared for consultation in this country and then substantially revised. It is now used by the Government of Burkina Faso for assessing its policies for agriculture investment. The Burkina Faso project and the participation of the national task force have greatly enhanced the present draft. It also benefited from the discussions on Responsible Investment in Agriculture (RIA) held at the OECD within the framework of the Freedom of Investment Process. (See box on following page.) The purpose of this document is therefore to initiate discussion on a draft policy framework for investment in agriculture in order to improve and refine it into a final version. Such a policy framework would be intended as a flexible instrument that governments can use in evaluating and designing policies for agricultural investment in Africa. It could assist African governments in their efforts to attract more and better quality investment in support of national development objectives, including through the elaboration of actionable and time-bound policy measures. By focusing on host-country perspectives, it would serve as a complement to international initiatives, such as the ‘Principles for Responsible Agricultural Investment that Respects Rights, Livelihoods and Resources’ promoted by the Food and Agriculture Organisation (FAO), the International Fund for Agricultural Development (IFAD), the World Bank Group and the United Nations Conference on Trade and Development (UNCTAD). The draft policy framework for investment in agriculture could also contribute to achieving CAADP objectives through supporting the design and implementation of regional and national plans for agricultural investment. In addition, it could provide the Global Donor Platform on Rural Development (GDPRD) and the ‘Alliance for a Green Revolution in Africa (AGRA)’ with an instrument to facilitate donor dialogue, harmonization and alignment around African countries’ priorities for agricultural investment. Since ODA can play an important role in supporting African governments to address policy issues that hamper agricultural investment, the draft policy framework for investment in agriculture also highlights the positive contribution of new ODA instruments such as insurance mechanisms (like weather insurance), financial guarantees for smallholder farmers or initiatives to harness the potential of rural communities for innovation. ● Dakar Conference Magazine | Spring 2011 7

Food & Agriculture

Lessons from Burkina Faso Burkina Faso is one of the pilot countries for the NEPAD-OECD Policy Framework for Investment in Agriculture (PFIA). Eleven months after the project started, how is the sector faring? What lessons can already be drawn and applied elsewhere? Agriculture is still a critical component of land-locked Burkina Faso’s economy, accounting for 40% of GDP, and a whopping 86% of employment. The two principal agricultural drivers are cotton and livestock, followed by the forestry, hunting and fishing category. Yet agriculture suffers from chronic under-investment, especially outside the cotton sector. Most of Burkinabe investment flows into the mining sector. For investment in Burkinabe agriculture to flourish, the country faces the traditional chicken-and-egg dilemma. The country needs to exploit the agricultural potential in order to grow economically. Yet in order to grow its agriculture, the country needs private investors. Investors have been shy of the country’s extensive red tape. In fact, the World Bank’s 2007 “Doing Business” report ranks Burkina Faso 133rd out of 178 countries in terms of ease of administrative steps for businesses. The report deplores Burkina Faso’s forty-five different payments, compared to South Africa’s eleven or Mauritius’ seven. So how is Burkina Faso confronting these hurdles? The country started with a 2010 evaluation of its policies for investment in agriculture based on the PFIA, a tool elaborated by the NEPAD-OECD Africa Investment Initiative in close collaboration with theOECD’s Sahel and West Africa Club and the Office of the Special Adviser on Africa (OSAA) of the UN Secretary General. Overall, from 1996 to 2007 public spending on agriculture has been consistently above the Maputo target of 10% of GDP. However, the spending has suffered a general downward trend. In terms of its breakdown by component, almost half (49%) of agricultural investment goes to crop production, whereas 31% goes to water projects, 14% to environmental projects, and 4% on livestock. Analysis of public sector investment in agriculture shows four key findings. Firstly, seed distribution works better than fertilizer programs. Secondly, hydraulic projects capture a small proportion of public budgets. Thirdly, agricultural research and its dissemination are underfunded, despite their contribution to improved productivity. Lastly, the regional disparities subsist, with privileged funding going to drier Sahel areas. For the financing of agricultural investments in Burkina Faso, the socalled International Technical and Financial partners play a crucial role. From 2000 to 2008, they contributed approximately FCFA 624 billion,

Very weather-dependent Evolution of agicultural productivity (cereals, per active farmer) 600 500 400 300 200

100 19

Productivity (Kg/active farmer)

700

Source: NEPAD-OECD, Ministry of Agriculture

8 Dakar Conference Magazine | Spring 2011

with the World Bank, the EU, African Development Bank and Arab Funds playing key roles. With all these different financing sources, the analysis of investments according to their success is not an easy matter. The direct effect? For lack of suitable analytical tools, some of the agricultural investments are surely sub-optimal, but which ones? This is also an area where NEPAD-OECD can provide insight and capabilities, and hopefully bring Burkina Faso’s agriculture closer to its full potential. Some of the findings of the recent pilot project include five investmentrelated recommendations: 1. Improve the diagnostic analysis used as the basis for investment choices; 2. Systematically record relevant data and experience in a knowledgebase that can be used for strategic decisions and investment choices; 3. Carry out a nation-wide study on public investment programs; 4. Clarify the meaning of agricultural enterprises, be it in the areas of crop production, livestock, forestry or fish-farming; and 5. Correct specific shortcomings of the legal framework. In the mean time, over 200 internationally funded projects are underway, and one key emphasis is on agricultural entrepreneurs. The identification of these critical actors – based on a minimum critical size, enthusiasm, and basic managerial skills – should help to pull up agricultural production by its bootstraps, in turn aiding one of Africa’s poorest economies. Further information at: www.oecd.org then search for “NEPAD-OECD Africa Investment Initiative”

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Food & Agriculture

Multiplication of the loaves In its 2010 report ‘Lions on the Move’, the McKinsey Global Institute analyzed the growth potential of African agriculture and believes that three-fold growth – to $880 million – is within grasp. If all of Africa could have the agricultural productivity of Egypt, then agriculture could triple its contribution to African GDP, from a current $280 billion to $880 billion. Yet agriculture is no lightweight in the overall African economic picture, since it already accounts for __% of GDP (2010 figures). The benefits of such agricultural growth are not just in terms of selling the commodities grown (what McKinsey Global Institute MGI terms midstream benefits). Such growth also has upstream and downstream benefits. The upstream benefits include increased sale of pesticides, fertilizers and seeds (nice because these are high margin industries for which local industries can be developed), and of course farm or irrigation equipment. The MGI study estimates a $35 billion potential by 2030 for these upstream industries. The downstream benefits include the various food processing activities. If done locally, these higher value-added activities could generate $239 billion in additional revenues. So, this multiplier effect means that the tripling of sheer farm production could imply a boost to higher value-added downstream revenues, from their current $40 billion to almost $240 billion. Production triples, but downstream revenues jump six-fold. No wonder this is a target worth chasing.

An Africn “green revolution” could raise agricultural production to $800 billion per annum by 2030 Africa agricultural production revenue $ billion 880 140 235 280

Revenue in 2010

500

Obstacles in the path

225

Cultivation Yield growth Shift to high- Revenue in value crops 2030 in Green of new land Revolution scenario Growth annual growth rate 2008-2030 % 5.8

Revenue in 2030 under baseline scenario

2.7

Source: Food and Agriculture Organization, McKinsey Global Institute analysis

How to generate that growth? This all sounds nice on paper, but how does Africa reach this goal? According to MGI, firstly the emphasis is on eleven coastal countries with high potential: Angola, Cameroon, Cote d’Ivoire, Ethiopia, Ghana, Kenya, Madagascar, Mozambique, Nigeria, Sudan and Tanzania. There are three levers that boost agricultural production. First comes the cultivation of new land. If African countries can follow the example of Brazil – that added 1 million hectares of cultivable land per year from 1987 to 1996 – then MGI calculates an additional $225 billion revenues for 2030. The second lever is yield growth. If all African countries could have the productivity of Egyptian or South African soils, then an additional $235 billion could be reaped.

10 Dakar Conference Magazine | Spring 2011

Lastly, MGI recommends shifting soil use to high-value crops, namely fruits and vegetables which make for juicy exports, as Kenya’s $700 million of horticulture shipments demonstrate.

McKinsey is bullish about the agricultural potential, but remains realistic about the ease of achieving the targets. MGI suggests a comprehensive agriculture development policy with five core goals: • more intensive use of inputs • greater access to credit and insurance • improved infrastructure • further technical assistance for farmers • better tax and land laws. The study does not highlight any single successful government policy, but underlines several constructive policies. These include agricultural development along infrastructure corridors, ‘breadbasket’ approaches combining multiple initiatives, or targeted incentives for commercial farming. Now the final step will be to convince investors of the return on capital that African agriculture can provide. Perhaps McKinsey should organize a road show! Lions on the Move The progress and potential of African countries McKinsey Global Institute, June 2010 Link for download: www.mckinsey.com/mgi/publications/

Africa’s new legal frontiers How can African countries reinforce their legal frameworks so as to boost foreign direct investment and infrastructure investment? Two of French law firm FIDAL’s experts address these issues.

dedicated team is required. This team should be structured according to the type of project (e.g. energy vs. sewage) and should include specialists able to handle transnational issues specific to the multidisciplinary needs of large projects. Private and institutional investors always examine legal and audit aspects of PPP contracts by completing a so-called “due diligence”. This process verifies the effective implementation of PPP contracts, and the long-term stability of the legal framework. Sometimes, the adoption of specific legislation may be needed. These laws may address particular aspects of a concession-type PPP, or clauses required to enable the public sector to contract with private entities for specific services.

Most development financing institutions (DFI) that are active in Africa (e.g. World Bank, IFC, AfDB) distinguish between four main areas: (i) Energy (electricity and natural gas), (ii) Telecommunications, (iii) Transportation (airports, seaports, railways and toll roads); and (iv) Water and Sewage (processing plants and public utilities). In each of these areas, there are also four types of projects corresponding to the following categories: management and lease contracts, concession-based PPP, availability-based PPP, and outright divestitures (asset sell-off). Although the DFI typically only provides a fraction of the investment, its participation can substantially improve the credibility of the project by providing extra comfort and assurance to other investors, in particular regarding country risk. The DFI funds also help reduce the risk by providing local currency financing. DFIs may also contribute significantly to the preparation of a project by acting as a privileged partner able to advise on structuring and commercial viability. The DFIs can also be an important source of long-term financing and essential aides in the market analysis. To help provide a framework, it is useful to prepare a complete plan for infrastructure investment. This careful and comprehensive analysis is the best way for a country to present to the private sector its holistic approach and thus demonstrate its political commitment. A Public Private Partnership (PPP) project will usually require the services of outside consultants in the technical, economic and financial, legal and environmental areas. The term PPP has no legal significance and can be used to describe a wide variety of instruments involving some form of collaboration between the public and private sectors. To be successful in this area, a

Regulations in effect in each African country have an impact on the ten stages of the life of a company, namely: creation, granting of construction permits, employment contracts for workers, registering property, obtaining credit, protecting investors regarding the repatriation of investment, payment of taxes, the existence of economically integrated areas, enforcement of contracts and termination. Governments have realized that their roles extend beyond the macro-economic growth that ensures the economic health of their country. Governments also need to provide opportunities for their citizens, namely by implementing laws, regulations and institutions to provide a stable legal framework conducive to foreign direct investment (FDI). Starting from the fundamental principle that economic activity must be based on strong laws, the aim here is to implement a framework of business legislation that is effective, modern, accessible and simple to apply. The unprecedented initiative by the Organization for the Harmonization of Business Law now enables African lawyers as well as economics and business administration students, to absorb the new uniform laws covering African affairs. These significant advances now need to address the issues related to African property and real estate. This can be an important growth driver for many African countries. The reforms here should contribute to increased transparency in land management, and should strengthen the accountability of all parties, by involving both the private sector and civil society. They will also contribute to building the strategic management capacities of the state and local government, thus improving efficiency of public expenditure and enabling a more rational use of public land. The creation of national and local development plans will enable a standardized approach for the construction of public and private urban facilities, and better use of property taxation. • For further information please contact Issaka Zampaligre (izampaligre@ fidalinternational.com) or Yves Robert (yrobert@fidalinternational.com)

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What are the regulatory, legislative and institutional issues that can help address the infrastructure investment gap in Africa? Confronting these obstacles is important in order to move projects forward, namely those with innovative financing needs.

Strengthening the investment climate Let us now turn to some requirements to strengthen the investment climate in Africa. In particular, issues of structural reforms in the fields of corporate law, investment, trade, taxation, financial markets and infrastructure.

Private investment is essential for the development and prosperity of Africa. In the past few years, private investment in Africa has registered Mr. Mario Amano, Deputy a significant increase, Secretary General OECD from US$31 billion in 2006 to almost US$88 billion in 2008, which represents almost twice the amount of Official Development Assistance (ODA) to the continent. Moreover, Africa’s share of global FDI flows has risen over the last decade from 0.7% in 2000 to 4.5% in 2010. These figures are strong evidence of Africa’s increasing ability to harness globalization opportunities. Nevertheless, several challenges remain. The rate of investment in Africa is still significantly below levels of other developing regions and FDI continues to be concentrated in a few countries and sectors, with fifteen oil-exporting countries receiving more than two thirds of FDI flows, pointing to a need for further economic diversification. Faced with competition from other developing countries and the growing pressure of a young and under-qualified workforce, several African countries have taken important steps towards improving their investment climate and promoting private sector driven growth. The paradigm is simple: ensuring good governance and a supportive business climate, including adequate infrastructure and a qualified workforce, will bring more investment and improve the development prospects for the continent as a whole. However, translating the paradigm into reality requires important efforts on the part of African governments and their development partners. It is precisely to catalyze such efforts that the NEPAD-OECD Africa Investment Initiative was launched in 2006 as a partnership between the OECD’s Investment committee and NEPAD (as well as other regional and international organizations) to strengthen the capacity of African countries to improve their business climate. The Initiative has become the major regional forum on mobilizing investment for Africa’s development. It supports African countries in designing and implementing policy measures in a wide range of investment climate-related areas – such as investment, trade, taxation, financial markets and infrastructure. This work is carried out through ministerial meetings and expert roundtables that promote dialogue between policy makers and private sector representatives. It also takes the form of technical support provided to several African countries for evaluating and reforming their business climate. In addition, it aims to raise the profile of Africa as an investment destination, by fostering regional co-operation and emphasizing African perspectives in international dialogue on investment policy.

12 Dakar Conference Magazine | Spring 2011

NEPAD - OECD Africa Investment Initiative DAY 1: TUESDAY 26 APRIL MOBILISING INVESTMENT IN INFRASTRUCTURE AND AGRICULTURE 08:00 – 09:00

REGISTRATION OF PARTICIPANTS

09:00 – 09:45 WELCOME REMARKS Mr. Ibrahima MBAYE, S.E. Mr. Abdulaye WADE, Mr. Angel GURRÍA, Mr. Ibrahim Assane MAYAKI 09:45 – 10:30

PRESS CONFERENCE / COFFEE BREAK

10:30 – 12:30

SESSION 1: Bridging the investment gap in infrastructure

10:30 – 11:30 PRESENTATIONS Mr. Karim WADE, Mr. Ralph A.OLAYE, Dr. Elham M. A. IBRAHIM, Mr. Bobby J. PITTMAN, Mr. Soumaïla CISSE, Mr. Mario PEZZINI, Mme. Gabrielle GAUTHEY, Mr. Kei YOSHIZAWA, Mrs. Evelyne TALL

11:30 – 12:30

OPEN DISCUSSION

12:30 – 14:00

LUNCH AND NETWORKING

14:00 – 15:45 SESSION 2: Mobilizing more and better investment in agriculture Mr. Laurent BOSSARD, Mrs. Rhoda PEACE TUMUSIIME 14:00 – 15:00 PRESENTATIONS Mr. Laurent SEDEGO, Mr. Karim DAHOU, Mr. Khadim GUEYE, Mr. Agathane AG ALASSANE, Mr. Laurent SEDEGO, Mme. Florence A. CHENOWETH

15:00 – 15:45

15:45 – 16:00

COFFEE BREAK

OPEN DISCUSSION

16:00 – 17:45 SESSION 3: Focus sessions The third session of the NEPAD-OECD Forum will be divided into parallel meetings. Session 3.1: Green investment for growth and job creation in Africa Ms. Bintou Djibo, Mrs. Joséphine OUEDRAOGO, Mme. Alexandra TRZECIAK-DUVAL, Mr. Thomas SPILLER, Mr. Raffaele DELLA CROCE, Mme. Debo SOW, Dr. Moustapha Kamal GUEYE Session 3.2: Leveraging Aid for Investment in Infrastructure Mrs. Aminata NIANE, Mr. Brian ATWOOD, Mr. Yves Robert, Mr. Emmanuel OLE NAIKO, Mr. Toru HOMMA, Mme. Kaori MIYAMOTO, Mme. Yolande DUHEM Session 3.3: Responsible Business Conduct Mr. Mamadou DIOP, Mr. Elimane H. KANE, Mrs. Sandrine HANNEDOUCHE-LERIC, Mr. Akwasi AIDOO, Mme. Marie GAD, Mr. Roberto SCHATAN

Fifth Annual Conference

After Brazzaville in 2006, Lusaka in 2007, Kampala in 2008 and Johannesburg in 2009, Dakar is honored and proud to host this important event that will H.E. Mr. Ibrahima Mbaye, be a crucible for fruitful Minister Counsellor for NEPAD exchanges on investment policies in Africa. I am delighted that leading political actors, private sector representatives, technical experts and development partners have made the trip to Dakar to partake in these discussions. This conference is devoted to mobilizing investment in infrastructure and agriculture. What a timely topic, in a context marked by: • the completion of NEPAD’s integration into the processes and procedures of the African Union, symbolized by the establishment of NEPAD’s Planning and Coordination Agency (NPCA); • the adoption of the revised African Action Plan (AAP) and the development of the African Infrastructure Development Program (PIDA), which both place infrastructure and agriculture at the heart of the concerns of our countries and order partnership between Africa and the G8, the G20 and the rest of the world;

18:00 – 19:00 MEETING OF THE NEPAD-OECD AFRICA INVESTMENT INITIATIVE STEERING GROUP

(For members of the Steering Group only; Co-Chairs Japan and South Africa) 20:00

GALA DINNER

Welcome address: speech by the Chair of the OECD Development Assistance Committee and presentation of the ‘Aid for Investment in Infrastructure’ project

DAY 2: WEDNESDAY 27 APRIL MINISTERIAL MEETING: ACCELERATING REFORMS IN AFRICA 10:00 – 13:00

Ministerial Roundtable Mr. Tsutomu HIMENO, Mr. Abdoulaye DIOP, Mr. Felix MUTATI, Mr. Aiuba CUERENEIA, Dr. Maxwell M. MKWEZALAMBA, Mr. Henri RAINCOURT, Mr. Nobuhito HOBO, Mr. Alhaji Bamanga TUKUR, Mr. Victor MENGOT, Hon. Jose NGOUONIMBA, Mr. Aurelien NTOUTOUME

10:00 – 11:30

PRESENTATIONS

11:30 – 13:00

OPEN DISCUSSION

Closure of the two-day conference 13:00 – 13:30

SUMMARY, NEXT STEPS AND CONCLUDING REMARKS

• the placement on the agendas of both the G8 and the G20 of two items. Firstly, the absolute need to evaluate the G8/Africa partnership since Kananaskis (Canada). Secondly, the establishment of the G20 Development Committee and the High-Level Panel on Infrastructure. This Dakar session comes at an opportune moment in international events. It is a prime opportunity for African and OECD countries to send a strong message to the decision-makers of this world within the G8 and G20. It is also an opportunity for us to share our experiences and best practices so as to improve our investment climate, and thus attract further foreign direct investment, that Africa so desperately? needs to close the infrastructure gap, and progress towards food self-sufficiency. The conference will be also an occasion for African countries that may wish, such as Burkina Faso, Egypt, Mozambique and others, to explore deeper partnership with the OECD through its NEPADOECD Africa Investment Initiative, to support them in the review and evaluation of their investment policies (overall framework, agricultural investment and infrastructure investment). Finally, allow me to welcome each of you to discover Senegal’s experiences in the field of infrastructure. We have arranged guided tours to the Port of Dakar, the new toll highway, the new Blaise Diagne airport under construction and other sites throughout the city. Welcome to Dakar and may this conference bring us all new insights!

Dakar Conference Magazine | Spring 2011 13

Infrastructure

Building from ground up All the players agree that Africa needs infrastructure investment for its growth and development goals. Yet, with only 13% of the allocated budget in Sub-Saharan Africa, infrastructure is still a budgetary orphan. What steps should be taken?

ridging Africa’s infrastructure gap is key to overcoming the continent’s development challenges. Road and rail systems make trade and investment possible; electricity facilitates mining, manufacturing and commercial activities; irrigation is critical for unlocking Africa’s agriculture potential; communication technologies can support product marketing and facilitate financial transactions; and access to clean water and sanitation helps to improve health and education services and prevent the spread of disease. On the other hand, inadequate infrastructure retards economic growth and impedes human development efforts. Africa needs $93 billion a year for its infrastructure sectors, with about twothirds required for new investment in physical infrastructure and a third for maintenance and operations. Currently, only $45 billion is being invested, leaving a funding gap of $48 billion a year. The implications of this gap are serious: two-thirds of African countries face power crises; only 31 metres per 100 square kilometres of roads are paved; and only 60% of the population has access to improved water sources. The situation is particularly severe in the power sector – disruptions in power supply, for example, cost the African economy between 1 and 2% of GDP annually. Significant investment and management reforms are required to address the situation (See chart on next page). African governments are currently the primary funders of infrastructure – both for physical projects and operations and maintenance of assets. However, public spending is not enough to bridge the gap. Private investors (domestic and foreign) can play an important role in providing funding, improving efficiency in utilities, and bringing their management expertise, technological know-how and broad range of experiences to bear on infrastructure services. But for these benefits to materialise, some major financial, institutional and regulatory obstacles to attracting and retaining successful private sector participation in infrastructure need to be addressed (See chart on next page). 14 Dakar Conference Magazine | Spring 2011

Connected and Committed Africa is the continent of the future. Its regional pockets of excellence have contributed to improved macro-economic HE Mr. Felix Mutati, Minister of management, better governance and Commerce, Trade and Industry accountability, more vibrant private sector as well as unrivalled sectoral investment opportunities, such as in agriculture. Zambia leads the way. A driver of regional integration through its membership in regional economic communities, Zambia is a central economic pillar in Southern Africa. It has enjoyed political stability for over 20 years and is committed to becoming a middle-income country. Zambia needs investment, foreign and domestic, to boost its upward trend even more. Having recognized this, the government has introduced a series of private sector reforms to strengthen its policy framework for investment and to enable private business to grow. Notable advances have been made in investment policy. The investment code has been updated, and economic zones and industrial parks have been established. The legal framework is being upgraded to global standards and the institutional landscape is strengthened with specialized agencies such as the Zambia Development Agency, and better cross-border trading. In terms of infrastructure, Zambia’s primary and secondary road networks are good and we have large power generation potential. Private sector feedback is crucial – hence the Government has installed a series of consultative mechanisms. Our policies for responsible business conduct have led to an expansion of civil society, a trend to spur further private-sector led growth. All of these steps have contributed to improved investment climate over recent years. In fact, Zambia has improved its global rankings: third in COMESA for doing business, starting a business and paying taxes, and sixth world-wide in access to credit. Zambia’s future relies on stronger implementation of the comprehensive reform package aimed to diversify the economy, improve its infrastructure, and capitalize on its tourism and agriculture investment opportunities. To investors: I invite you to Zambia and grow with us.

Infrastructure

Telecoms dominates investor interest Total investment commitments to infrastructure projects with private participation in sub-Saharan Africa, 1990-2008 Electricity Roads 7% Seaports 5%

Natural gas 3%

Railroads 7%

Telecoms 77%

Clearly, most private investment has been in the information and telecommunication sector, which received 87% of all investment commitments in 2008.

Recent developments

Public-Private Partnerships (PPPs) for infrastructure development in Africa have been growing in importance. While there is no standard definition of PPPs, they can be described generally as an agreement between the government and one or more private partners whereby the latter delivers the service in such a manner that the service delivery objectives of the government are aligned with the profit objectives of the private partners. For PPPs to be effective, there needs to be sufficient transfer of risk to the private partners. While not a new concept, PPPs have yet to be widespread across Africa. Public agencies need increased capacity to design, appraise and oversee PPP projects, and to develop the necessary legislation and policy framework to support private sector participation in infrastructure. PPP units have been cropping up around the continent, but more need to be established and more reforms taken if they are to

be truly effective in boosting infrastructure. Another interesting trend is the increasing role played by infrastructure investors from emerging markets. A number of companies from India, Malaysia, and South Africa are active investors and operators in infrastructure projects all over Africa, not to mention some African countries like Kenya and Namibia that offer advisory services for utilities. China has made significant financial commitments to African infrastructure projects – a record $7 billion in 2006 (See chart on next page). However, China has also taken a challenging approach, the ‘Angola model’, whereby recipient countries receive loans from Chinese banks and in return contract Chinese companies to construct new infrastructure while also extending to them rights to extract natural resources. While an innovative system for countries that could otherwise not afford to raise capital for projects, the Angola model could also fall short if there is insufficient capacity and resources for maintaining and operating the infrastructure once it has been built. India has also been playing an increasingly big role in Africa.

How NEPAD helps private financiers In light of an increase in the array, number and sophistication of risk mitigation instruments for infrastructure financing, the NEPADOECD Initiative has designed an Initiative for Risk Mitigation in Africa (IRMA) with Italy during its tenure as chair of the G8. IRMA, currently implemented by the African Development Bank (AfDB), mobilizes brokerage services to channel infrastructure investors towards the coverage instruments that are best suited to their needs – from credit guarantees and political risk insurance to new mechanisms covering the currency, regulatory and sub-sovereign risks.

Furthermore, the OECD has developed practical guidance for governments wishing to engage the private sector in developing their water infrastructure. This guidance, the Checklist for Public Action, has been applied to assess and reform the institutional and policy framework for investment in the water sector of a number of countries, including Russia, Egypt and Lebanon. Assessments of Tunisia and Mexico are expected to commence soon. The NEPAD-OECD Africa Investment Initiative will further use the Checklist for Public Action to support African countries in designing and delivering enabling environments for private sector participation in their water sectors.

Dakar Conference Magazine | Spring 2011 15

Infrastructure Transport at the top Infrastructure spending on addressing Sub-Saharan Africa’s infrastructure needs, US$ billion annual Operation and maintenance Infrastructure sector

Capital expenditure

Public Sector

ODA*

Non-OECD financiers

Private Sector

Total

Total spending

ICT

2.0

1.3

—

5.7

7.0

9.0

Power

2.0

2.4

0.7

1.1

0.5

4.6

11.6

Transport

7.8

4.5

1.8

1.1

8.4

16.2

Water/Sanitation

3.1

1.1

1.2

0.2

2.1

4.6

7.6

Irrigation

0.6

0.3

—

0.3

0.9

20.4

9.4

3.6

2.5

9.4

24.9

45.3

Total *ODA: Official Development Assistance

Source: Briceño-Garmendia, Smits and Foster 2008.

Policy challenges and opportunities

There are many challenges to developing Africa’s infrastructure. First of all, many infrastructure projects are very capital intensive, but domestic financial markets are not developed enough to be able to fund these projects. This obliges project sponsors to tap into international capital markets but there are a number of risks that arise, chief among them the exchange rate risk, whereby project funders service their debts in foreign currency but receive revenues for projects in local currency. Moreover, many African countries do not have attractive credit ratings, which hampers their ability to source international funding for their projects. However, a few countries have had success with innovative funding mechanisms that make use of domestic resources: municipal bonds, pension funds and infrastructure bonds and funds have all been used in South Africa, Kenya and Cape Verde among others. Moreover, syndicated loans – where a number of financial institutions pool loans for one project – have been increasing in recent years, from $138 million in 2000 to $1.18 billion in 2006 in 23 countries alone. There is therefore a lot of scope for raising funds for infrastructure through domestic resources. There are also institutional and regulatory challenges to infrastructure development. Many utilities in Africa are stateowned and tend to perform badly compared to other developing regions although there are big variations among countries. For example, the inefficient management of infrastructure results in annual losses of $17 billion due to uncollected bills, overstaffing, poor budget execution, and so on. It is common for tariffs to be set below cost-recovery or profit-making levels. Independent regulators are few and far between. 9% of all projects between 1990 and 2008 were cancelled or in distress and often contracts have to be renegotiated during the life of the project. These challenges highlight the need for better project management skills, independent and transparent regulatory bodies, and institutional reforms to make utilities more efficient. One way to measure the institutional reforms in infrastructure undertaken by African countries is the Institutional Scorecard comprised of three broad areas: reforms (sectoral legislation, restructuring enterprises, private sector participation); regulations (transparent and independent regulatory agencies

16 Dakar Conference Magazine | Spring 2011

Impact of the crisis Between 2002 and 2007, there was an increase in investment in infrastructure, largely because of the availability of project finance globally for infrastructure projects. African countries took advantage of this because international lenders had funds to spare to invest in projects that might otherwise have been deemed too risky. However, with the onset of the financial crisis, investment commitments to infrastructure projects decreased and capital dried up. In 2008, commitments for African infrastructure decreased from $37.3 billion in 2007 to $36.5 billion. As foreign banks’ risk appetites diminished, so did inter-bank lending and access to international capital for African banks. Even when funding is available, the terms for loans have become stricter, with higher interest rates a common feature. However, Africa has not been as badly affected as Europe and Central Asia. Also, some multi-lateral donors have increased their aid and loan contributions for African infrastructure in response to the financial crisis. For example, the European Commission doubled its contribution to the EU-Africa Infrastructure Trust Fund as a direct response to the crisis, while the African Development Bank made efforts to release funds more quickly to eligible countries’ infrastructure projects.

Infrastructure

As the chart illustrates, most African countries have made barely half the progress they need to in these three areas. However, there are important sectoral variations to these reforms and there is often a correlation between institutional quality for infrastructure and general governance quality in a country, so these country variations must also be taken into account. As for opportunities, renewable energy has a lot of potential, especially given the abundance of solar, hydro, geothermal and wind resources all over the continent. However, there has been little investment in renewable energy for a number of financial and regulatory reasons.

China believes in Africa Chinese infrastructure commitments in sub-Saharan Africa, 2001-2007 8 7 6 5 $ billions

and tools), and governance (internal management within infrastructure enterprises such as shareholder relations).

4 3 2 1 0 2001

But in the context of climate change and energy poverty, especially in rural areas, and the increasingly undesirable effects of oil and coal, renewable energy can be an important way to address Africa’s energy crisis in a sustainable way.

The recent creation of the Programme for Infrastructure Development in Africa (PIDA), which merges all continental initiatives on infrastructure and is led by the AU Commission, the NEPAD Secretariat and the African Development Bank, is a good example of how harmonisation can happen. ●

2003

2004

2005

2006

2007

Source: UNCTAD Africa Report 2009, adapted from Foster et al. 2008.

Reforms still needed Institutional progress across sectorst 70% % Score on institutional scorecard

Moreover, regional infrastructure such as transport corridors and power pools hold a lot of promise for regional integration and increased access to utilities, due to economies of scale, but various states need to harmonise their regulatory standards and pull their resources together if such projects are to be realised.

2002

60% 50% 40% 30% 20% 10% 0%

Telecoms

Electricity Governance

Water Regulation

Ports

Railways

Reforms

Source: AICD 2009

Stretch of road together Five East African countries understood that closer cooperation on transportation infrastructure projects would enhance competitiveness, trade and investment. The projects include roadways for now, but may go intermodal in the future. The establishment of the East African Community (EAC) in July 2000 by Burundi, Kenya, Rwanda, Tanzania and Uganda was the first step in a path of closer coordination and cooperation. Rather than espouse the tunnel vision that hampered the development of many similarly linked economies, these five nations understood that depoliticizing the development of regional infrastructure was key to overall economic gains. The first transport project undertaken by the EAC was the 235kilometer road linking Nairobi to Arusha (Kenya to Tanzania). Financed by the African Development Bank and the Japanese Bank for International Cooperation, the planning for this project went so smoothly that two further road projects are underway. The 240-kilometer stretch from Arusha to Voi will open a new road link to the Kenyan port of Mombasa. A 400-kilometer coastal segment between Kenya and Tanzania (Malindi to Bagamoyo) will help develop tourist potential and inter-harbour freight traffic.

among road projects: there is no lack of budgetary demands, but there is not yet a sustainable financing source at hand. To address this concern, the EAC is preparing a multimodal transport strategy, and a road sector development program. Another concern is to harmonize various transport parameters, including truck axle loads, road construction and safety standards. In its mid-term vision, the EAC aims to establish an East African Transport Authority to coordinate road and rail transport, with an eye on helping its three land-locked members better and more efficient access to sea ports. This authority would also help expedite lengthy procurement procedures by exploiting technical centers of excellence. Further information at: www.nepad.org then use the keyword search “infrastructure” www.afdb.org then search for “PIDA infrastructure”

Among its challenges for the future, the EAC needs to set priorities

Dakar Conference Magazine | Spring 2011 17

Taxation

Transparency in the context of tax and development Transparency and taxation: a broad view on exchange of information, capacity building in tax administration and the role of civil society.

ransparency is considered crucial in a number of contexts relevant to the mobilization of domestic resources in developing countries. Taxes are a key component of domestic resources available to governments to finance their development efforts; they are also a fundamental determinant of a country’s business climate and thus in the promotion of investment and economic growth. Transparency is pertinent to how countries collaborate with each other on international taxation issues, to how tax authorities manage their relationship with their taxpayers and to how government relates to civil society. International initiatives to improve transparency on each of these levels of activity are now being discussed or implemented.

The Global Forum on Transparency and Exchange of Information for Tax Purposes

The unprecedented liberalization of national economies and progress in information and telecommunication technologies has made cross border investment and business easier and more accessible to a wider spectrum of the population. In contrast, tax administrations are not free to carry out their functions beyond national borders. As a result, the proper exercise of fiscal sovereignty depends upon international cooperation. The OECD has actively promoted improvements in transparency and effective exchange of information between countries as a means for tax authorities to more effectively administer their tax systems in the increasingly borderless world in which business operates. Exchange of information among countries helps countries to fight tax evasion by their higher income earners. To the extent that these taxpayers can elude their tax obligations by diverting their income to jurisdictions that do not cooperate with exchange information, a fundamental source of domestic resource mobilization will be compromised, especially in less developed countries where the tax base may be considerably more concentrated in a narrow segment of the population.

18 Dakar Conference Magazine | Spring 2011

Transparency under ground How is the joint initiative involving governments, industry and civil society organizations progessively pushing a new voluntary standard for mining and natural resource exploitation? The Extractive Industry Transparency Initiative (EITI) has pioneered the effort to design a voluntary standard of transparency; this is a joint initiative by governments, multinational corporations and civil society organizations, whereby all payments to governments from companies in the extractive industry and all government receipts from them are made public, compared and validated by an independent expert. The EITI has developed quite significantly in the last few years: at the beginning of 2011 there were more than 30 countries participating in the process and 11 of them were considered fully compliant with the transparency requirement of the initiative. However, the campaign for transparency in financial reporting is broader than the EITI and nongovernmental organizations; multilateral institutions and governments have been increasingly involved as well. In 2007 the EU Parliament voted for a resolution requesting the International Accounting Standards Board (IASB) to develop a new international accounting standard with country by country reporting for the extractive industries; in 2008 the UNCTAD ‘Guidance on Corporate Responsibility Indicators in Annual Report’ mentioned that MNEs revenues should be broken down by country. Also, in June 2009 the UK Treasury announced its support for country by country reporting. More recently, in 2010, the World Bank indicated its support for country by country reporting for the extractive sector and suggested that such reporting standard could be expanded to other sectors. Most significantly, in July 2010 the U.S. Congress approved the Dodd Frank Act that makes it an obligation for resource extraction enterprises to include in an annual report to the SEC any payments made to governments, identifying the country of the government

Recent transparency initiative developments 2008 2007

on cou

EU Parliament endorsed a resolution requesting the International Accounting Standards Board (IASB) to develop a new international accounting standard with country by country reporting for the extractive industries

UK Treas announc support f country b country r

UNCTAD “Guidance on Corporate Responsibility Indicators in Annual Report” mentions that MNEs revenues should be broken down by country

June 20

on bility Report”

broken

Taxation

Tackling aggressive tax planning through improved transparency

Unprecedented progress has been made in countering offshore tax evasion, as all financial centers have agreed in the context of the Global Forum to provide bank and other relevant information on request. However, aggressive tax planning encompasses a much larger set of strategies than offshore tax evasion.

The Global Forum on Transparency and Exchange of Information for Tax Purposes (“Global Forum”), with more than 100 members, is today the largest international organization dealing with tax transparency. The Global Forum brings together jurisdictions that have committed to ensure that they put in place mechanisms that provide effective international co-operation in tax matters, which includes addressing domestic issues such as access to beneficial ownership information, access to banking information and ensuring that relevant financial and accounting records are maintained. The Global Forum promotes a consistent implementation of standards of transparency and exchange of information through comprehensive and phased peer reviews. This effort in international transparency, although many years in the making, has been brought to the intentional spotlight due to the recent global financial crisis. The G 20 Leaders’ Statement in Toronto in June 2010 firmly endorsed it: “We fully support the work of the Global Forum… and welcomed progress on their peer review process. We encourage the Global Forum to report to Leaders by November 2011 on progress countries have made in addressing the legal framework required to achieve an effective exchange of information.” Hundreds of bilateral exchange of information agreements have already been signed, domestic laws have been changed to meet transparency requirements (e.g elimination of bearer shares) and as a result a more transparent environment is emerging. In addition, the multilateral Convention on Mutual Administrative Assistance in Tax Matters (“Convention”) has been amended to open it up to all countries, thereby obviating the need for individual bilateral treaties or agreements. This is another very important step to put the instruments of international transparency at the disposal of developing countries in order to strengthen their capacity to protect their tax base.

OECD countries have developed a number of strategies to deal with aggressive tax planning by ensuring the availability of timely, targeted and comprehensive information from taxpayers. To improve information flows, several countries have put into place measures that either require or provide incentives for taxpayers to disclose instances of tax risk. Early mandatory disclosure rules for tax avoidance transactions or tax shelters allow tax authorities to have relevant information on a timely basis, which permits a quicker dispute resolution and improved legal certainty, but also holds the potential for better allocation of resources in tax enforcement. These transparency initiatives are relatively recent, but countries’ experiences have been positive overall. It has been shown that enhanced transparency in the relationship between taxpayers and tax authorities leads to an environment of increased collaborative compliance, which proves to be more efficient for both parties. Developing countries could benefit by adopting similar approaches.

Public disclosure of information

Greater disclosure of information to governments, be it directly by taxpayers or by other governmentspursuant to exchange of information agreements, is essential to enhance countries capacity to mobilize domestic resources. However, another aspect of the debate on transparency relates, first, to how governments collect and spend their revenues and, second, how MNEs comply with their tax obligations. a) Government transparency Ensuring an effective use of public resources is at the center of the social contract between the state and its citizens. In practice, governments can use public resources to benefit sectors of the population either by exempting them from taxation or by a direct expenditure program. The former option of public policy has received special attention in the context of tax and development.

on country by country reporting June 2009

2010

July 2010

2010

UK Treasury announced its support for country by country reporting

World Bank indicated its support for country by country reporting for the extractive sector and suggested that such reporting standards could be expanded to other sectors

U.S. Congress approved the Dodd Frank Act, which makes it an obligation for resource extraction enterprises to include in an annual report to the Securities and Exchange Commission (SEC) any payments made to governments, identifying the country of the government

IASB finished a consultation in order to evaluate whether it should go ahead with the development of a new International Financial Reporting Standard for the oil, gas and mining industries

European Commission carried out in 2010 its own consultations on country by country reporting in the extractive industry sector and expects to publish an impact report in the second half of 2011

Dakar Conference Magazine | Spring 2011 19

Taxation Such a targeted exemption is called a tax expenditure. A fundamental difference between a tax expenditure and a formal budgetary expenditure is that the former is not equally transparent. Each budget expenditure is debated and approved by a legislature, with an identifiable amount associated to it, as well as the purpose of the expenditure. It can be tracked. By contrast, a tax expenditure is harder to track.

propose that corporations disaggregate their global consolidated accounts on a country by country basis, making public the amount of income earned and the amount of taxes paid in each jurisdiction. In their view, such country by country reporting would assist in holding governments to account but also, and quite crucially, it would assist in holding MNEs to account with regard to their tax obligations.

Many tax expenditures are known and allow certain relief to particular groups of taxpayers, such as small businesses and retirees. However, tax expenditures are somewhat opaque by design, and often the cost in forgone tax collections is not estimated, or is very uncertain. Thus, where fiscal policy is managed through tax expenditures, it is harder to hold governments to account for the use of public funds (in this case foregone revenues).

This proposal has been part of the discussions on good corporate citizenship and social responsibility of enterprises and civil society organizations have been successful in putting this topic on the international agenda, particularly in the context of the extractive industry sector (see box on previous page). The Extractive Industry Transparency Initiative (EITI) has pioneered the effort to design a voluntary standard of transparency. This is a joint initiative by governments, multinational corporations and civil society organizations, whereby all payments to governments from companies in the extractive industry and all government receipts from them are made public, compared and validated by an independent expert.

Furthermore, inefficient government programs can be more easily perpetuated if delivered via tax expenditures because of the lack of transparency of these expenditures. Government transparency with regards to tax expenditures is thus considered an important element of good governance.

ÂŠ EITI

b)â&#x20AC;&#x201A; Transparency in financial reporting by MNEs A number of civil society organizations have argued that MNEs should modify how they release their financial data: they

The OECD, in the framework of its recently launched Tax and Development programme, is also examining the appropriate scope of such disclosure. The consideration of this issue is aided by the multi-stakeholder Task Force on Tax and Development.

OECD Deputy Secretary General Richard Boucher speaking at Extractive Industries Transparency Initiative meeting on 2 March 2011

20 Dakar Conference Magazine | Spring 2011

Taxation

Issues for further discussion Two principal areas Linkages between Transparency and Compliance

Evaluation of Mechanisms to Promote Transparency

● How costly for LDCs to obtain information?

● What instruments can deliver greater transparency?

● How costly for MNEs to provide information?

● Legally mandated disclosure

● Confidentiality and compliance

● Voluntary disclosure of local statutory accounts

● Beyond extractive what other industries?

OECD’s Task Force on Tax and Development

The OECD’s Committee on Fiscal Affairs and the Development Assistance Committee set up an informal Task Force on Tax and Development in January 2010 to provide a platform for a tax and development programme aimed at providing an integrated approach towards the role taxation plays in building capacity for developing, to achieve sustainable growth, tackle poverty, combat corruption, attract direct investment and develop transparent financial systems. The Task Force, in its advisory capacity to the OECD, brings together key stakeholders, including OECD and developing countries, business, non-governmental organizations (NGOs), international organizations, academics and tax experts, with a view to work to produce an enabling environment for developing countries to collect adequate tax revenues and to build effective state institutions. To work towards this outcome the Task Force is focussing on two strategic areas: i) state building and ii) improving capacity to address international tax challenges. The Task Force identified three key issues in this second area: i) capacity to operate transfer pricing regimes and to implement the arm’s length standard so that developing countries can improve their ability to properly tax MNEs; ii) capacity to take advantage of the international instruments on exchange of information; iii) transparency with which MNEs report their financial data. The issue of transparency, specifically, country by country reporting by MNEs, was selected to be studied to see if it in fact can be relevant to the ability of developing countries to protect their tax base, to the extent that it could serve to improve accountability of both international businesses and governments. Since there is currently no international consensus on the pros and cons of country by country reporting by multinational enterprises of their financial information, including taxes, the Task Force provides a neutral space for dialogue and analysis relevant to all interested parties of the issues at stake.

Some key issues in the transparency debate

Currently, international accounting standards do not require listed multinational enterprises to disclose their financial data on a

country by country basis. MNEs’ annual reports typically register their financial information on a worldwide aggregated basis. Civil society organizations believe that transparency in financial reporting can be an effective tool to combat corruption and to protect the tax base in less developed countries. However, this opinion is not necessarily shared by others. Country by country reporting, the latter argue, could be misleading in that data will reflect a combination of multiple factors, including national tax policies, tax exemptions and, possibly, tax avoidance by some firms, without an objective base to distinguish the effects of each of these factors. Proponents of country by country reporting argue further that tax minimisation techniques, even if legal, may well not be ethical. Corporate social responsibility should be guided by a higher standard and public disclosure of information would help achieve this and indicate which aspects of the law may need to be strengthened or amended. Others suggest that the wish to hold taxpayers to account to standards other than their legal obligations puts in doubt the fundamental concept of the rule of law. Intuitively the concepts of transparency and integrity in tax administration and corporate tax compliance appear connected, but the possible linkages and interactions between them are complex. Alternative forms of disclosure exist; for example, voluntary versus compulsory disclosure of information, general versus specific business sectors, the EITI collaborative approach versus the more uniform obligation under the US Dodd Frank Act. In some countries it is a legal obligation for privately held companies to disclose their statutory accounts. Potentially, developing countries could promote more corporate transparency by their own means. The cost of implementing these practices in less developed countries could be assessed, as well as the financial and technical assistance that would be required to enable them to put efficient registry systems in place. Another approach that has been suggested to country by country disclosure of financial data is to explore the possibility of MNEs voluntarily disclosing on their websites the statutory accounts of all their (non-listed) subsidiaries. This may be effective in providing a large amount of financial information on a country by country basis, as part of an active responsible business agenda. The question of how public country-by-country financial information on MNEs could directly help tax authorities do their enforcement work in less developed countries is also relevant as is the issue of compliance burdens on business. Clearly, further research is needed on the linkages between transparency and tax compliance and integrity to inform possible policy decisions However, there is little doubt that transparency will be a key element to guide the discussion during the next decade on how governments, businesses and citizens can work together in the area of taxation to produce an environment that will induce better governance and also assists in the mobilization of domestic resources in developing countries. ● For further information please contact Roberto Schatan OECD/CTPA: roberto.schatan@oecd.org

Dakar Conference Magazine | Spring 2011 21

Country focus

Intent on growth Tunisia expects to stay its course in terms of economic and social progress, despite the recent change in its political governance.

ince its strategic macro-economic reforms started in the 1980s, Tunisia has results to boast of. GDP has grown annually at rates above 5% since 1999. Inflation has been stable at 3%. The ratio of national debt-to-GDP has dropped nine points. Currency reserves more than doubled to five months of imports. Tunisia is now firmly established as a middle-income African state, with average per-capita GDP of $3,600 in 2009. What’s more, Tunisia has managed this feat without relying on natural resources. Its economy has an enviable diversity, with almost 43% coming from services and almost 35% from industrial production (manufacturing and other). (see chart). Social progress has accompanied the economic locomotive. Healthcare in Tunisia is not to be sneezed at, with 95.5% of the population having access to health services. Health accounts for a respectable 8.6% of the national budget. Over the past thirty years, life expectancy has jumped from 68 to 74 years in 2008. Education is no exception, with 99% of children aged six attending school. The education budget represents a full 22% of national budget, almost double the level of France (11.4%)! For its sustained economic growth, Tunisia has focused its strategy on four key industrial segments: • Aeronautics and automotive, • ICT, offshoring and outsourcing, • Textiles, leather and shoes, and • Food processing. In addition, the country knows that it benefits from geo-strategic location at the heart of the Mediterranean basin. A key Tunisian advantage is in capturing higher-value, last-minute industrial orders, that often cannot be shipped from the Far East in due time. Formulating policies was just the first step; then Tunisia delivered on its intentions. The country has established more than 120 industrial zones and 10 techno-parks, and is busy promoting export-promotion industries by offering tax advantages. Although the country is weak on natural resources, it has a strong human resource profile, with well-educated young workforce. Financial resources are also improving, with the banking sector having weathered the 2008 financial crisis in relatively good condition. Weak on natural resources? Tunisia is counting on its sunshine for two purposes. The country is capitalizing on tourism, with 6.5% 22 Dakar Conference Magazine | Spring 2011

Open for business As director of Tunisia’s ‘Invest In Agency’, I spend my days convincing foreign investors to choose Tunisia for their investments. These are people who want stability to insure the returns on their investments. So the recent months, when the jasmine revolution swept old power from Tunisia, have been difficult for us. I now breathe more easily. Although some foreign and local firms were affected during the early days of the revolution, many companies were protected by their own workers and pursued their normal activities. The vast majority of the 3,135 foreign companies that operate here have resumed their normal rhythm. Business as usual – daily operations, new investments or new business creations – is back despite the current political transitional phase. ‘Tis true, the euphoria that blew across the country resulted in a surge of social claims, but foreign investors were not specifically targeted. In general, an effective dialogue between social partners was established and the voice of reason was heard. This new era of more open communication should be productive in the long-term. Most observers agree, the future of Tunisia will improve. Our reinforced democratic process will help the integration of Tunisia into the global economy. We are comforted by the support announced by the World Bank, African Development Bank and the European Union, that upheld its commitment to accelerate granting Tunisia the advanced status. Finally, in the name of my agency, I would like to thank the dozens of foreign investors who expressed their concern and support during our jasmine revolution.

Noureddine Zekri, Director, FIPA Tunisia. For further information: www.investintunisia.tn of GDP coming from visitors, and about 400,000 jobs linked to the sector. In 2010, tourism revenues did drop from Euros 1.3 to 1.1 billion – and the drop in 2011 will be worse because of the unrest – but the country recently hired a consultancy to analyze how to improve its catch of tourists. The Tunisian sun will also provide energy, namely via the Desertec project that aims to build several highly innovative solar power plants in the Sahara Desert. After the recent jasmine revolution (see box), the sun seems to be rising on a new day for Tunisia. ● For further information, please contact Said Kechida at the OECD, said.kechida@oecd.org For further information: “Experiences in national economic diversification in Africa”, OECD, 2010

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