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On Wednesday 28 June we were joined by three speakers to discuss the state of the media, land matters and the economy, ahead of the August 8th election.

Kwame Owino is chief executive officer of the Institute of Economic Affairs (Kenya).

Ambreena Manji is Professor of Land Law and Development at Cardiff University and former director of the British Institute in East Africa. She is the author of ARI Counterpoint ‘Whose land is it anyway: The failure of land law in Kenya‘

Denis Galava is a former Managing Editor of the Nation Media Group.

The event marked the launch of “How Kenya is failing to create decent jobs” by Kwame Owino, Ivory Ndekei and Noah Wamalwa”.

The interview with Denis Galava featured in the event is separately available here as well.

Podcast

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Less than two decades after it was granted debt relief, the Government of Mozambique again finds itself unable to honour obligations to international creditors. Pending the publication of an audit of US$2 billion of borrowing by Mozambican companies afforded questionable sovereign guarantees, Africa Research Institute and Zitamar News convened a webinar with four expert panellists: Roberto Tibana, principal consultant at Analitica-RJT; Anne Frühauf, senior vice president with Teneo Intelligence; Tariq Hamoodi, partner at Bybrook Capital; and Dr Joseph Hanlon, visiting senior fellow at the London School of Economics.

This Briefing Note sets out the known details of the controversial loans to Mozambican companies and their ramifications for the government, the banking sector and international financial institutions. It then summarises panellists’ perspectives on the debt, and how Mozambique and its creditors might extricate themselves from the crisis.  

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• Fishy business
• Loan sharks
• Mayday! Mayday! Mayday!
• Navigating choppy waters
• Getting off the hook?

Fishy business

Between February 2013 and May 2014, three Mozambican companies contracted Middle Eastern shipbuilding group Privinvest and other suppliers to provide a tuna fishing fleet and maritime security. The project eventually involved borrowing US$2 billion, roughly equivalent to a third of the national budget. This sum exceeded the total amount of external debt raised directly by the government between 2010 and 2012, and breached commitments made to the International Monetary Fund (IMF) in July 2013.[i]

At the time, President Armando Guebuza was preparing to depart from office and intent on ensuring that his chosen successor secured a victory for Frente de Libertação de Moçambique (Frelimo) in the October 2014 general elections. The Guebuza family is said to have initiated the discussions with Privinvest through connections to the holding company’s co-founder and director, Iskandar Safa.[ii] The national security services, Serviço de Informação e Segurança do Estado (SISE), which report directly to the president, were tasked with establishing three companies: Empresa Moçambicana de Atum (Ematum), ProIndicus and Mozambique Asset Management (MAM). A SISE officer, António Carlos do Rosário, was appointed CEO of all three corporations.[iii]
[quote]Fishing boats were not the only item on an undisclosed shopping list; Rosário later admitted that the tuna concept had been a pretext for defence expenditure[/quote]
During September 2013, the London offices of investment banks Credit Suisse and VTB Capital arranged US$850 million in “loan participation notes”, akin to an unlisted bond, for Ematum.[iv] According to a three-page prospectus, this was intended to fund a tuna fishing fleet capable of landing 20,000 tonnes of tuna per annum.[v] Only a year earlier, a South African company, Oceanfresh, had been granted exclusive rights to fish tuna off the Mozambican coast, with a quota of 12,000 tonnes per annum.[vi] Fishing boats were not the only item on an undisclosed shopping list; Rosário later admitted that the tuna concept had been a pretext for defence expenditure.[vii]

Despite having not built a fishing vessel since the 1980s, Privinvest shipbuilder Constructions Mécaniques de Normandie (CMN) was contracted to supply 24 trawlers, in addition to three patrollers and three interceptors (each designed to be armed with a 20mm cannon and 12.7mm machine gun).[viii] The company had unveiled designs for a new 23.5-metre trawler, alongside plans for a new 43-metre trimaran patroller, only six months earlier. Mock-ups of the 32-metre high-speed interceptors were disclosed on the day the deal was announced.[ix] Guebuza and Safa visited the CMN shipyard on 30 September 2013. Within a month, Ematum had transferred US$836.3 million directly to Abu Dhabi Mar, CMN’s holding company, which is part-owned by Privinvest. The balance of the money raised by Credit Suisse and VTB – US$13.7 million – was spent on banking and transaction fees. Ematum itself was left with no working capital for its operating costs or funds for future debt repayments.[x]

Loan sharks
[quote]The lending package was signed in June 2013, but not disclosed to investors who purchased the Ematum debt just months later. Credit Suisse reportedly purchased insurance against the risk of Mozambique defaulting at Lloyd’s of London[/quote]
Concurrently, Credit Suisse and VTB Capital arranged further loans totalling US$1.16 billion for ProIndicus and MAM, apparently disregarding the considerable implications for investors in the Ematum debt. Credit Suisse raised US$622 million for ProIndicus, a corporation established to provide security for firms involved in offshore gas exploration and shipping in Mozambican waters, despite an absence of demand for these services.[xi] This followed a feasibility study undertaken by the bank in February 2013, initially assuming a US$372 million loan.[xii] The lending package was signed in June 2013, but not disclosed to investors who purchased the Ematum debt just months later. Credit Suisse reportedly purchased insurance against the risk of Mozambique defaulting at Lloyd’s of London.[xiii]

Within months of the loans to Ematum and ProIndicus, VTB Capital privately arranged US$535 million of borrowing for MAM.[xiv] This entity was hastily incorporated in April 2014, ostensibly to provide services to ProIndicus and others.[xv] In May 2014, MAM contracted Privinvest to build two shipyards (in Maputo and Pemba), where it would could construct, under license, Privinvest security vessels. The deal included the provision of spare parts and maintenance for the fleet, and the establishment of a naval training school.[xvi] VTB Capital charged an up-front arrangement fee of US$35 million, equivalent to 7% of the amount raised.[xvii] The co-arranger of the deal was Palomar Capital Advisors, a subsidiary of Privinvest led by Andrew Pearse, who had worked on the fundraising for ProIndicus while at Credit Suisse.[xviii]

In each instance, Manuel Chang, Mozambique’s then finance minister, signed paperwork confirming that the government would guarantee the debts. A parliamentary inquiry later found Chang acted in contravention of Article 179 of the Mozambique Constitution, which requires that the legislature be consulted on sovereign guarantees.[xix] The sums borrowed also exceeded the limit set by the legislature for that year, thus violating the budget laws.[xx] A further irregularity was that the contracts exist only in English, while Mozambican law requires such documentation to be translated into Portuguese and authenticated.[xxi]
[quote]The Office of the Attorney General subsequently characterised the granting of unauthorised sovereign guarantees as a “criminal offence” in the form of “abuse of office”[/quote]
The Office of the Attorney General subsequently characterised the granting of unauthorised sovereign guarantees as a “criminal offence” in the form of “abuse of office”.[xxii] Irregularities surrounding the guarantees may explain why neither the Government of Mozambique, nor the banks arranging the loans, took steps to inform the IMF and World Bank, despite a clause in the loan agreements which stipulated that the guarantor would comply with its obligations to those bodies.[xxiii]

President Nyusi, who took office in January 2015, sought to rectify remaining irregularities. The Government of Mozambique formally assumed responsibility for US$500 million of the US$850 million Ematum debt, including it in the defence budget for that year, and obtaining retrospective parliamentary endorsement for the borrowing. Mozambique honoured the first scheduled repayment, despite a budget shortfall amid declining commodity prices, substantial currency depreciation and delays to the development of liquid natural gas (LNG) reserves. Officially, at this juncture, Mozambique’s external debt stood at some US$6 billion, exceeding the sum at which the country had been granted debt relief under the Heavily Indebted Poor Countries Programme in 2001.

Mayday! Mayday! Mayday!

In March 2016, struggling to meet its obligations, the government was forced to restructure the balance of the Ematum debt. Mozambique asked international investors to exchange US$697 million in Ematum notes for new sovereign bonds with a later repayment date.[xxiv] To assuage its creditors, the government offered a higher interest rate and other incentives, thus increasing its total obligation to US$726.5 million.[xxv] Credit Suisse and VTB Capital arranged the restructuring; however, negotiations with bondholders were rushed. Charles Blitzer, a former IMF assistant director advising investors, asserts that the process failed to comply with recognised principles for fair debt restructuring.[xxvi]
[quote]Only after investors had accepted the restructuring terms did details emerge of the US$622 million loan raised for ProIndicus[/quote]
Only after investors had accepted the restructuring terms did details emerge of the US$622 million loan raised for ProIndicus.[xxvii] The UK Financial Conduct Authority has initiated an inquiry into whether Credit Suisse violated regulations by failing to disclose the existence of the ProIndicus debt to Ematum creditors during the restructuring.[xxviii] The bank’s hand was forced when, on 15 March 2016, Standard and Poor’s downgraded Mozambique’s credit rating, which entitled investors in ProIndicus to exercise their right to immediate repayment.[xxix] This situation prompted Credit Suisse to reveal the US$622 million in additional borrowing.[xxx] The Government of Mozambique then disclosed that a further US$535 million had been borrowed by MAM.

Alarmed by the fiscal mismanagement and fearing a vast corruption scandal, the IMF halted its programme in Mozambique, including payment of the second instalment of a US$283 million loan from its Standby Credit Facility.[xxxi] The World Bank also suspended disbursements, while bilateral donors terminated general budget support. The metical, the national currency, depreciated sharply, losing 40% of its value in two months.[xxxii]

Despite the sovereign guarantee, MAM missed its first payment of US$178 million due on 23 May 2016. In October 2016, the government conceded that it did not have sufficient capital to service any of the three loans, including the restructured Ematum debt. On 18 January 2017, Mozambique missed the first US$60 million coupon payment on its sovereign bond.[xxxiii]

Navigating choppy waters

The government and its creditors are at an reached an impasse. Mozambique wishes to restructure the three debts; however, holders of the sovereign bond have refused to negotiate until an independent audit has been completed, and the IMF resumes its programme.[xxxiv] Webinar panellists acknowledged the challenges faced by Kroll, the firm appointed to audit the accounts of Ematum, ProIndicus and MAM, especially as substantial sums appear to have been transferred directly to Privinvest and associated entities.[xxxv] It is unlikely that Mozambicans will ever know precisely how the money borrowed was spent, or what assets remain unaccounted for, given the veil of secrecy surrounding the transactions.
[quote]It is unlikely that Mozambicans will ever know precisely how the money borrowed was spent, or what assets remain unaccounted for, given the veil of secrecy surrounding the transactions[/quote]
ProIndicus is due to make a capital repayment of US$119 million on 21 March 2017, but is not expected to pay. As the loan was reportedly syndicated by Credit Suisse to numerous Mozambican banks, the country’s financial sector could be severely tested if the government defaults on its obligations as guarantor.[xxxvi] Local bondholders include Millennium BIM and Moza Banco (which is already in administration).[xxxvii] A related risk is that the capital raised by ProIndicus was used as collateral for commercial loans, or for down-payments on contracts for military equipment, thus increasing the risk of yet more undisclosed debt.[xxxviii] When addressing the parliamentary inquiry in late 2016, do Rosário spoke of an entire maritime protection system (Sistema Integrado de Monitoria e de Protecção) supported by 16 radars, 6 patrol aircraft, drones and satellite imagery.[xxxix]

Anne Frühauf, senior vice president at Teneo Intelligence, who advises investors in Mozambique, anticipates a “significant restructuring deal” during 2017. She questions how such a negotiation cannot result in a “haircut” for creditors, despite some having already participated in one restructuring. With the government’s repayment capacity practically non-existent, Frühauf anticipates discussion regarding the possibility of postponing debt repayments until the 2020s – the point at which revenue from vast offshore gasfields should become available, assuming final investment decisions on LNG extraction are taken soon. A major challenge is that holders of the original Ematum debt, which has since been repackaged as a sovereign bond, will resent being treated identically to holders of ProIndicus and MAM debt: in 2016, Ematum bondholders agreed to a longer amortisation period in return for a higher coupon rate. Having been restructured into a bullet payment, the annual interest burden related to the sovereign bond is already much lower than the debt-servicing costs associated with ProIndicus and MAM.
[quote]Frelimo, is reluctant to acknowledge that the guarantees were issued illegally. The Nyusi government would rather assume the liabilities inherited from the Guebuza administration than risk the political fall-out[/quote]
Tariq Hamoodi, a partner at Bybrook Capital in London, anticipates Mozambique honouring its obligations – eventually. Panellists noted that the ruling party, Frelimo, is reluctant to acknowledge that the guarantees were issued illegally. The Nyusi government would rather assume the liabilities inherited from the Guebuza administration than risk the political fall-out. Hamoodi points to the recent restructuring of the Ematum bond as having precluded any admission of wrongdoing. He views all three debts as equally binding and regards any calls for differential treatment as unrealistic. Hamoodi anticipates the three being bundled into a single loan, despite sovereign bondholders holding out for a better deal. One way to alleviate the haircut on international investors might involve Mozambique issuing gas warrants, granting creditors a certain share of future revenues from Empresa Nacional de Hidrocarbonetos (ENH), the state oil and gas company.

Getting off the hook?

Dr Joseph Hanlon, visiting senior fellow at the London School of Economics, pointed out there is an argument against bundling the three loans. ProIndicus and MAM debts were issued by Credit Suisse and VTB Capital as syndicated loans, thus establishing a fiduciary duty on behalf of the banks. By contrast, the Ematum debt is now packaged as a sovereign bond. All three debts were issued in London under contracts governed by English law. Hanlon believes that a legal process in the UK could prove advantageous for Mozambique. He notes that, historically, governments that default on their debts do better than those which attempt to pay from a position of debt distress.
[quote]Hanlon believes that Credit Suisse and VTB misled investors by claiming that the debts were repayable when this manifestly was not the case[/quote]
Hanlon contends that Credit Suisse and VTB face widespread criticism for their failure to either undertake sufficient investigations, or to report their findings to investors. Competent due diligence should have brought to light three facts. First, that in the absence of parliamentary approval, the sovereign guarantees were unconstitutional and illegal. Second, that the Credit Suisse feasibility study was “totally ridiculous”, and founded on assumptions that Mozambique could sell its tuna for three times as much as the Seychelles. Third, that collectively the three loans would make Mozambique’s debt burden unsustainable. Hanlon believes that Credit Suisse and VTB misled investors by claiming that the debts were repayable when this manifestly was not the case.

Hanlon argues that Mozambique should repudiate the “secret” and “illegal” debts issued to ProIndicus and MAM. It would then fall to a bondholder or one of the banks to appeal to the UK courts. The banks might prefer to proceed to arbitration, since the process is private. Hanlon believes that “Credit Suisse do not want to go into open court”, where they would be asked to present due diligence reports. While details of any settlement reached through arbitration would be public, documentation would not need to be disclosed.
[quote]Hanlon believes that a government refusal to honour its sovereign guarantees would be accepted, and possibly even welcomed, by the international financial institutions and donors[/quote]
As for Ematum, Hanlon concedes that the repackaging of the debt as a sovereign bond complicates further negotiations with creditors. In practice, the government has accepted, however reluctantly, its obligation as a guarantor. That distinction aside, he believes that “the original notes were sold on the same false prospectus”, which – unwittingly or intentionally – misled investors. Even if an agreement cannot be reached immediately with holders of the Ematum bond, renouncing the sovereign guarantee on the ProIndicus and MAM loans would bring Mozambique closer to debt sustainability. Such a scenario could enable the IMF to re-engage with the government, providing it with room for manoeuvre. Although bilateral donors will not want to run the risk of aid money being, in effect, used to service the debt, all parties want Mozambique to return to debt sustainability. Hanlon believes that a government refusal to honour its sovereign guarantees would be accepted, and possibly even welcomed, by the international financial institutions and donors.

Frühauf challenges this scenario on the grounds that the government has displayed no political will to repudiate the debts. Investigations have been limited, and politicians have displayed no sign of wanting to issue a declaration of “odious debt” or “illegitimate debt”, which might provoke further scrutiny. Frühauf argues that Mozambique will remain saddled with a heavy debt burden primarily because of political dynamics within Frelimo. The political cost of implicating allies of former President Guebuza or the security services could divide the party and jeopardise the leadership transition. Nyusi’s recent appointment of a new SISE director could, however, indicate willingness to subject the security services to greater scrutiny.[xl] Frühauf posited that internal opposition to Nyusi and his handling of the debt crisis might grow ahead of the crucial party congress in September 2017, and pressure to renounce part of the debt could gain traction.
[quote]Tibana predicted a tricky year ahead for President Nyusi and Frelimo grandees. In September, the party will have to decide whether the incumbent will remain its candidate for the next elections, or if Frelimo needs to replace Nyusi to turn the page on the debt scandal[/quote]
Roberto Tibana, principal consultant at Analitica-RJT, noted that any legal process brought against former finance minister Manuel Chang would inevitably open a can of worms. It remains unclear whether Frelimo elites are ready to “sacrifice” Chang, or indeed to countenance any course of action that might lead to court cases – and revelations. Tibana stressed that government ministers, past and present, would be implicated in any findings. Nyusi was the minister of defence when the debts were issued, making it “difficult to shrug off responsibility”. Tibana believes that all of Mozambique’s creditors will need to take a haircut. He questioned whether Credit Suisse and VTB Capital failed to conduct adequate due diligence or if the loans were issued with their full connivance. Tibana predicted a tricky year ahead for President Nyusi and Frelimo grandees. In September, the party will have to decide whether the incumbent will remain its candidate for the next elections, or if Frelimo needs to replace Nyusi to turn the page on the debt scandal.

External actors could yet intervene to Mozambique’s advantage. The US Securities and Exchange Commission (SEC) has requested copies of the documents provided to purchasers of the Ematum bond. Swiss regulators are also known to be taking a keen interest. If further financial transgressions are disclosed, a declaration of “odious debt” or “illegitimate debt” might become more expedient.  Not all outsiders sympathise with Mozambique’s plight, however.

The government will struggle to extricate itself from its current predicament without presenting the country, and the region, as a far riskier investment destination than had previously been projected. Trust with the international financial institutions and bilateral donors will also need to be restored if Mozambique is to diversify its sources of concessional borrowing, and this is unlikely to be a smooth process. Perhaps most importantly, as Tibana pointed out, the crisis has come as “a big shock” to hard-pressed Mozambicans, a fact that Frelimo elites have been slow to acknowledge, let alone react to. The party’s 2014 campaign song, Moçambique confia em Filipe Nyusi, stressed the trust placed in the presidential aspirant. With Frelimo’s egregious fiscal indiscipline now common knowledge, such confidence will be hard to recover.

For a two-week free trial of Zitamar News, please email subscriptions@zitamar.comreferencing ARI in the subject line.

An edited recording of the webinar is available here

Notes

[i] “Alarm over new debts”, Africa Confidential, 15 November 2013

[ii] “How far to push Guebuza”, Africa Confidential, 12 June 2015

[iii] Gestão de Investimentos, Participações e Serviços (GIPS), the social security arm of SISE, owns 98% of MAM, 50% of ProIndicus and 33% of Ematum. The other shareholders of Ematum are the national fishing company, Empresa Moçambicana de Pesca (Emopesca), and the parastatal fund manager, Instituto de Gestão das Participações do Estado (IGPE). ProIndicus is 50% owned by Monte Binga, which is managed by the Ministry of Defence but owned by IGPE. Ematum and ProIndicus each hold 1% of shares MAM. See “Secret debts devastate economy”, Africa Confidential, 13 May 2016

[iv] A fundraising by Credit Suisse for US$500 million was oversubscribed, leading VTB Capital to issue a further US$350 million. See “Secret security debts devastate economy”, Africa Confidential, 13 May 2016

[v] “MDM calls for measures against those responsible for ‘hidden debts’ – Mozambique”, AIM/Club of Mozambique, 12 December 2016

[vi] “Oceanfresh awarded tuna quota in Mozambique”, Undercurrent News, 16 September 2012

[vii] “Mozambique tuna company was front for security spending, CEO admits”, Zitamar News, 9 December 2016

[viii] Contrary to the CMN announcement, a spokesman for Credit Suisse insisted that “there are no weapons or combat systems of any kind on any of the vessels being built under the EMATUM contract.” See: Boris Korby, Paul Burkhardt and Lyubov Pronina, “Mozambique Tuna Bonds Fund Anti-Pirate Fleet in Surprise”, Bloomberg, 13 November 2013

[ix] “CMN décroche une commande historique de 30 navires”, Mer et Marine, 6 September 2013

[x] “Revealed: Ex-Credit Suisse banker in business with EMATUM ship-builder”, Zitamar News, 11 May 2016

[xi] For ProIndicus, the principal sum borrowed was US$622 million, with a final maturity date of 21 March 2021. The first repayment of US$24.88 million was due on 21 March 2016, with subsequent repayments of US$119.424 million in March 2017, 2018, 2019, 2020 and 2021. Interest Rate: LIBOR + 3.20% until 21 March 2014 and then 3.75% thereafter (payable annually). According to Quinn Emanuel Urquhart & Sullivan LLP, Credit Suisse raised US$522 million, with VTB arranging and underwriting the balance. This assertion is not reflected in the “Summary of Key Terms of Certain Commercial External Indebtedness” issued by the Ministry of Finance in November 2016

[xii] “Leaked Credit Suisse doc puts complete Mozambique coastal security contract at only $372m”, Zitamar News, 21 June 2016

[xiii] Matt Wirz, Julie Wernau and Matina Stevis, “Behind Credit Suisse’s Soured Mozambique Deals”, The Wall Street Journal, 11 August 2016

[xiv] For MAM, the principal sum borrowed was US$535 million, with a final maturity date of 23 May 2019. Four repayments of US$133.75 million agreed for May 2016, 2017, 2018 and 2019. Interest Rate: LIBOR + 7% (payable annually). Arranged by Palomar Capital Advisors and VTB Capital

[xv] “Mozambique: Prosecutors Investigating Ematum, Proindicus and MAM”, Agencia de Informacao de Moçambique, 1 May 2016

[xvi] “Mozambique’s defaulting MAM denied access to Maputo shipyard site”, Zitamar News, 14 June 2016

[xvii] Ed Cropley, “Exclusive: Mozambique paid $35 million for VTB shipyard loan – documents”, Reuters, 11 June 2016

[xviii] “Palomar named as joint arranger on $535m Mozambique shipyards loan”, Zitamar News, 25 November 2016

[xix] The inquiry was held during November 2016, with a confidential report delivered to MPs during December 2016. Article 179(2)(p) of Mozambique’s constitution grants the Assembly of the Republic “exclusive power” over the authorisation of government borrowing for a period of a year or more, and defines parliament’s role in determining the upper limits for any state guarantees

[xx] For 2013, the limit had stood at 183.5 million MZN (approximately US$5 million). In December 2013, parliament amended the budget law and increased the ceiling on government guarantees to 15.8 billion MZN, enabling Frelimo to accommodate US$350 million of Ematum’s “non-commercial activities” in the Ministry of Defence budget for 2014

[xxi] “Relatório e Parecer sobre a Conta Geral do Estado, Capítulo X – Dívida Pública”, Tribunal Administrativo de Moçambique, (February 2015) pp.X-20-21

[xxii] Procuradora-Geral da República spokesman Taibo Mucobora quoted by Voice of America: William Mapote, “Procuradoria de Moçambique admite indiciar membros do Governo Guebuza”, VOA Portgues, 14 July 2016

[xxiii] “Former Finance Minister signed loan guarantees”, A Verdade, 11 October 2016

[xxiv] Elaine Moore and Andrew England, “Mozambique proposes ‘tuna’ bond restructuring”, The Financial Times, 10 March 2016

[xxv] Once restructured, Ematum notes were issued for US$726.524 million on 6 April 2016. These have a maturity date of 18 January 2023 with a single repayment due then. Interest Rate: 10.5% per annum (payable semi-annually) with repayments due on 18 January and 18 July of each year until maturity (commencing on 18 January 2017)

[xxvi] Specifically, Principles for Stable Capital Flows and Fair Debt Restructuring issued by the Institute of International Finance. See Joseph Cotterill, “So long, and thanks for all the tuna bonds”, The Financial Times Alphaville, 11 March 2016

[xxvii] Matt Wirz and Julie Wernau, “Tuna and Gunships: How $850 Million in Bonds Went Bad in Mozambique”, The Wall Street Journal, 3 April 2016

[xxviii] Matina Stevis, “U.K. Regulator Scrutinizes Credit Suisse, VTB Over Mozambique Debt”, The Wall Street Journal, 3 June 2016

[xxix] “IMF cut-off follows secret debt shock”, Africa Confidential, 15 April 2016

[xxx] “Secret security debts devastate economy”, Africa Confidential, 13 May 2016

[xxxi] “Key Facts on Fund’s Engagement with Mozambique”, International Monetary Fund, 27 May 2016

[xxxii] The Mozambican metical had remained steady at 30 meticais to the USD during 2013 and much of 2014. Short on hard currency, the government was no longer able to support the currency during 2015, causing it depreciate to 50 meticais to the USD by March 2016. The value plummeted to 78 meticais to the USD in September/October 2016. During February 2017, the exchange rate has stabilised at approximately 70 meticais to the USD

[xxxiii] “Mozambique bondholders condemn ‘strategic’ default”, Zitamar News, 23 January 2017

[xxxiv] “Mozambique says it will default on debut sovereign bond”, Zitamar News, 16 January 2017

[xxxv] “Sovereign default looms”, Africa Confidential, 23 May 2016

[xxxvi] “Mozambique must restructure debt by March deadline to avoid banking ‘chaos’”, Zitamar News, 20 January 2017

[xxxvii] “Frelimo’s ostrich plan”, Africa Confidential, 8 July 2016

[xxxviii] “The burden of war and debt”, Africa Confidential, 18 November 2016

[xxxix] Joseph Hanlon, “Mozambique News Reports & Clippings”, The Open University, 13 February 2017

[xl] “Nyusi names new head of Mozambique’s security services”, Zitamar News, 30 January 2017

The post Mozambique’s debt crisis: Trawling for answers appeared first on Africa Research Institute.

Informal employment was defined by the International Labour Organization in 1993 as “jobs or work without employment-based social protection in informal enterprises, formal firms and/or households”. It includes self-employed workers, wage workers and contracted or sub-contracted workers that may work in the formal sector but through informal arrangements.

Marty Chen, Co-founder and International Co-ordinator, Women in Informal Employment: Globalizing and Organizing (WIEGO):

• WIEGO is an action-research-policy network working in 20 countries across Africa. We learn through both action and research. Improving statistics on the informal sector is key: better data is required to advocate more effectively and to inform policy discussions.
• The informal economy accounts for 66% of non-agricultural employment in sub-Saharan Africa. In southern Africa the figures are much lower than the average, but in Mali and Madagascar the figure is over 80% – and in Uganda it is 94%. The degree of informality varies regionally in Africa; it is also disproportionately female and significantly shaped by ethnicity.
• Ongoing, active dialogue between informal workers and city authorities will help to create inclusive urban spaces in Africa. WIEGO supports the development of negotiating platforms, by building the capacity of local organisations to enter into and maintain dialogue.
• Most informal workers are poor; most working poor are informally employed. In this sector it is generally the case that earnings are low, while business costs and risks are disproportionately high. Informal workers operate in a very uncertain environment.
• Contrary to popular perceptions, informal workers do not operate outside of the state. In fact, they are directly impacted by the policies, plans and practices of city authorities and local governments – often in punitive form. Increasingly, efforts to “modernise” cities are making them more hostile to informal traders; but the main message of informal workers to authorities is “regulate us, but do not criminalise us”.

Kate Meagher, Associate Professor, London School of Economics:

• A historical understanding of the informal economy in Africa highlights how different institutional histories shaped the development of very different informal economies.
• In the pre-colonial era the informal economy was the economy, but that does not mean there was uniformity across the continent. In West Africa, where centralised states and empires dominated, a more urban environment and regulatory systems for economic activity were well developed. In southern Africa, the complexity and density of regional trade networks and economic systems was much lower.
• The colonial period witnessed the first wave of informalisation in the sense that all economic activity now operated outside newly created, imposed states. Different types of colonial states shaped the differing developments of informal economies in Africa. Cash crop economies, most prominent in West Africa, allowed local informal activity to continue uninterrupted as it did not interfere with agricultural production. Labour reserve economies, predominantly found in southern Africa, were accompanied by a more controlling state that crushed and criminalised economic activity which competed for human resources. The concession economies of central Africa, run through brutal systems of labour control, were shaped by extensive criminality and repression.
• Different African states had different independence histories, but one largely similar shared experience was the introduction of structural adjustment programmes in the 1980s. These led to a severe contraction of the formal sector, thereby forcing an even larger share of population into informal economic activities.
• In the 1970s, the average size of the informal economy in cash crop regions was 58% of the non-agriculture labour force; in concession economies, it accounted for 49%; and in labour reserve economies just 19%. The figures that have all increased substantially in the past forty years.
• In former cash crop economies, the percentage of self-employed is far higher than that of wage workers; in labour reserve economies, this is reversed. A large share of informal employment in southern Africa is with formal companies.
• Africa’s informal economies can generate more employment. Individual entrepreneurs can evolve their activities into small businesses, given the right support. Micro-credit is not helpful, but technical training and local sub-contracting can support a framework that might help address, in part, burgeoning youth unemployment.

Verner Ayukegba, Principal Analyst, Sub-Saharan Africa at IHS Economics and Country Risk:

• In Africa, it is extremely difficult for people who have registered business to access capital – let alone those in the informal sector. In addition, the cost of being “legal” in African economies is very expensive. To register a business, due to government efforts to clamp down on tax avoidance, you are often required to pay taxes in advance of starting trading.
• Governments often pay lip service to improving the business environment: practical steps do not always match up to the promises. For many people, it makes sense to stay in the informal sphere.
• The extent to which the informal sector drives the entire economy is difficult to ascertain accurately because of a lack of data and the absence of a critical understanding of how informal activities manifest themselves. Take motorcycle drivers in Cameroon, for example. They are a fundamental part of the economy but their value is not yet being captured and their potential harnessed.
• Organised groups in the informal economy, such as motorbike unions, have power in a city; they can do more to leverage it for positive change. If they speak loud enough governments will not be able to ignore their demands and will have to listen responsively.

The post Africa’s informal economies appeared first on Africa Research Institute.

• Nothing is more important to the future of Africa than the future of China. Africa’s population is projected to grow rapidly, more than doubling to 2.5 billion by 2050. To benefit from this and secure a demographic dividend, Africa is reliant on China as the major buyer of its natural resource exports. As China’s economy slows it will produce and import less. This is already having a marked impact on countries like Zambia which is reliant on copper exports for 86% of its revenue.
• If China’s GDP growth slows to 5%, down from 6.9% this year, this spells disaster for Africa. With static or diminishing income from natural resources, countries that are not food self-sufficient – like Nigeria – will be have generate alternative foreign exchange revenues for that purpose. This issue is only going to become more acute given the demographic projections and Chinese land grabs in Africa. If China’s downturn is less pronounced, the consequences for Africa will be less severe.
• China has provided a lot of easy credit to African governments to build damns and other infrastructure projects. This has brought substantial benefits. However, many projects are being built using Chinese labour and this is a missed opportunity.
• To date, China has been disinterested in the political leanings of African governments when it comes to investment. It has supported the political elites of many of the most unequal countries, like Angola. In a sense, China is non-ideological: it is pursuing a mercantile rather than altruistic approach, extracting resources at the least cost and greatest benefit to itself. Nonetheless, it still wants to be seen as a major player in Africa and has increasingly sought to develop its soft power on the continent by teaching Mandarin, developing media outlets and opening embassies than the US or UK.
• China does not see Africa as an arena for global competition. The US, UK and former colonial powers welcome Chinese involvement, as it does things that are necessary but they are not prepared or able to do – like build big infrastructure, fast. Despite the recent Indo-African Summit India won’t pick up China’s slack anytime soon: it does not have the same growth needs.
• China’s engagement in Africa does have some rough edges. It fails to employ Africans to carry out infrastructure projects, there is a lack of technology and skills transfer to local people, and growing competition between Chinese and African small traders has devastated domestic manufacturing. Support for highly authoritarian regimes also comes at a cost for citizens.
• Xi Jinping’s recently launched corruption drive at home, which led to the detention of Sam Pa, a renowned Chinese investor in Africa, might have wider impacts. It is difficult to know yet whether this is part of a political purge within the Chinese Communist Party or a wider crackdown. Private Chinese companies in Africa cannot operate without official state support. So if it is about tackling corruption at large then the impacts for investment in some African states will be sizeable.

Here are links to some recent articles that complement Professor Rotberg’s narrative or present alternative points of view:

• Deborah Bräutigam’s new book “Will Africa Feed China?” reveals the real story behind allegations of large-scale Chinese land grabs on the continent. A review is available here
• The Mail & Guardian Africa’s Christine Mungai and Charles Onyango-Obbo looked at the impact China’s economic slowdown might have on countries like Angola, Nigeria and Zambia, and on specific sectors like trade and technology
• In the Financial Times, Aubrey Hruby suggested that China’s economic slowdown is an opportunity for Africa to address longstanding economic inefficiencies; and incoming Africa Editor David Pilling argued that China-Africa relations are about more than just raw materials
• Amadou Sy of The Brookings Institution provided a nuanced and accurate picture of China’s direct investment in Africa and scrutinised the facts and fictions behind Chinese land grabs
• In conversation with The Washington Post, Howard French looked beyond the “trade not aid” rhetoric to explore the complexity of Sino-African relations
• JR Mailey, writing for African Arguments, provided analysis on the recent detention of Sam Pa, the Chinese tycoon renowned for striking deals with the most authoritarian of African governments
• IIED’s Xiaoxue Weng discussed China’s impact on Africa’s informal economy, a topic also addressed in this book review of Margaret C Lee’s “Africa’s World Trade”

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Podcast:

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Dr. Jesse Salah Ovadia, Lecturer in International Political Economy, University of Newcastle; author of The Petro-Developmental State in Africa: Making Oil Work in Angola, Nigeria and the Gulf of Guinea:

• Oil and gas possess unique potential to leverage foreign investment in domestic industry. However, the benefits of extractives development need to be directed towards national development, rather than a small elite.
• Petro-developmental states must harness state capacity and invest revenues from oil and gas productively, but should also utilise local content policies to diversify the economy. Local content can anchor non-oil growth and economic transformation. The rebasing of Nigeria’s GDP last year highlighted the importance of domestic manufacturing and the service industry to the economy as a whole.
• Nigeria’s local content law is both one of the oldest and one of the strongest in terms of what it requires. Every country that has enacted legislation since has weaker regulations.
• The current downturn in the global oil price offers advantages for the development of local content. In Nigeria the depreciation of the naira has made local services cheaper for international investors. As long as oil extraction continues, so too do the benefits of local content.

Dr. Ernest Nwapa FNSE, Pioneer Executive Secretary, Nigerian Content Development & Monitoring Board (NCDMB):

• The discovery of oil distorted Nigeria’s economy, leading citizens to abandon productive sectors in search of easy profits from extractives. No value was added in country; crude was exported and gas was flared. Taxation and royalties were assumed to be sufficient benefits. There was little attempt by domestic businesses to provide materials or services to the hydrocarbon industry. International oil companies (IOCs) everywhere assumed they had no role to play in national economic development until producers established national oil companies (NOCs) to increase indigenous participation in the sector.
• President Obasanjo directed the Nigerian National Petroleum Corporation (NNPC) to work with IOCs to enhance value addition. The NNPC reviewed programmes from Brazil and worked with a Norwegian agency to avoid disruption to operations while creating a transparent way of broadening participation in the industry. A decision was taken to legislate, but to avoid being too prescriptive. Between the genesis of local content policies in 2003 and the final legislation in 2010, the NNPC opened dialogue with IOCs, service companies and regulatory agencies.
• The NNPC began by collaborating with those possessing technology, funding and expertise; it was important to start by building trust, before moving to detailed discussions. Avoiding disruption and remaining globally competitive were two key priorities, but so were the need to ensure sustainability and demonstrate government commitment. Nigeria pushed for immediate benefits to communities affected by oil exploration. Oil exploration brings noise, pollution, and social challenges to parts of Nigeria; and when companies move on they often take electricity and employment opportunities with them.
• In five years, the NCDPM multiplied the number of Nigerians employed in the oil industry ten-fold. This was more than the country had been able to achieve in the previous 50 years. IOCs moved from operating out of hotel rooms to establishing offices and workshops in Nigeria.
• Enshrining a local content policy in legislation is important; but there is a risk of including too much in the laws, which prevents innovation. Equally, targets needed to be revisited. Strong political will and demonstrations of financial commitment are required from government to build confidence. Collaboration with IOCs should result in win-win situations. Nigeria was fortunate that any risk of losing investment was mitigated by a global movement toward adopting local content policies. The supply chain in Nigeria is now robust, with most large companies using local suppliers.

Patrick Obath, Executive Director, ASI Kenya Extractives Industry Development Programme:

• Kenya has much smaller oil and gas reserves than Nigeria, but nevertheless the discovery has resulted in high expectations. Kenya is currently establishing how best to harness income from sector, use oil to catalyse economic transformation, and ensure sustainability. The country is also in the process of devolving power from the national level to 47 county governments. Tensions between different tiers of government, and between counties, may make it difficult to leverage benefits at the local level.
• Communities where resources are located have experienced interventions by NGOs and others warning of a “resource curse”. The challenge is to manage popular expectations. Investors, government and communities are meeting to debate how the proceeds of investment should be shared. At this stage, the aim is to transform knowledge and skills in affected communities so that over the long-term local people can be properly involved in the exploitation of natural resources.
• The sharing of revenue is a political hot potato. There is a false expectation that the day drilling starts, there will be funds available to communities. County governments need to brace themselves for a delay of eight to ten years before they see any returns on the development of oil and gas reserves. Both the national government and the counties need to better understand the investment cycle and plan accordingly.

Isabelle Ramdoo, Deputy Head of Programme, Trade and Economic Transformation at the European Centre for Development Policy Management (ECDPM):

• Local content policies take different forms. There can be quantitative requirements, for example quotas based on numbers, or on value; or qualitative requirements, such as reporting and justification obligations, information sharing, and advertising of opportunities. The scale and provisions can vary widely, both in terms of how ‘local’ the policies seek to be and whether they deal with labour, procurement, joint venture and technology transfer.
• Local content is not an end in itself, but part of a comprehensive development package. Governments also need to consider incentives for both foreign and domestic investors. A major challenge remains linking the extractive sector to others in the economy.
• Even if legislation is well drafted, more than just regulation is required. NOCs must possess a sound understanding of the sector, and the procurement needs at different stages. The government should work to identify opportunities and gaps, finance shortages, and adjust policies to enable local and international companies to cooperate.
• Research and development and innovation are also important. Local content can provide an opportunity to address the technology gap. However, it remains difficult to catch up with international suppliers given the degree of competition in that sector. Collaboration and partnership are the core of successful local content policy.

The Q&A can be listened to here:

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Full Podcast:

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To mark the 40^th anniversary of ECOWAS, Africa Research Institute, in partnership with The Africa Report, hosted a panel discussion to debate its continued relevance and role in improving regional economic, cultural and political integration. Our assembled experts – Arnold Ekpe, Véronique Tadjo and Patrick Smith – shared their thoughts and responded to wide-ranging questions from the audience.

Ekpe on the economy:

An ECOWAS single currency: The single currency remains a dream. It does not make economic sense when the West African economies are so heterogeneous. Regional convertibility is a more sensible approach and would encourage the free movement of capital across the region. The proposed Eco currency would have to be based on the Naira because Nigeria’s economy accounts for 77% of regional wealth; but this would be unacceptable to the francophone countries that use the CFA Franc. They are unable to provide a viable counter-proposal because the CFA is pegged to the Euro and guaranteed by France. How can you have a West African currency without having control of setting policy, printing money and a central bank?

Economic leadership: Currently we look outside, to Europe and elsewhere, for solutions to our economic problems. We must learn to look within Africa. I would support an Africa-Africa summit to discuss how we can work together to move forward economically. There is a lack of visionary pan-African leadership. Within ECOWAS I see a willingness to get things done but an inability to execute; moving from talk to action has always been its biggest challenge.

The fallacy of the African economic miracle: The 6-7% GDP annual growth figures we see in West Africa are not good enough. China grew at double digits for three decades to catch up. If Africa is to do the same we need to create bigger markets and big banks to finance infrastructure. If a country has 45 banks, they have 40 too many.

Funding development: Some African countries have struggled to attract foreign investment for ambitious infrastructure projects. Ethiopia financed its new dam by raising money from its own citizens. More attention needs to be paid to domestic revenue mobilisation if we are to create a pool of revenues for investment. Countries cannot develop from external funding alone.

Tadjo on culture:

Language: One of the biggest missed opportunities is language. ECOWAS made a key decision to keep French and English as official languages, in the belief that this would facilitate communication, but the gap between Anglophone and Francophone countries remains as stark as at independence. A lack of communication means we are not sharing ideas and knowledge across the region. This is true of African languages too.  We are not talking to each other within country borders; there is alienation between elites and the majority of the population. People are trapped within ethnic and linguistic groups. This leads to marginalisation and radicalisation.

The culture industry: We need to make culture an integral part of the economy. Government budgets for culture are an afterthought; there is a lack of political will to support art in West Africa. I see this as a loss of potential earnings.

Smith on politics and security:

Anti-third term movements: The uprising in Burkina Faso to oust President Compaoré was a very important juncture. It sent shockwaves across the continent and we are seeing the after-effects in DRC and Burundi. To ECOWAS’s credit they have tried, just two days ago, to restrict all leaders in the region to two terms but it should be no surprise that the only objectors were Togo and Gambia – the members most hostile to democratic freedoms.

The insecurity threat: If insecurity in northern Nigeria can be tackled the focus might shift to Islamist rebels in Mali. The vast amounts of military hardware in Libya left behind after the fall of Gaddafi poses a significant threat to stability in the ECOWAS region. Security crises will not go away and ECOWAS will have to find a way of financing future interventions.

Nigeria and the region: Buhari’s election in March 2015 was part of wider political movement against corruption and lawlessness that was undermining economic opportunity. His efforts to re-establish the rule of law will be vital to Nigeria’s future and promise to have regional implications with elections in Ghana, scheduled for 2016, drawing some parallels.

A political union: ECOWAS is an economic union in denial. It has done more in political and security interventions – Cote d’Ivoire, Guinea-Bissau, Sierra Leone and Liberia – than anything else.

Audio podcast:

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Dr Nara Monkam est directrice de recherche au Forum sur l’Administration Fiscale Africaine – African Tax Administration Forum (ATAF).

Mick Moore est chercheur universitaire à l’Institute of Development Studies (IDS) et directeur général de l’International Centre for Tax and Development (ICTD).

• L’impôt et l’édification de l’état
• Le pour et le contre de l’impôt foncier
• Un méli-mélo de taxes à la sauce foncière
• Le gouvernement à niveaux multiples
• Un fossé rural-urbain et la ‘délégation des activités fiscales’
• Investir dans la réforme
• La volonté politique…
• …et la persuasion
• Une recette réformatrice
• Notes

L’impôt et l’édification de l’état

L’imposition joue un rôle primordial dans l’édification de l’état. Surtout, l’impôt facilite l’établissement d’un contrat social entre les citoyens et l’état, grâce aux processus de négociation permettant la communication entre les contribuables et le gouvernement qui perçoit les recettes. La réalité de l’imposition entraîne un engagement de la part des citoyens : elle les encourage à collaborer avec le gouvernement pour s’assurer que leur argent est employé de manière judicieuse. C’est l’activisme citoyen qui établit les normes de la responsabilité et de la transparence qui favorisent la création ou le renforcement des assemblées représentatives. De telles institutions, qu’elles soient des corps législatifs officiels ou des tribunes non officielles de la société civile, donnent aux gouvernements la possibilité d’un échange avec les contribuables : ils gagnent l’observation de ces derniers en leur offrant une voix dans la détermination de la politique fiscale. Par ailleurs, elles constituent une tribune pour la discussion des priorités en matière de dépenses publiques, de sorte que les bénéfices des recettes soient partagés par les citoyens et l’état.

L’imposition joue un rôle primordial dans l’édification de l’état

Pour réussir à gérer un régime fiscal, il faut que les gouvernements développent des réseaux administratifs efficaces. Le processus de la réforme institutionnelle peut générer de nombreuses retombées positives. Les réformes administratives nourrissent des attentes en matière de méritocratie et de professionnalisme qui peuvent s’étendre à l’ensemble de la fonction publique : ainsi, il y a une amélioration dans l’efficacité. Les informations exigées dans le cadre de la fiscalité accentuent notamment les pressions sur d’autres agences – par exemple, les responsables du bureau du cadastre – pour qu’elles perfectionnent leurs propres services. La perception des impôts a pour effet de renforcer la présence du gouvernement et d’augmenter sa portée dans l’ensemble de son territoire, ce qui empêche les concurrents éventuels – par exemple, les insurgés – de créer des relations de dépendance mutuelle avec les populations locales. Enfin, la perception des recettes génère, elle aussi, des données, des informations utiles dans la planification économique de la nation.

La relative prévisibilité des revenus tirés de la fiscalité intérieure représente un atout, surtout au regard des revenus variables dérivant des aides et de l’exportation de ressources naturelles. Dans la volonté de maximiser la prévisibilité des revenus, l’état s’en trouve donc incité à investir dans la prospérité de ses citoyens, au lieu de se concentrer sur les marchés internationaux ou sur les revenus non gagnés émanant des donateurs.

Certains gouvernements d’Afrique, ayant compris les avantages potentiels de l’imposition, ont créé des autorités semi-autonomes de perception d’impôts (‘Semi-Autonomous Revenue Authority’ – SARA), dans le but de professionnaliser la perception fiscale. La quasi-totalité de ces autorités ont mis en place un régime de taxe sur la valeur ajoutée (TVA), touchant et les biens et les services. Cependant, il n’est pas rare que le secteur formel, cible principale de ces réformes, représente moins de la moitié de l’ensemble de l’économie. Dans une société où la majorité de la population n’est touchée par l’imposition que de manière indirecte, les citoyens ne se sentiront pas impliqués dans la politique.

Par contraste, l’instauration d’un impôt foncier – sur terrains et bâtiments – aurait pour effet de stimuler les processus précités de l’édification de l’état ; elle établirait, d’ailleurs, une relation entre le gouvernement et ceux qui travaillent dans le secteur informel. Les recettes de l’impôt foncier fourniraient des finances aux autorités locales – un niveau gouvernemental négligé et qui manque de ressources dans toute l’Afrique subsaharienne – permettant aux municipalités d’améliorer la prestation des services locaux et d’investir dans les infrastructures : ainsi, les conditions de vie sont améliorées et la croissance économique est stimulée.

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Le pour et le contre de l’impôt foncier

L’impôt foncier, c’est un prélèvement annuel sur les biens immobiliers, tels les terrains et les bâtiments, dont le propriétaire paie ses contributions, en général, à l’état. Cette forme d’imposition s’associe étroitement au financement du gouvernement municipal en raison des liens immédiats entre la valeur de la propriété et les services financés au niveau local. A titre d’exemples, ces services seraient l’approvisionnement en eau, la construction d’égouts, la collecte de déchets, la police, et l’entretien de jardins publics, des écoles, des routes.

Il est généralement admis que l’imposition foncière est hautement progressive et équitable, car c’est la richesse qui détermine la somme due : il ne s’agit pas d’un pourcentage général prélevé sur les transactions. Vu que les terrains et les bâtiments sont – justement – des biens ‘immobiliers’, les propriétaires-contribuables ne peuvent pas éviter le prélèvement en se déplaçant – à moins de vendre leurs biens. Dotées d’un régime d’impôt foncier bien organisé, les autorités locales sont en mesure de compter sur une source de revenus prévisible, autonome, et – potentiellement – lucrative.

L’imposition foncière est hautement progressive et équitable, car c’est la richesse qui détermine la somme due au lieu d’un pourcentage général prélevé sur les transactions

Néanmoins, contrairement aux taxes de consommation comme la TVA, dont les contributions sont payées par un nombre réduit d’entrepreneurs, un impôt foncier annuel est hautement visible aux contribuables ordinaires. Les propriétaires ont une conscience aiguë de l’impôt en question, ce qui donne la possibilité d’améliorer la responsabilisation des gouvernements municipaux. Cela est très positif, d’un point de vue économique (restrictions budgétaires, transparence) et d’un point de vue politique (développement de la démocratie). Cela ne signifie pas pour autant que c’est chose appréciée par les contribuables : sa nature inévitable, intransigeante a eu pour résultat une absence globale d’élaboration. On a estimé que les prélèvements sur les terrains et les bâtiments représentent 0,5% du PIB de l’Afrique subsaharienne.1 Ce manque de volonté de taxer la propriété a privé les gouvernements municipaux des capitaux nécessaires à l’amélioration des services locaux et des infrastructures, sapant ainsi le développement économique et social.

En Afrique, comme ailleurs dans le monde, les gouvernements nationaux citent le manque d’effectifs et les contraintes techniques pour justifier la responsabilité limitée ou inexistante à l’égard de l’impôt foncier. L’argument que prônent toujours bon nombre de gouvernements, c’est que permettre aux autorités infranationales de dépendre des impôts fonciers perçus à l’échelle locale entraînera des iniquités entre les localités riches et les localités pauvres. Des critiques généralisées de la compétence du personnel au niveau des gouvernements municipaux, ainsi que les risques de disparité sont les raisons apparentes que donnent les gouvernements centraux, à travers l’Afrique, pour maintenir la dépendance des autorités locales aux transferts du Trésor public. Cependant, ces réticences pourraient tout autant découler d’une peur de conférer du pouvoir à des politiciens de l’opposition et à leurs fiefs.

Cette hésitation a pour effet de sous-évaluer les bénéfices potentiels de la concurrence entre les municipalités sur le plan d’une amélioration dans la responsabilité et la réactivité des gouvernements ; elle fait fi, d’ailleurs, des cas où les réformes dans l’impôt foncier ont bien réussi. Sans le transfert de la responsabilité de la perception des recettes, et sans la dévolution parallèle d’autres responsabilités et pouvoirs à l’égard des dépenses, les citoyens ne ressentiront pas les bienfaits éventuels de la décentralisation. Le cas de Lagos représente, à cet égard, un exemple typique. Les gens sont attirés à la capitale commerciale du Nigéria en raison de son administration fiscale relativement favorable et son engagement à la prestation des services. La concurrence politique, liée à l’ambition de transformer Lagos en une ‘mégapole’ moderne, ont débouché sur la réussite de réformes dans les impôts fonciers. Ces deux facteurs ont aussi favorisé le développement d’une administration relativement efficace dans l’Etat de Lagos. Vu l’importance de Lagos dans l’économie nationale, cette transformation se révèle bénéfique aussi pour le pays entier.

Les gens sont attirés à la capitale commerciale du Nigéria en raison de son administration fiscale relativement favorable et son engagement à la prestation des services

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Un méli-mélo de taxes à la sauce foncière

Il existe toute une pléthore de modèles d’imposition foncière dans le continent africain : c’est le legs de systèmes fiscaux différents de l’ère coloniale et de réformes sélectives depuis l’accession à l’indépendance. Les gouvernements ont la possibilité de taxer les terrains ou les bâtiments, ou bien un mélange des deux. Par exemple, le Kenya taxe les terrains depuis plus d’un siècle, alors que la Tanzanie – où les terres appartiennent à l’état – ne taxe que les bâtiments. Ailleurs, en Ouganda, les terrains et les bâtiments sont imposés ensemble, alors qu’au Malawi, au Botswana, et en Zambie, on taxe séparément les améliorations structurelles apportées aux terrains.

Les taux d’imposition sont calculés en fonction de la superficie du terrain, sa valeur en capital, ou bien sa valeur locative. Théoriquement parlant, les économistes affirment qu’il est préférable de faire ces calculs à partir des valeurs (en capital, locative) parce qu’elles sont, justement, ad valorem. Cependant, ces valeurs-ci dépendent toutes les deux d’un marché immobilier qui soit développé et performant. Cela nécessite l’existence de relevés d’opérations et de registres fonciers clairs et complets. Qui plus est, ces modèles ad valorem exigent la collaboration d’un grand nombre d’experts agréés capables d’évaluer la valeur des terrains et/ou des bâtiments à intervalles fixes. En l’absence de réévaluations périodiques, le prélèvement perd de sa crédibilité, et les revenus des impôts se voient rapidement érodés par l’inflation et par les hausses des valeurs foncières. Compte tenu des barrières bureaucratiques à l’obtention d’un titre foncier, les marchés immobiliers de nature formelle restent, pour la plupart, à l’état embryonnaire. Donc, l’application pratique du modèle ad valorem s’en trouve limitée.

Comme solution provisoire, beaucoup de pays ont adopté un système d’évaluation sur la base de la superficie. En Ethiopie, au Mozambique, aux Comores, et dans plusieurs états du Nigéria, les gouvernements municipaux imposent une taxe forfaitaire sur les bâtiments en fonction de leur taille, leur localisation : dans une certaine mesure, on a simplifié le système pour qu’il soit transparent et facile à administrer. De la même façon, au Burkina Faso, le gouvernement national applique une taxe d’habitation forfaitaire, dont le taux se détermine à partir des caractéristiques de l’habitat et de l’offre des biens publics locaux. Cette taxe d’habitation a pris pour modèles la taxe urbaine du Maroc et une taxe locative perçue autrefois en Tunisie. Dans un premier temps, au vu de ses capacités administratives limitées au lendemain du génocide de 1994, le Rwanda a adopté un modèle similaire fondé sur la superficie ; de nos jours, on y a instauré un système d’autocotisation. Cette évolution réduit encore plus le fardeau administratif ; mais les risques de paiements en moins s’en trouvent accentués.

A la suite de la guerre civile en Sierra Leone, les conseils municipaux de Freetown, Bo, Makeni, et Kenema se sont écartés du modèle ad valorem consacré par la législation nationale et ont adopté, eux aussi, un modèle simplifié et fondé sur la superficie. Selon ce modèle, on a calculé la valeur des propriétés en fonction des dimensions de la structure, du type de construction, de leur localisation, de leur accessibilité. Cette approche équitable a eu pour effet de garantir la légitimité d’un échelon nouvellement ré-établi du gouvernement, tout en permettant aux quatre autorités locales d’augmenter leurs revenus des impôts fonciers de 300-500% entre 2007 et 2010.

Quel que soit le modèle d’évaluation employé, il faut que les gouvernements entreprennent un recensement cadastral pour identifier tous les terrains et/ou les bâtiments d’un territoire donné, et qu’ils obtiennent un ratio de couverture aussi élevé que possible. Cependant, dans la pratique, ce sont là des projets qui risquent de se révéler coûteux et chronophages. Il faut se servir des informations cadastrales pour créer un rôle d’impôt où sont consignées une description de la propriété, sa localisation, et la somme due. Enfin, il faut que les gouvernements émettent les factures d’impôt, qu’ils perçoivent les taxes, qu’ils s’occupent des arriérés de paiements. A la lumière des points sensibles de l’imposition foncière, il faudrait mettre en place un processus d’appels – que ces appels s’adressent directement aux autorités fiscales ou qu’ils se fassent dans le cadre de l’appareil judiciaire.

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Le gouvernement à niveaux multiples

Les pays de l’Afrique anglophone sont héritiers d’un régime d’impôt foncier où les gouvernements municipaux étaient chargés de l’administration d’un impôt sur les terrains et/ou les bâtiments. De nos jours, ces autorités locales continuent à appliquer ce système. En revanche, dans l’Afrique francophone, l’imposition foncière est trop souvent négligée : les gouvernements municipaux sont dépendants de transferts émis par le centre. Depuis l’accession à l’indépendance, les gouvernements nationaux francophones ont conservé la responsabilité de l’évaluation et de la perception des impôts. Cela dit, on voit apparaître des exemples du système de partage de recettes fiscales au Cameroun, en Guinée, et au Tchad. Cela représente un développement positif, car les gouvernements centraux préfèrent normalement concentrer leurs ressources limitées sur les réformes qui visent une contribution accrue au Trésor public, au lieu d’investir dans le but d’améliorer la production même des revenus.

Au Nigéria, les 36 états sont eux-mêmes responsables de la législation fiscale en matière de l’impôt foncier. Selon l’état, on utilise le système basé sur la valeur en capital, celui fondé sur la valeur locative, ou bien celui qui calcule l’impôt en fonction de la superficie du terrain. Au Ghana, en Sierra Leone, au Libéria, et en Gambie, la législation a consacré un régime d’impôt foncier ad valorem qui attribue des valeurs discrètes à chaque propriété imposable. Cependant, dans ces cas-là, la mise en œuvre de ce système a rencontré des difficultés à cause d’un manque de données concernant le marché immobilier, ainsi que d’une pénurie d’experts capables de faire les évaluations. Parmi ces quatre pays, seul le Ghana est doté de centres pour former de tels experts. La Sierra Leone et le Libéria, pris ensemble, comptent moins de 50 experts évaluateurs pour une population totale de 10 millions d’habitants.

En Afrique orientale et en Afrique australe, c’est aussi le modèle ad valorem que l’on préfère. Il a donné de bons résultats en Afrique du Sud et en Namibie, où les marchés immobiliers sont fortement plus développés, où les gouvernements municipaux disposent des ressources et des compétences suffisantes. En Afrique du Sud, les gouvernements provinciaux offrent aux autorités locales un appui administratif complémentaire et une formation pour faciliter l’évaluation des biens, l’émission des factures, et la perception des impôts. Pour les huit conseils métropolitains du pays, l’impôt foncier constitue approximativement un quart du budget annuel. La combinaison de l’impôt foncier et des revenus provenant des frais d’utilisateurs – de services tels l’électricité, l’eau, l’assainissement – a permis aux grandes villes de l’Afrique du Sud une autonomie relative par rapport au gouvernement central. Par contre, dans les zones rurales de l’Afrique du Sud et de la Namibie, tel n’est pas le cas, car on n’y perçoit pas l’impôt foncier.

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Un fossé rural-urbain et la ‘délégation des activités fiscales’

Malgré le phénomène de l’urbanisation, l’on estime que 60% de la population africaine habitent toujours les zones rurales. Dans de nombreuses zones habitées, la prestation de services et les infrastructures de base restent largement absentes, alors qu’une combinaison de taxes régressives et de méthodes d’imposition quelque peu coercitives adoptées par les gouvernements coloniaux et les chefs traditionnels a porté atteinte à la confiance dans les autorités locales. Nombreux sont les citoyens qui s’enfuient de leur foyer, de manière instinctive, pour éviter les visites des percepteurs d’impôts : ils préfèrent ainsi esquiver tout contact avec l’état. Dans certaines zones rurales, comme certaines zones urbaines informelles, les organisations internationales non gouvernementales (OING) ont contourné les autorités locales en se présentant comme les seuls prestataires de services : le développement d’une interaction constructive entre les citoyens et l’état s’en trouve ainsi sapé, compromis.

Dans certaines zones rurales, comme certaines zones urbaines informelles, les organisations internationales non gouvernementales (OING) ont contourné les autorités locales en se présentant comme les seuls prestataires de services

Au lieu de relever directement ce défi lancé à l’autorité de l’état, les gouvernements du Botswana, du Malawi, et de la Tanzanie ont sous-traité l’évaluation et la perception des impôts au secteur privé. Cependant, une telle ‘délégation des activités fiscales’ comporte des risques élevés, puisque les sous-traitants n’ont aucun intérêt direct dans l’élaboration de relations amicales avec le public ou dans l’édification de l’état. Ce qui prime avant tout, dans ce contexte, c’est le désir de maximiser les revenus ; les entreprises privées sont donc plus susceptibles de se servir des méthodes coercitives au lieu des méthodes fiscales axées sur le contrat social. Cela risque d’accroître les tensions entre les citoyens et l’état. Par ailleurs, si les données sur les propriétés évaluées et sur les revenus générés ne sont pas mises à disposition à des fins d’examen, et qu’elles n’y soient pas soumises, la corruption risque d’être endémique.

L’externalisation de la perception fiscale n’est pas une alternative durable et progressive au développement des capacités administratives locales. Elle sape le développement d’administrations efficaces, tout en minant le contrat social entre l’état et les citoyens. Face à un manque de capacités de l’état, une solution plus réalisable, consisterait à externaliser certains éléments de l’évaluation fiscale et de la perception de manière sélective en les confiant à des spécialistes dans le secteur privé. Il s’agit des arpenteurs, des professionnels de l’informatique, des experts-comptables, des vérificateurs… Néanmoins, l’investissement dans les capacités administratives reste essentiel pour que les autorités locales puissent maintenir toute amélioration dans le long terme.

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Investir dans la réforme

Pour créer un régime d’imposition foncière qui soit efficace, prévisible, et lucratif, il est essentiel de s’attaquer au déficit administratif au niveau des gouvernements. Comme en témoigne le cas de Sierra Leone, de petites réformes peuvent avoir un impact considérable, en augmentant de manière significative les recettes fiscales et en apportant des capitaux indispensables à l’amélioration des infrastructures et à la prestation de services proposés par les gouvernements municipaux. Ce n’est nullement une tâche impossible. Par exemple, les levés cadastraux sont accélérés par l’emploi des outils des urbanistes et des ingénieurs: les systèmes d’information géographique, les cartes numériques, les photographies aériennes. De même, il est possible d’augmenter sensiblement le ratio de couverture grâce à la numérisation des titres fonciers et grâce à l’harmonisation des bases de données locales existantes avec le registre foncier national et avec les dossiers des compagnies de services publics. On peut soutenir de telles actions « à gain rapide » en favorisant un partage d’informations parmi les niveaux différents du gouvernement dans le but de garantir que les ventes immobilières entraînent une facturation correcte des nouveaux propriétaires.

Au début des années 2000, à Niamey, la capitale du Niger, on a démontré le potentiel d’une collaboration entre les agences gouvernementales existantes. On y a créé des équipes mixtes d’officiers municipaux, d’arpenteurs, et de représentants des compagnies étatiques de l’eau et de l’électricité pour permettre au gouvernement municipal de faire concorder en temps réel son registre foncier avec les données sur les rues et les adresses. Une fois créées, les bases de données facilitent la tenue d’un registre foncier, l’émission de factures, et la résolution des cas d’appel ; d’ailleurs, elles servent à renforcer l’intégrité du système en supprimant les possibilités des pouvoirs administratifs discrétionnaires et de la recherche de rente. Là où l’on manque des données complètes et à jour sur les rues et les adresses, ou en l’absence d’un service postal qui fonctionne, les contractuels à court terme peuvent intervenir pour fournir la main d’œuvre ainsi qu’une connaissance des lieux, en livrant les factures d’impôt en main propre, et en pourchassant les retards de paiement.

Comme en témoigne le cas de Sierra Leone, de petites réformes peuvent avoir un impact considérable, en augmentant de manière significative les recettes fiscales

Les gouvernements municipaux doivent examiner soigneusement la meilleure façon de s’assurer une conformité à grande échelle à leur travail. Nombreux sont les contribuables qui sont réfractaires aux taxes, en raison d’un manque d’avantages visibles, surtout dans les zones où les infrastructures sont faibles et où la prestation de services est intermittente ou même inexistante. En principe, il est possible de répondre à la non-conformité aux demandes d’impôt foncier par la confiscation et la vente de la propriété concernée ; dans la pratique, en fait, l’application de telles sanctions est souvent impossible. Devant l’absence d’améliorations dans le domaine des services publics, les autorités locales ne gagneront l’observation des contribuables qu’en créant un climat de légitimité et de confiance.

En Afrique francophone, le premier pas en vue d’assurer la légitimité consisterait à décentraliser les responsabilités de la génération de revenus et des dépenses aux gouvernements municipaux. La sensibilisation et l’engagement des contribuables par le biais du budget participatif a connu un certain succès à Yaoundé, capitale du Cameroun, ainsi qu’à Madagascar, au Sénégal, et ailleurs. La participation étroite des contribuables dans l’élaboration du budget – sa formulation, législation, mise en œuvre, évaluation – accroît la responsabilité et la réactivité du gouvernement municipal, ce qui s’accompagne d’améliorations dans la prestation des services locaux et dans le contrat social et fiscal.

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La volonté politique…

Quand les autorités locales seront plus largement perçues comme légitimes et responsables envers les contribuables, et plus fiables dans l’utilisation des recettes pour leur offrir de précieux services, elles auront plus de facilité à établir des procédures justes dans la perception et dans l’observation, et instaurer un climat de confiance. Les résidents doivent avoir la certitude que leurs voisins paieront leur part d’impôt – quelle que soit leur influence politique, et que les gouvernements municipaux sont déterminés à s’attaquer à quiconque refuse d’accepter leur autorité. Inévitablement, ceux ayant de grands investissements immobiliers résisteront à l’imposition. Cependant, les autorités locales doivent être prêtes à faire face aux intérêts particuliers en poursuivant le non-paiement, en appliquant les décisions de justice, et en fuyant l’exercice d’un pouvoir discrétionnaire à l’égard des passifs d’impôt des riches propriétaires.

Dans le but d’illustrer cet argument, il est utile de comparer les quatre conseils municipaux précités de la Sierra Leone. A Bo, 93% des propriétaires d’entreprise interrogés en 2012 étaient en mesure de fournir un reçu d’impôt foncier ; 87,5% croyaient que l’on poursuivait avec succès les élites locales en cas d’inobservation. Cependant, à Makeni et à Kenema, à peu près 40% seulement pouvaient produire un reçu, et 30% seulement croyaient aux poursuites fructueuses. Ces trois villes avaient fait preuve de gains rapides, mais à Makeni et à Kenema il y a eu une stagnation des hausses annuelles puisque les élites se sont révélées résistantes à l’impôt, tandis que les autorités municipales de Bo ont progressé davantage grâce à une volonté politique soutenue. On ne dispose pas de statistiques comparables portant sur la capitale, Freetown, mais le conseil municipal de celle-ci a concentré ses efforts sur l’imposition de grandes entreprises et sur l’application d’un impôt de capitation visant chaque résident, au lieu d’élargir l’assiette fiscale (en y incorporant les propriétés des élites locales).²

Le degré de volonté locale de cibler les élites constitue un indice décisif, révélateur de la volonté générale d’instituer des réformes

Le degré de volonté locale de cibler les élites constitue un indice décisif, révélateur de la volonté générale d’instituer des réformes. Cependant, pour réussir à identifier les facteurs déterminant le degré de volonté politique, il faudrait que les conseillers externes désireux d’appuyer les réformes aient une compréhension approfondie de l’économie politique en place. Il faudrait, par ailleurs, que leur analyse se conjugue à l’évaluation des liens entre les élites économiques et politiques, de ce qui caractérise la concurrence politique locale ; leur analyse doit également établir si les gouvernements nationaux et municipaux sont sous le contrôle de partis en compétition. Toute réforme durable ne peut pas dépendre uniquement de ces facteurs : elle sera construite, obligatoirement, sur un véritable engagement de la part des dirigeants locaux à la réciprocité et à la transparence, en les soulignant comme moyens de fonder un contrat social.

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…et la persuasion

La légitimité et la transparence sont les bases sur lesquelles les gouvernements locaux doivent construire afin de dialoguer avec le public, tout en considérant, de manière attentive, la forme de la présentation de l’impôt foncier. Alors que certains gouvernements en Afrique ont choisi de ‘montrer du doigt’ des individus, des entreprises en vue n’ayant pas payé leurs cotisations, d’autres gouvernements ont adopté une approche opposée. Chaque année, les offices des recettes du Rwanda, de la Tanzanie, et de l’Ouganda organisent une semaine dédiée à la reconnaissance des contribuables, où les bénéfices résultant du paiement des impôts sont communiqués aux citoyens. Il serait possible de déployer un modèle similaire à l’échelle locale, pour sensibiliser les citoyens aux avantages qui leur reviendront s’ils paient les impôts fonciers.

On pourrait même aller plus loin, dans la perspective de cette approche, en transformant le nom de l’impôt foncier en ‘taxe bénéfique’ locale. Un tel changement d’image permettrait aux citoyens en Afrique d’accepter l’idée de payer des taxes en contrepartie d’infrastructures et de services fournis par les gouvernements municipaux. Dans les zones urbaines, surtout, il serait possible de reformuler l’impôt foncier comme moyen de générer des revenus réservés exclusivement pour financer des améliorations apportant des bénéfices directs aux propriétaires, à savoir la collecte des déchets, l’éclairage public, les routes, les espaces publics…

C’est ce lien, justement, aux yeux des contribuables, entre l’observation et la prestation de services locaux, que les municipalités africaines – par centaines – appliquant déjà le budget participatif, cherchent à promouvoir. Sans aucun doute, la réussite de cette promotion est l’un des facteurs sous-jacents de la réussite de l’impôt foncier en Sierra Leone post-conflit. A la suite de réformes dans la méthode d’évaluation en Sierra Leone, les autorités locales ont mené de grandes campagnes de sensibilisation et d’éducation du public. Des présentations et des émissions-débats radiophoniques ont servi de plate-forme aux élus, aux agents fiscaux, aux chefs traditionnels et religieux pour expliquer aux contribuables le raisonnement du prélèvement, la façon dont les recettes seraient dépensées, les modes de paiement, et les procédures de recours.

Au fur et à mesure de l’expansion des villes africaines, de l’élargissement de la classe moyenne urbaine, une meilleure connaissance – ainsi qu’un respect accru – des droits et des obligations dans le domaine de la propriété pourrait donner aux individus les cadres juridique et financier pour accéder aux crédits, en utilisant leurs terrains/bâtiments comme garanties. Cela permettrait alors d’améliorer les systèmes fonciers et les marchés immobiliers dans les zones urbaines, tout en fournissant une incitation supplémentaire pour la conformité fiscale. Les gouvernements municipaux pourraient donc passer d’un impôt calculé en fonction de la superficie du terrain à un impôt à base de valeur. Dans bien des cas, cette éventualité demeure malgré tout une perspective lointaine.

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Une recette réformatrice

Le potentiel de l’impôt foncier – dans les contextes de la gouvernance municipale et de l’édification de l’état – est clair. Il faut conjuguer la réforme législative, le savoir-faire technique, et la volonté politique pour s’assurer que la taxe devienne une source de revenus durable pour les autorités locales. Dans de nombreux pays, en Afrique francophone surtout, on a consacré les politiques de la décentralisation dans la législation, mais leurs dispositions n’ont pas encore été adoptées. Pour ce qui est des décideurs politiques, la réforme des finances du gouvernement local devrait constituer une priorité. Mais, dans ce contexte, il leur faudra la détermination de bâtir des alliances et de s’attaquer aux intérêts particuliers, pour mobiliser et protéger des revenus lucratifs issus de l’impôt foncier.

Dans le cadre de l’impôt foncier en Afrique, il y a plusieurs tendances positives qui autorisent un optimisme prudent. Dans bon nombre de pays africains, la prospérité s’accroît et l’on assiste à l’émergence d’une classe moyenne éduquée et politiquement engagée. Selon les spécialistes des sciences sociales, ce sont là des signes révélant qu’il devrait y avoir une hausse des recettes fiscales.

Qui plus est, l’Afrique s’urbanise de plus en plus, ce qui augmente la pression populaire exercée sur les gouvernements municipaux pour qu’ils fassent quelque chose. Cela nécessite, à son tour, une réforme du financement du gouvernement municipal et offre des possibilités pour l’introduction d’un régime d’impôt foncier global et efficace. La diffusion du budget participatif, par exemple, est la preuve que les citoyens réclament des droits, des services, et la responsabilisation des gouvernements locaux avec toujours plus d’insistance. Enfin, la baisse des cours du pétrole et des prix des produits de base, ainsi que la diminution de l’aide extérieure, commencent déjà à exposer la dépendance de plusieurs gouvernements africains aux rentes extérieures, ce qui les inciterait à se concentrer sur les possibilités de générer des revenus intérieurs.

L’avenir des gouvernements municipaux et nationaux de l’Afrique dépendra d’institutions et d’une politique fiscale équitables, qui améliorent la prestation des services locaux, et qui encouragent l’observation en établissant un contrat social entre les contribuables et l’état

Malgré les perspectives de l’introduction de taxes foncières, qui semblent s’améliorer, les progrès dans ce domaine demeurent sporadiques. Dans une grande partie de l’Afrique, l’on peut témoigner d’une stagnation de la décentralisation. Il faut d’urgence lui donner un nouvel élan, pour permettre une réforme du financement des gouvernements municipaux, et pour que le potentiel de l’impôt foncier soit réalisé. Les donateurs internationaux doivent accorder une plus grande attention au rôle de la mobilisation des ressources intérieures dans le fondement d’états réactifs, responsables, et efficaces. Les OING, pareillement, doivent tenir compte des conséquences à long terme d’une politique qui contourne les institutions nationales, qui sape – volontairement ou non – l’autorité de ces gouvernements qui essaient de créer des rapports de dépendance réciproque avec les contribuables. L’avenir des gouvernements municipaux et nationaux de l’Afrique dépendra d’institutions et d’une politique fiscale équitables, qui améliorent la prestation des services locaux, et qui encouragent l’observation en établissant un contrat social entre les contribuables et l’état. Pour atteindre ces objectifs, l’impôt foncier constitue l’un des moyens les plus efficaces.

NOTES

1 Fjeldstad, Odd-Helge and Heggstad, Kari, “Local Government Revenue Mobilisation in Anglophone Africa”, ICTD Working Paper 7, Institute of Development Studies, p.15

2 Jibao, Samuel and Prichard, Wilson, “Rebuilding Local Government Finance After Conflict: The Political Economy of Property Tax Reform in Post-Conflict Sierra Leone”, ICTD Working Paper 12, Institute of
Development Studies, p.22

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The post Les avantages de l’impôt foncier pour l’Afrique – Nara Monkam and Mick Moore appeared first on Africa Research Institute.

Dr. Nara Monkam is Director of Research at the African Tax Administration Forum (ATAF). Mick Moore is Professorial Fellow at the Institute for Development Studies and Chief Executive Officer of the International Centre for Tax and Development (ICTD).

• Taxation and state-building
• The pros and cons of property tax
• A spaghetti soup of property taxes
• Tiered government
• Rural-urban divide, and “tax-farming”
• Investing in reform
• Political will…
• …and persuasion
• Recipe for reform
• Notes

Taxation and state-building

Taxation plays a critical role in state-building. Most importantly, it helps to forge a social contract between citizens and the state through bargainto taxation and the government collecting the revenue. The experience of being taxed engages citizens, incentivising them to collaborate to ensure their money is well spent. Civic activism establishes norms of accountability and scrutiny that encourage the establishment or strengthening of representative assemblies. Such institutions, whether formal legislatures or informal civil society associations, provide governments with an opportunity to secure taxpayer compliance in return for a voice in setting tax policy. They also provide a forum for discussion of public expenditure priorities, ensuring that the benefits of tax revenue are shared by citizens and the state.

Taxation plays a critical role in state-building

To successfully manage a tax regime, governments must develop effective bureaucracies. The process of institutional reform can produce a number of positive outcomes. Administrative reforms foster expectations of meritocracy and professionalism, which can spread across the civil service, enhancing efficiency. The information required for taxation also increases pressure on related agencies – for example, those responsible for land registration – to improve their services. Tax collection extends the presence and reach of the government across its territory, preventing potential competitors, such as insurgents, from establishing relations of mutual dependence with local inhabitants. Finally, revenue collection generates data and information that can facilitate national economic planning.

The relative predictability of domestic taxation is advantageous compared to fluctuating income from aid flows or the export of natural resources. In an effort to maximise predictable flows of income, the state is therefore incentivised to invest in the prosperity of its citizens, rather than focusing on unearned rents from donors and international commodity markets.

Some African governments have recognised the potential benefits of taxation and established semi-autonomous revenue authorities (SARAs) to professionalise tax collection. Almost all have implemented a value-added tax (VAT) regime on goods and services. However, the formal sector, the prime target of these reforms, often accounts for less than half of the total economy. If a majority of the population is only indirectly affected by taxation, citizens will not be politically engaged. In contrast, a tax on land and buildings would stimulate the processes of state-building outlined above, as well as create a relationship between government and those active in the informal economy. Revenues from property taxation would provide finance to local authorities – a neglected and under-resourced tier of government across sub-Saharan Africa – enabling town and city councils to improve local service delivery and invest in infrastructure, improving living conditions and stimulating economic growth.

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The pros and cons of property tax

Property tax is an annual levy on immovable property, such as land and buildings, usually paid by the owner to the state. This form of taxation is closely associated with financing municipal government because of the immediate connection between property values and services funded at the local level. These services may include the provision of water, sewerage, refuse collection and policing, and the maintenance of public parks, schools and roads.

Property taxation is widely regarded as highly progressive and equitable because the sum due is determined by wealth rather than being a percentage levy on transactions. The fact that land and buildings are immobile means that taxpayers cannot relocate to another jurisdiction to avoid the levy – unless they sell their assets. With welladministered property tax, local authorities can count on a predictable, autonomous, and potentially lucrative source of income.

However, in contrast to consumption taxes such as VAT, where payments are made by a small number of businesspeople, an annual property tax is highly visible to ordinary taxpayers. The fact that property owners are acutely aware of the tax has the potential to enhance the accountability of municipal governments, a positive from both economic (budget restraint and transparency) and political (democratic development) points of view. But that does not make it popular, and the unavoidable and uncompromising nature of property tax has led to it being neglected globally. Levies on land and buildings are estimated to account for 0.5% of GDP in sub-Saharan Africa.¹ The unwillingness to tax property has deprived municipal governments of the capital required to improve local services and infrastructure, undermining social and economic development.

In Africa, as elsewhere in the world, technical and staffing constraints are often cited by national governments as justification for limited or non-existent local responsibility for property tax. Many governments continue to argue that allowing sub-national authorities to become significantly dependent on property taxes that they raise locally will lead to unfairness between richer and poorer localities. Generalised indictments of competence in municipal governments and the risks of disparity are the ostensible reasons why, across Africa, central governments continue to keep local authorities dependent on transfers from the national treasury. Yet reluctance could equally stem from fear of empowering opposition politicians and strongholds.

Property taxation is widely regarded as highly progressive and equitable because the sum due is determined by wealth rather than being a percentage levy on transactions

This hesitancy undervalues the potential benefits of competition between municipalities in terms of enhanced accountability and government responsiveness, and disregards examples of successful property tax reform. Citizens will not feel the potential benefits of decentralisation until responsibility for revenue-raising is devolved in tandem with responsibilities and expenditure powers. Lagos is a case in point. People are drawn to Nigeria’s commercial capital because of its comparably favourable tax administration and commitment to service delivery. A combination of political competition and an ambition to transform Lagos into a modern “megacity” has resulted in successful property tax reforms, in addition to the development of a relatively efficient bureaucracy in Lagos State. Given the importance of Lagos in the national economy, this is ultimately beneficial for Nigeria as well.

People are drawn to Nigeria’s commercial capital because of its comparably favourable tax administration and commitment to service delivery

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A spaghetti soup of property taxes

A plethora of different property taxation models exist on the African continent, the legacy of colonial era tax regimes and selective reforms since independence. Governments can tax land, buildings or a combination of the two. Kenya has raised levies on land for over a century, whereas Tanzania only taxes buildings because land belongs to the state. In Uganda, land and buildings are taxed together, while in Malawi, Zambia and Botswana structural improvements on the land are taxed separately.

Taxation rates can be calculated based on plot area, capital value or rental value. Economists argue that the latter two, being ad valorem or value-based, are preferable in theory; however, both require a mature and well-functioning property market, which in turn demands clear land ownership and transaction records. Ad valorem models also require a large number of qualified valuers, capable of assessing the worth of land and/or buildings at fixed intervals. In the absence of regular revaluations, the levy loses credibility, while tax gains are quickly eroded by inflation and increases in property values. Given the bureaucratic obstacles to obtaining land title, formal property markets remain for the most part embryonic, limiting the practical application of the ad valorem model.

Many countries have adopted area-based valuation as a temporary solution. In Ethiopia, Mozambique, the Comoros, and several Nigerian states, municipal governments raise a presumptive levy on buildings based on size and location, simplifying the system to a degree where it is both transparent and easy to administer. Similarly, in Burkina Faso the national government administers a presumptive residence tax, the rate of which is determined by housing characteristics and the supply of local public goods. This residence tax was modelled on the urban tax in Morocco and a rent tax formerly levied in Tunisia. Rwanda initially adopted a similar area-based model, recognising its limited administrative capacity in the aftermath of the 1994 genocide, but has since moved to selfassessment by the taxpayer. This further reduces the administrative burden, but carries significant risks of underpayment.

Following the civil war in Sierra Leone, Freetown, Bo, Makeni and Kenema city councils deviated from the ad valorem model enshrined in national legislation and also adopted a simplified, area-based model. Properties were valued based on the dimensions of the structure, construction type, location and accessibility. This equitable approach secured legitimacy for a newly re-established tier of government, while enabling the four local authorities to increase their income from property tax by 300-500% between 2007 and 2010.

Regardless of the valuation model, governments must identify all of the land and/or buildings in a given jurisdiction by undertaking a cadastral survey. Authorities need to obtain as high a coverage ratio as possible, but in practice this can prove expensive and time-consuming. Cadastral information is used to prepare a tax roll, containing a description of the property, its location, and the amount due. Finally, governments must issue tax bills, collect taxes, and deal with arrears. In light of the sensitivities of taxing property, a process for appeals should also exist, either directly to the tax authority or via the judicial system.

 

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Tiered government

Anglophone African countries inherited a property tax system where municipal governments were responsible for administering a tax on land and/or buildings. Local authorities have continued to apply this system. However, across Francophone Africa, property taxation has been for the most part neglected, with municipal governments reliant on transfers from the centre. Since independence, national governments have retained responsibility for tax assessment and collection, although instances of revenue sharing are emerging in Cameroon, Guinea and Chad. This is a positive development as central governments usually prefer to concentrate their limited resources on reforms that can make a greater contribution to the national treasury rather than invest in improving that revenue generation.

In Nigeria, the 36 states are responsible for property tax legislation. Capital value, rental value and area-based property taxation are all used in various locations. In Ghana, Sierra Leone, Liberia and The Gambia, an ad valorem property tax system with discrete values for each rateable property is enshrined in legislation, but a lack of data on the real estate market and a dearth of valuers has rendered this difficult to implement. Of these four countries, only Ghana has training facilities for valuation officers. Sierra Leone and Liberia together have fewer than 50 valuers for a combined population of 10 million inhabitants.

The ad valorem model is also favoured in eastern and southern Africa. It has worked well in South Africa and Namibia, where real estate markets are considerably more mature and municipal governments have adequate skills and resources. In South Africa, provincial governments provide local authorities with additional administrative support and training to assist with valuation, issuing bills and collection. Property tax contributes about one-quarter of the annual budget for the country’s eight metropolitan councils. The combination of property tax and income from user fees on services – electricity, water and sanitation – has enabled South African cities to become relatively autonomous from the central government. However, this is not the case in rural South Africa and Namibia, where property tax is not collected.

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Rural-urban divide, and “tax-farming”

Despite urbanisation, an estimated 60% of Africans still live in rural areas. Basic infrastructure and service delivery remain largely absent in many settlements, while a combination of regressive levies and coercive taxation methods adopted by colonial governments and traditional leaders has undermined trust in local authorities. Many citizens instinctively flee their homes to evade tax collectors, preferring to avoid any encounter with the state. In some rural areas, as well as in informal urban settlements, international non-governmental organisations (INGOs) have circumvented local authorities by presenting themselves as the only providers of services, thus undermining the development of constructive citizen-state interaction.Rather than address this challenge to state authority head-on, the governments of Botswana, Malawi and Tanzania have contracted out tax assessment and collection to the private sector. “Tax farming” is fraught with risks, however, as contractors have no vested interest in building amicable community relations or in state-building. The desire to maximise income is to the fore, and private firms are therefore more likely to employ coercive rather than contractual taxation methods, which can exacerbate tensions between citizens and the state. If data on properties assessed and revenue generated are not available for – and subjected to – scrutiny, corruption is also likely to be prevalent.

In some rural areas, as well as in informal urban settlements, international non-governmental organisations (INGOs) have circumvented local authorities by presenting themselves as the only providers of services

Outsourcing tax collection is not a sustainable or progressive alternative to developing local administrative capacity. It undermines the development of effective bureaucracies and the social contract between the state and citizens. A more feasible solution to lack of state capacity would be to outsource elements of tax assessment and collection selectively to private sector specialists such as surveyors, IT professionals, accountants and auditors. However, investment in bureaucratic capacity remains essential if local authorities are to sustain improvements in the long term.

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Investing in reform

Addressing the administrative deficit in municipal governments is the key to creating an efficient, predictable and lucrative property taxation regime. As demonstrated in Sierra Leone, minor reforms can have a dramatic impact, significantly increasing the tax take and providing much-needed capital for improvements to infrastructure and local government service delivery. This is by no means an impossible task. For example, cadastral surveys can be expedited by deploying the tools of urban planners and engineers such as geographic information systems, digital maps, and aerial photographs. Similarly, the coverage ratio can be significantly increased by digitising property ownership records, or harmonising existing local databases with the national land registry and utility company records. These quick wins can be sustained by ongoing information-sharing between different tiers of government to ensure that property sales result in the new owners being billed correctly.

In the early 2000s, the Nigerien capital of Niamey demonstrated the potential of collaboration between existing government agencies by establishing mixed teams of municipal agents, cadastral surveyors, and representatives from the state water and electricity companies to enable the municipal government to reconcile its property register with street address data in real time. Once established, databases can facilitate the maintenance of property records, issuing bills and dealing with appeals, in addition to strengthening the integrity of the system by removing opportunities for administrative discretion and rent-seeking. In the absence of up-to-date street address data or a functional postal service, short-term contractors can provide the manpower and local knowledge to hand deliver tax bills and pursue delayed payments.

As demonstrated in Sierra Leone, minor reforms can have a dramatic impact, significantly increasing the tax take

Municipal governments need to consider carefully how best to ensure widespread compliance. Many taxpayers resist paying their bills due to the lack of any visible benefit, especially in areas where infrastructure is poor and service delivery intermittent or non-existent. Non-compliance with property tax demands can be enforced in principle by the confiscation and sale of property, but in practice such penalties are often unenforceable. In the absence of improvements to public services, local authorities will only earn taxpayer compliance by creating a climate of greater legitimacy and trust.

In Francophone Africa, the first step towards ensuring legitimacy would be to decentralise responsibility for revenue generation and expenditure to municipal governments. Taxpayer education and engagement through participatory budgeting has enjoyed some success in the Cameroonian capital of Yaoundé, Madagascar, Senegal and elsewhere. The close involvement of taxpayers in the budget development process – formulation, legislation, implementation and assessment – leads to more accountable and responsive municipal government, with commensurate improvements in local service delivery and the fiscal social contract.

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Political will…

Once local authorities are more widely regarded as legitimate and accountable to taxpayers, and can be relied upon to use tax revenues to provide services of value to citizens, it becomes easier for them to establish fair procedures for revenue collection and enforcement and establish a climate of trust. Residents need to have confidence that their neighbours will pay their share of the tax regardless of their political or economic influence, and that municipal governments are resolved to address any challenges to
their authority. It is inevitable that those with significant investments in property will resist the tax, but local authorities must be willing to confront strong vested interests by prosecuting non-payment, enforcing judgments and eschewing the exercise of discretion regarding the tax liabilities of wealthy landowners.

The degree of local commitment to targeting elites can be a litmus test for commitment to reform in general

A comparison of the four previously mentioned city councils in Sierra Leone is illustrative. In Bo, 93% of business owners surveyed in 2012 were able to produce a property tax receipt and 87.5% believed that local elites were successfully prosecuted for non-compliance. In Makeni and Kenema, however, only around 40% were able to produce a receipt, and just 30% were confident of successful prosecution. All three cities had demonstrated rapid revenue gains, but in Makeni and Kenema annual increases stagnated as elites proved resistant to the tax, while the municipal authorities in Bo made further progress due to sustained political will. Comparable statistics are not available for the capital Freetown, but the city council there focused its efforts on taxing large businesses and enforcing a poll tax on all residents, rather than expanding the tax base to include properties owned by local elites.²

The degree of local commitment to targeting elites can be a litmus test for commitment to reform in general. However, external advisers wishing to support reform need to have a deep understanding of the prevailing political economy if they are to successfully identify the factors determining the degree of political will. Their analysis must include an assessment of the connections between political and economic elites, the characteristics of local political competition, and whether municipal and national governments are controlled by competing parties. Sustainable reform cannot depend on any of these factors alone and must be built on a genuine commitment by local leadership to emphasise reciprocity and transparency as a means to establish a social contract.

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…and persuasion

Building on the foundations of legitimacy and accountability, local governments must engage with the public and carefully consider how property tax is presented. While some African governments have attempted to “name and shame” high-profile individuals and businesses for not paying their dues, others have taken the opposite approach. The national revenue authorities in Rwanda, Tanzania, and Uganda hold an annual taxpayers’ appreciation week during which the benefits of paying taxes are communicated to citizens. A similar model could be deployed locally to make citizens aware of the advantages of paying their property tax bills.This approach could be taken one step further by rebranding property tax as a local “benefit tax”. This would enable African citizens to buy in to the idea of paying taxes in return for infrastructure and services provided by municipal governments. In urban areas, in particular, property tax has the potential to be reframed as a means to generate revenues that are earmarked to finance improvements that directly benefit property owners, such as waste collection, street lighting, roads and public spaces.This link in the minds of taxpayers between compliance and local service delivery is exactly what the many hundreds of African municipalities now practising participatory budgeting are seeking to promote. Its successful promotion is certainly one of the factors underlying the success of property tax in post-conflict Sierra Leone. Following reforms to the assessment method there, local authorities conducted extensive public education and awareness campaigns. Radio presentations and call-in shows provided a platform for councillors, tax officials, paramount chiefs and religious leaders to explain to taxpayers the basis of the levy, how revenue would be spent, payment methods, and appeals procedures.As African cities expand and the urban middle class grows, greater awareness of – and respect for – property rights and obligations could provide the legal and financial foundations for individuals to access credit, using their land and buildings as collateral. This would in turn help to improve land tenure systems and property markets in urban areas, in addition to providing an added incentive for tax compliance. Municipal governments could conceivably shift then from area-based to value-based property tax, although this remains a distant prospect for many.

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Recipe for reform

The potential of property tax for both municipal governance and state-building is clear. A combination of legislative reform, technical know-how and political will is required to ensure that the levy becomes a durable source of income for local authorities. In many countries, especially in Francophone Africa, decentralisation policies have been enshrined in legislation, but their provisions have not been enacted. The reform of local government finance should be a priority for policymakers, but they will need determination to build alliances and confront vested interests if they are to mobilise and sustain lucrative revenues from property taxation.A number of positive trends give rise to cautious optimism regarding property tax in Africa. Prosperity is increasing and an educated, politically-engaged middle class is emerging in many countries. Social scientists identify this as a sign that the tax take should increase. Africa is also increasingly urban, amplifying popular pressure on municipal governments to do something. This in turn necessitates a reform of municipal government financing and creates opportunities for the introduction of comprehensive and effective property taxation. The spread of participatory budgeting, for example, is evidence that citizens are increasingly demanding rights, services and accountability in local government. Finally, declining oil and commodity prices and aid flows are already beginning to expose the dependence of many African governments on external rents, providing an incentive to focus on domestic revenue generation potential.

The future of African national and municipal governments will depend on institutions and tax policy that are equitable, improve local service delivery and encourage compliance through establishing a social contract between taxpayers and the state

Despite the seemingly improving outlook for the introduction of property taxes, progress remains sporadic. Across much of Africa, decentralisation has stagnated. Renewed impetus is urgently required if municipal government finance is to be reformed and the potential of property taxation realised. International donors need to be more mindful of the role of domestic resource mobilisation in underpinning effective, accountable and responsive states. Similarly, INGOs must consider the long-term implications of circumventing domestic institutions and undermining, deliberately or otherwise, the authority of governments attempting to forge a relationship of mutual dependence with taxpayers. The future of African national and municipal governments will depend on institutions and tax policy that are equitable, improve local service delivery and encourage compliance through establishing a social contract between taxpayers and the state. Property tax is one of the more effective means of realising these goals.

NOTES

1 See Fjeldstad, Odd-Helge and Heggstad, Kari, “Local Government Revenue Mobilisation in Anglophone Africa”, ICTD Working Paper 7, Institute of Development Studies, p.15

2 Jibao, Samuel and Prichard, Wilson, “Rebuilding Local Government Finance After Conflict: The Political Economy of Property Tax Reform in Post-Conflict Sierra Leone”, ICTD Working Paper 12, Institute of
Development Studies, p.22

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The post How Property Tax Would Benefit Africa – Nara Monkam and Mick Moore appeared first on Africa Research Institute.

By Paul Adams

• Window of opportunity
• Going international
• Credit, with hazards
• Rules of engagement
• Caution and public scrutiny
• Back to the IMF
• Notes

Window of opportunity

The 1996 Heavily Indebted Poor Countries (HIPC) Initiative, supplemented by the 2005 Multilateral Debt Relief Initiative (MDRI), cancelled about US$100bn of debt in 30 African countries in exchange for economic reforms. By 2014, 21 African countries had credit ratings issued by international agencies, more than double the number a decade earlier. Fast-growing African economies have gained access to international bond funds seeking higher-yield investments in emerging economies and portfolio diversification. Demand intensified as interest rates tumbled in developed economies after the 2008 financial crisis.

In 2014, new bond issues from Zambia, Kenya, Côte d’Ivoire, South Africa, Senegal and Ghana had raised almost US$7bn by the end of the third quarter, bringing the cumulative total since 2006 to US$25.8bn. Yields on some African issues are similar to those of southern European states, seemingly indicating a low risk of default. The coupon on Ethiopia’s US$1bn issue in December 2014 was 6.625%. Although one of the 10 fastest-growing economies in the world, Ethiopia also has debt levels forecast to exceed 50% in 2014-15, a depreciating currency and scant foreign exchange reserves.

Borrowers and investors seem equally pleased with the deal. Borrowers can raise funds for infrastructure, general purposes or debt rescheduling at rates far lower than those offered by undeveloped local bond markets – and with longer maturity. Investors appear unperturbed about lending to African countries with credit ratings “deep into the ‘junk’ range”.¹ Most issues have been comfortably over-subscribed.

An implicit assumption prevails that there is little danger of African countries going bust. While there is no immediate likelihood of widespread sovereign default, the nature and consequences of financial mismanagement in Ghana – a flag-bearer for the “Africa rising” narrative – should not be ignored. Debt levels do not have to match those of developed economies to trigger an economic crisis.

 

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Going international

Africa needs to spend US$360bn on infrastructure by 2040, according to the African Development Bank (AfDB). Ghana, Senegal and Zambia are among the countries that have issued sovereign bonds to pay for infrastructure development. Competition for funds is global, and funding will be needed from diverse sources. Sovereign bonds are one alternative to concessional loans from donors. “African governments have been able to shop around in a way that wasn’t previously possible,” says David Cowan, Africa economist at Citi. Diversification of borrowing sources is evidence of sensible management of public debt. Funds can be invested in assets and institutions that will support economic growth and generate taxes to service the debt.

The use of sovereign bonds in debt restructuring and rescheduling can have a positive effect on a country’s debt profile. An issue puts a country “on the radar” of international debt markets. Since 2006, Côte d’Ivoire, Gabon, the Republic of Congo and Seychelles have used international bond issues in debt rescheduling. All of these countries had – unusually in Africa – borrowed heavily from the private sector; restructuring the debt in a Eurobond made repayment more straightforward and lowered interest rates.

In larger, more developed economies, a sovereign debt issue also provides a benchmark to assist the expansion of local bond markets and borrowing by domestic banks and companies on international markets. “The original purpose of Nigeria’s 2011 issue was to price Nigerian risk internationally because the benchmark for commercial debt is sovereign risk,” says Femi Edun, managing director of Frontier Capital in Lagos. The purpose of Kenya’s 2014 US$2bn Eurobond issue was similar. The government was keen to prove that it could successfully launch a large international bond issue and for the issue to provide a stimulus to the local debt market.

Diversification of borrowing sources is evidence of sensible management of public debt

Debt levels are rising in Africa, in some cases rapidly. Long term domestic and international commercial borrowing was forecast to rise by about 50% in 2014. As early as April 2012 a World Bank economist observed that the eight African countries to have borrowed fastest since receiving debt relief – Ghana, Uganda, Senegal, Niger, Malawi, Benin, Mozambique, and São Tomé and Príncipe – “could within a decade be back to pre-debt relief debt stock levels”. Rising debt-to-GDP ratios have been mitigated by upward revisions of GDP in Ghana, Kenya and Uganda. But the cost of external financing looks set to increase just as economic growth slows. At the end of 2014, yields on most African Eurobonds were at record highs.²

In May 2014, International Monetary Fund (IMF) Managing Director Christine Lagarde cautioned African governments against “overloading with too much debt”.³ “When some African countries go to the bond market, they’re exposing themselves to market discipline which they don’t understand. You can see the results with Ghana,” a government adviser in Uganda, which has decided against issuing a Eurobond for the time being, told ARI. “Zambia doesn’t have the discipline either. I’d say that African bond issuance has outstripped government capacity to manage the debt.”

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Credit, with hazards

International bond investors impose no conditions on how funds are spent by sovereign borrowers, unlike multilateral and bilateral lenders. A bond prospectus may state that the proceeds will be allocated to infrastructure development or debt rescheduling, but this is not always the case – and any mention of a use of funds is non-binding. “Once they’ve issued a Eurobond, and US$1bn or so rolls in, they can spend it how they like. That is what got Ghana into trouble,” says a Ghanaian debt specialist. The country’s 2007 US$750m issue was earmarked for infrastructure but then mostly used for general budgetary purposes. Fungibility – using funds for a different purpose than originally stated – may not concern investors unduly, but it should concern legislators and citizens.

Currency risk is often underestimated. The cost of servicing a US dollar-denominated Eurobond may look cheaper than that of a debt issue in local markets, but if the national currency declines the cost of foreign borrowing rises. In 2000-13, average annual currency depreciation in sub-Saharan Africa was 3-4%, amounting to 44%cumulatively. According to an IMF study, the cost to the Ghanaian Treasury of servicing an equivalent debt in local markets – had there been sufficient capacity – would have been less than that of both the 2007 and 2013 dollar-denominated bond issues.⁴

Currency risk is often underestimated

Vulnerability to currency risk increases if the borrower is dependent on the exports of one or two commodities for revenue and foreign exchange. Copper accounts for 70% of Zambia’s exports and earns one-third of its foreign exchange. When the price of copper fell sharply between January and April 2014, jeopardising revenue, the Zambian kwacha fell by one-third in a similar timeframe. In June, the country approached the IMF to discuss an economic reform programme – just two months after launching a US$1bn bond issue at 8.5%, compared to 5% for its 2012 issue. The kwacha subsequently recovered and the copper price did not fall further. Annual GDP growth of 6-7% in 2014-16 and a peak government debt level of 33% of GDP are forecast. Despite the stabilised outlook, Zambia’s experience of economic volatility and its vulnerability to shocks during 2014 should not be ignored by other sovereign borrowers.

The requirement to service debt is immediate and delays in expenditure on infrastructure can be costly. Debt service and the economic rate of return on the investment are not always given adequate consideration and they assume greater importance in the case of large loans. Zambia had paid millions of dollars in interest on its 2012 US$750m Eurobond issue before it began to spend the money on power, road, railways, hospitals and funding small and medium-sized enterprises. Given the consensus outlook for rising global interest rates over the next decade, loan repayment and rollover risk are added concerns. “We don’t think the Ministry of Finance has laid out a payback plan, two years after the first Eurobond,” Albert Halwampa of the Zambia Institute for Policy Analysis and Research (ZIPAR) commented soon after Zambia’s second issue was launched in 2014. “No one is saying how we are going to pay back the money when debts mature in 2022 and 2024.”

The lack of conditionality attached to a sovereign Eurobond issue is alluring for African borrowers, as is the speed with which an issue can be packaged and launched, in comparison to funding from a multilateral or bilateral donor. But “they are more costly if you fail than going to the World Bank or AfDB,” warns a government adviser in Uganda. Furthermore, the World Bank and IMF maintain that “international sovereign bonds may not be the best option for financing infrastructure investment,” ⁵ and recommend concessional finance – or a combination of concessional, public-private partnership and syndicated loans instead.

The lack of conditionality attached to a sovereign Eurobond issue is alluring for African borrowers

The issuance of international sovereign bonds to commercial investors exposes a defaulting borrower to specific legal risks, notably from “vulture funds”. The International Capital Markets Association, IMF and AfDB are studying ways to mitigate the risks of “collective action” during sovereign debt restructuring. This danger was recently underscored by a September 2014 New York court judgement in favour of a debt fund against Argentina, which is seeking to restructure its external debt in the wake of its 2001 financial crisis and US$95bn debt default. Some of the “holdout” creditors – US hedge funds – who own the remainder of the defaulted bonds sued Argentina in 2011 for principal and past-due interest claims of US$1.6bn. “There is a system for private-sector debt default – bankruptcy,” says Amir Shaikh at the AfDB’s African Legal Support Facility. “But there is no system for sovereign default – sovereigns aren’t supposed to default. We’re looking at Argentina as a sort of test case.”

 

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Rules of engagement

Disciplined debt management is crucial, based on sound institutions able to manage risk. Before negotiating debt relief in 2005, Nigeria established a budget office and debt management office (DMO). The country has a widely respected central bank. “If you’re going to borrow aggressively you need a good DMO,” says Bode Agusto, the founder of Nigeria’s first domestic debt-rating agency who set up the government’s Budget Office in the early 2000s. “Originally, it was to enable us to get debt relief. Now it helps to ensure that the level of debt is sustainable.” While Nigeria’s public debt level is small, at about 12% of GDP, this does not diminish the importance of professional debt management – for local as well as international debt. “The Nigerian government owes a lot to local borrowers,” explains Agusto, “and the ‘Nigeria Club’ doesn’t forgive anybody.”

Elsewhere in Africa, David Cowan at Citi suggests that sovereign borrowers could usefully learn from Botswana that “dull but sound” has merits. “In Botswana they evaluate every proposed loan with a proper cost-benefit analysis of the projects they’ll undertake with the money and work out whether the benefits will service the debt,” says Cowan. “South Africa is also sensible about debt,” he adds. Cowan is critical of the widespread reliance on the World Bank and IMF to carry out debt sustainability reviews since debt relief. “I’d prefer to see borrower countries do that themselves. It’s a basic duty of government to work out what they can borrow sustainably.”

Skilled planning and project management is essential to secure projected returns from investment in infrastructure. “You have to have projects for which you have already done a feasibility study, your engineering design and your costings so that you know you can service the debt and are ready to go as soon as you have the money,” says William Kalema at international advisory and accounting firm BDO in Uganda. “The foreign financiers don’t do this. The borrower must do the preparation. Secondly, you have to implement the projects to tight deadlines and spend tightly so you don’t overshoot the budget.” The design and implementation of “shovel-ready” projects “needs engineers, planners and economists”, Kalema emphasises. Crucially, he adds, “you also need someone who understands that spending isn’t the same thing as development.”

Domestic resource mobilisation – tax collection – needs to be maximised, particularly in countries with high budget deficits. Ghana would not need to borrow so heavily on international debt markets if it were to increase its tax-to-GDP ratio from the current 16% to a figure comparable with neighbouring Côte d’Ivoire (18%) or Togo (23%). Similarly Zambia, where tax revenue accounts for 19% of GDP, lags behind Zimbabwe at 26%, Botswana at 30% and Namibia at 32%. States which have worked to secure higher domestic taxation have established more sustainable revenue streams than those that relied on taxes and levies generated by the commodities boom. While taxes from resource extraction in Africa increased their contribution to GDP more than threefold between 1998 and 2006, from 4% to 14%, the contributions of other forms of tax revenue have stagnated. Direct personal and corporate taxation, and indirect taxes like VAT, both remained at about 6% of GDP. Trade taxes and duties declined from 3% to 2% of GDP. ⁶ Countries that rely on taxing domestic businesses and citizens rather than revenue from oil or mining exports, such as Rwanda and Kenya,
may prove to be the most reliable borrowers.

The potential of local currency debt markets should not be ignored. Although most borrowing in Africa is external, many countries raise the majority of their funding in domestic debt markets. African local debt stock rose from US$150bn to about US$400bn in 2004-14, a sum which dwarfs that raised by Eurobond issues. ⁷ In 2014, Standard & Poor’s forecast that 80% of commercial borrowing by the 17 sub-Saharan African countries it assigns a credit rating would be raised locally. ⁸ At present there are only 15 investable local bond markets on the continent. Many lack the size, length of yield curve, liquidity or currency stability to satisfy offshore investors; access to others remains restricted or closed for foreign investors, especially in the CFA franc zone. According to forecasts by South African bank Investec, African fixed-income markets could raise as much as US$500bn in the next five years. ⁹ But unless domestic savings rates are boosted, Africa will remain substantially dependent on international capital to finance infrastructure and current account deficits.

The potential of local currency debt markets should not be ignored

In Kenya and Nigeria, the growth of banks, insurance companies and pension funds is strengthening local debt markets. In 2012, Nigerian local debt was admitted to J.P. Morgan’s Government Bond Index-Emerging Markets (GBI-EM). The International Finance Corporation, part of the World Bank, and the AfDB have begun to issue naira-denominated bonds to improve liquidity in local capital markets. Nigeria launched an over-the-counter trading platform in 2013 to make a secondary market in local debt. However, even in Nigeria, sub-Saharan Africa’s largest economy, the local currency bond market remains underdeveloped, representing only 7% of GDP compared to more than 50% of GDP in South Africa.

 

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Caution and public scrutiny

While current debt levels in Africa are manageable, the consequences of the speed with which debt has been accumulated and the management of government borrowing and expenditure are causing concern. The role of the IMF in the region is increasing again. While its involvement can be interpreted as evidence of prudence and a constructive ongoing relationship in some countries, in others it is depicted as raising the spectre of a new phase of debt relief and even structural adjustment.

Unsustainable increases in government expenditure, often linked to the electoral cycle, are becoming more commonplace. “If you have real GDP growth of 6-7% you can sustain a budget deficit of 3-4% of GDP, especially if the deficit has a bias towards investment-driven spending. But if the deficit rises to around 7% of GDP or higher for a couple of years it is bound to get you into trouble,” says David Cowan at Citi. The end of quantitative easing programmes in advanced economies, the strength of the US dollar, China’s economic slowdown and lower commodity prices will all magnify the consequences of overspending.

The importance of developing and maintaining strong institutions to control spending, manage debt and maximise domestic revenue collection cannot be overstated. This is no easy task in countries with substantial new income from natural resources or volatile trade revenue. While external technical assistance is readily available, donor-funded “capacity building” is not always constructive or productive. In the eyes of recipients, assistance is often an imposition, inflexible, oblivious to the prevailing political economy and over-reliant on the input of western advisers on short-term contracts. There is scope for considerably greater intra-African advisory co-operation and exchange of knowledge. “The [Zambian] government should seek assistance from places such as the Macro Economic and Financial Management Institute of Eastern and Southern Africa”, says Albert Halwampa at ZIPAR. “There is a lack of expertise at what is known as ‘the middle office'”.

Unsustainable increases in government expenditure, often linked to the electoral cycle, are becoming more commonplace

The merits of conventional sources of borrowing have been overshadowed by the attractions of sovereign bonds. Syndicated bank loans are a commercial alternative, and concessional finance from official donors remains available, even as many African countries join the middle-income category. Nigeria recently accepted concessional loans worth US$945m from the World Bank, repayable in 20 years with an interest rate including costs of 2%. The AfDB asserts that its most important contribution is to introduce co-financing to its projects – from other official development partners or the private sector – and act as a “shop window” for Africa’s large-scale investment opportunities. New bilateral lenders have emerged since 2000, especially Brazil and China which, for example, accounts for more than one-third of Mozambique’s debt stock. Greater diversity of lenders is welcome, but diversification should not be at the expense of pragmatic and transparent financial management.

Funds raised by governments are public money. In keeping with their constitutional mandate, legislators need to exercise vigorous oversight and demand transparency about debt terms and spending plans. The Public Affairs and Budget Committees in the Tanzanian legislature exemplify the potential influence of parliamentary scrutiny. Albert Halwampa at ZIPAR suggests that in Zambia “parliament should scrutinise the whole [borrowing] process”. He explains: “We follow debt sustainability frameworks set out by the IMF and World Bank. A few months ago the finance minister went to parliament to raise the debt ceiling. The legal framework for state borrowing isn’t quite clear.” In November 2014, Auditor General Edward Ouko, the Parliamentary Budget Office and MPs rejected the Kenyan government’s proposal to raise the country’s debt ceiling by 50% – to 53% of GDP after it was rebased in September – until further details about spending plans and returns on investment were provided. Ouko publicly warned that such a move “will mortgage Kenyans for the next 50 years”.

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Back to the IMF

In 2007, Ghana was the first African beneficiary of debt relief to tap the international bond markets, launching a US$750m 10-year issue. In 2014, despite a 60% upward revision of GDP, which elevated it to middle-income status, Ghana became the first beneficiary to return to the IMF for a three-year rescue package including up to US$1bn to allay a balance-of-payments crisis.

The discovery of oil and rapid economic growth spurred Ghana to raise loans that increased indebtedness to a higher level than pre-HIPC. The proceeds were not invested in infrastructure or reforms that would sustain GDP growth and generate the extra revenue to service the debt. Instead, the government vastly increased public-sector salaries, which now account for 70% of the budget. At the same time, the anticipated oil revenue was delayed and state mismanagement of the energy sector led to acute power shortages. Import costs and volumes rose steeply, leaving Ghana with a double-digit current account deficit, a budget deficit of 9.5% of GDP and public debt amounting to 60% of GDP in 2014.

By 2014, Ghana’s high GDP growth – which reached 14.5% in 2011 – could no longer mask the unsustainable state of the country’s finances. The cedi had declined nearly 40% against the US dollar by August, following a 24% slide in 2013. GDP growth slowed to less than 5%.

Assistance from the IMF enabled Ghana to launch its third Eurobond in September 2014. The issue had a 12-year maturity and raised US$1bn at 8.125% – compared to 5.625%, 6.875% and 6.625% for the 2014 issues by Côte d’Ivoire, Kenya and Ethiopia respectively. The cedi stabilised. In effect, the success of an unconditional bond issue was dependent on conditional IMF support, requiring cuts in public spending amounting to 3.5% of GDP that include civil service pay restraint, elimination of inefficient energy subsidies, and higher tax revenues to curb Ghana’s twin deficits.

Ghana entered into three-year support programmes with the IMF in 1999, 2003 and 2009. The current negotiations with the IMF are being led not by the current Finance Minister, Seth Terkper, but by a distinguished predecessor, Dr Kwesi Botchwey, the architect of Ghana’s economic reform programme in the 1980s.

NOTES

1 FastFT, Financial Times, Dec. 3rd 2014

2 Thomas, Mark R., “Africa debt since debt relief: how clean is the slate?”, World Bank blog, April 10th 2012

3 “IMF warns ‘rising’ African nations on sovereign debt risks”, Financial Times, May 29th 2014

4 IMF, Regional Economic Outlook: Sub-Saharan Africa, October 2014, pp.16-17

5 IMF, African Department (Series) 14/02, Issuing International Sovereign Bonds, p.1 Opportunities and Challenges for Sub-Saharan Africa
6 Data from www.africaneconomicoutlook.org
7 Sulaiman, Tosin, “African local bonds – an untapped opportunity?”, Financial Times beyondbrics blog, October 15th 2014
8 Standard & Poor’s “Ratings Direct, Sub-Saharan African Sovereign Debt Report”, February 27th 2014, p.2
9 Sulaiman, Tosin, “African local bonds – an untapped opportunity?”, Financial Times beyondbrics blog, October 15th 2014

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The post Africa Debt Rising – Paul Adams appeared first on Africa Research Institute.

At the launch, Mick noted that although African governments are relatively competent at taxation, reforms have been limited to increasing revenue at the national level. Little attention has been paid to improving local government revenue. Across the continent, there exists a strong connection between the extent of property taxation and the vibrancy and strength of municipal government. Sub-national governments keen to revitalise local services and infrastructure should focus their limited resources on taxing land and buildings.

Nara defined property taxation as a recurrent levy on the ownership and/or occupation of real estate. This differs from taxes on rental income, or on the transfer of deeds from one owner to another. Property taxation falls naturally within the domain of sub-national government because of the logical link between contributions at the local level and improvements to municipal services and infrastructure. The static nature of land and buildings also means that those seeking to avoid the levy can only do so by selling their assets.

Property taxation is highly progressive, as it is a tax on wealth rather than consumption. However, as a one-off payment, as opposed to a percentage on transactions, the levy is highly “visible”. This makes the tax unpopular, like all taxes, but it can improve local government accountability and encourage transparency in expenditure. As local taxes provide more predictable revenue than royalties from commodities or funding from central government, they facilitate better planning and budgeting, and enable local authorities to achieve greater fiscal autonomy from the centre.

Effective implementation requires a functioning local bureaucracy and an assessment model compatible with local property markets and land tenure regimes. Value-based taxation best reflects the ability to pay; yet, it can only work where property markets are mature. The value-based approach requires extensive data on sale prices and sound deed registration, in addition to a large number of valuers undertaking regular property appraisals.

Two simpler alternatives exist. Area-based models determine dues by assessing the size of a property; location-based systems assign a flat rate to all buildings in a particular ward or block. Although not designed to automatically reflect economic growth or inflation, these simple and transparent approaches to valuation can provide a temporary solution where property markets remain immature and land tenure regimes informal. If implemented successfully, area- and location-based taxation can help to establish a compliance culture and encourage the development of a social contract between citizen and state.

Successful property taxation cannot occur without fiscal decentralisation. In too many African states, sub-national governments have not been given authority to raise revenue commensurate with their expanded responsibilities. National governments are wary of successful municipalities becoming power-bases for opposition politicians. As a result, many local authorities remain dependent on transfers from the centre, and accountable to ministries in the national capital rather than local citizens. If municipalities were empowered to tax local land and buildings, they could better engage with taxpayers through mechanisms such as participatory budgeting, which can stimulate mutual accountability and drive improvements in local service delivery.

Irrespective of their approach, local politicians need to educate taxpayers about the benefits of paying property tax. Nara argued that presenting the tax as a benefit charge or user fee can increase its attractiveness. Directly earmarking revenue from the tax for improvements to local services and infrastructure that are clearly of benefit to property owners – such as waste collection, roads, and security – can have a similarly positive effect. However, widespread compliance will only happen if local authorities demonstrate the political will to address non-payment by powerful elites. There is no set formula for achieving this necessary objective, but sustained commitment from the mayor, at the very least, is essential.

Questions

Q: Bronwen Manby, independent consultant: Mick said that the tax system is not broken, but Nara argued that we need to commit greater political will to make property taxation work. How can we address this dichotomy?

Mick responded by explaining that international support has focused on national revenue administrations, with very little channelled to the local level. Municipal staff working on property tax are unable to draw on the same global connections as their counterparts in national capitals. It also remains difficult to aggregate local success stories and share these with others facing similar challenges. The lack of administrative capacity compels municipal governments to raise taxes in a coercive fashion, which is bad for their reputation and precludes the establishment of a social contract. This is a vicious circle which needs to be broken through sustained political will.

Q: Claire Frost, Commonwealth Local Government Forum: Why has property tax – one of the most difficult levies to raise – been left to municipal government, which has the least capacity to implement it? Additionally, what can be done to encourage greater political leadership and better community relations?

Nara explained that the taxation regime presented a question of subsidiarity. Irrespective of capacity, local authorities constitute the tier of government closest to the people and best placed to deliver services such as refuse collection, sewerage, public lighting and infrastructure such as roads and parks. Property taxation happens to be the most efficient source of revenue for municipal government due to the connection between these local services and local real estate.

In terms of leadership, fiscal, administrative and political decentralisation must go hand-in-hand. Officials need to be elected and accountable to local citizens if they are to be effective. Countries need to avoid the example of Kenya where devolution has been handled badly, leading to conflict between the new county governors and senators on one hand, and the National Assembly and executive on the other. The new county governments have yet to realise that taxing their own people will be more beneficial than remaining reliant on transfers from the centre.

Mick added that effective leadership is critical for creating trust between taxpayers and government. Elected leaders need to show that they are serious about dealing with local challenges if they are to win the trust of citizens and increase compliance. Property taxation can provide them with the revenue to reform local services and infrastructure, but revenues must be spent wisely if goodwill is to endure.

Audio podcast:

Video of Nara’s talk:

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Susan Parnell introduced the discussion by explaining how Africa’s Urban Revolution feeds into broader efforts to develop a distinctly African approach to analysing the continent’s cities.

Sean Fox challenged a “flawed line of reasoning” that has “dominated our thinking about the dynamics of Africa’s urban transition”, which he summarised as follows:

1. “Urbanisation is fundamentally an economic process that’s driven by people migrating from rural to urban areas in search of economic opportunity”
2. “Rapid urban growth in Sub-Saharan Africa has not been accompanied by a complementary expansion of formal waged employment opportunities, i.e industrialisation, and it’s therefore abnormal, undesirable, distorted”
3. “We should try to prevent what is often referred to . . . as over-urbanisation by discouraging or restricting people from moving from rural to urban areas. “

Sean argued that “urban policy” in Sub-Saharan Africa has been misguided because, very often, the key assumptions underpinning these conclusions are incorrect. What has actually taken place in Sub-Saharan Africa since the 1970s is “urbanisation without growth”, whereby cities have continued to grow despite economic stagnation and contraction. Furthermore, rural-urban migration is not the primary cause of the recent urban growth seen on the continent. Cities are actually expanding from within, thanks to high fertility rates and a diminution in mortality rates.

These misconceptions about what is driving urban growth in Africa have encouraged bad policy, and spurred “an overemphasis on population mobility – that is migration – rather than the demographic . . . changes in fertility and mortality”. In turn, this has led to governments and aid agencies justifying expenditure on rural development as a strategy for slowing down urban poverty.

Sean also highlighted the subtle differences between urban growth, which refers to an increase in the urban population in absolute terms, and urbanisation; the “change in the percentage of the population living in cities”. This point is analysed in detail by Deborah Potts in her ARI Counterpoint “Whatever happened to Africa’s rapid urbanisation?”

To conclude, Sean emphasised that the evolution of Africa’s cities “should be of concern to everybody around the world”, as there will likely be over a billion people living in African cities by 2030, which is more than the urban and rural populations of Europe and North America combined.

The second panellist, Jo Beall discussed the main ideas raised in her chapter on conflict and post-war transition in African cities, co-authored with the University of Sheffield’s Tom Goodfellow. Their intention was to look past the “noir” and dystopian portrayals of African cities to “see what really happened to cities in different kinds of conflict”. They also wanted to explore what role cities could play in supporting reconstruction and peacebuilding efforts. The research resulted in a heuristic model, “which is basically a typology of different kinds of conflicts”, and an assessment of “the relationship between cities and those particular kinds of conflicts”.

Also Read: Interview with Jo Beall about conflict in cities

The first type is “sovereign conflict”, which involves direct intervention by international actors, such as the UN, African Union or other states; the US-intervention in Somalia in 1993 is one such example. In sovereign conflicts, taking control of cities is crucial because of their political and economic significance.

Secondly, “civil conflict” refers to situations where the government is being challenged by organised armed groups, such as local warlords or rebels. “The relationship between cities and civil conflict is much more complex”, Jo remarked. For instance, despite on-going armed conflict in the DRC, “Kinshasa was a haven for peace” because the government retained firm control of the city. On the other side of the country, Goma has also remained relatively peaceful serving as the hub of war economy. It has been “in the interests of people engaged in [the] conflict to keep Goma going”. While civil conflicts are generally played out in rural areas, they are often “instigated by urban actors who resented something about the urban context”.

The final category is that of “civic conflict”, which usually results from the failure of governments to provide basic services. Both citizens and the state can perpetrate civic conflict. When carried out by citizens, civic conflict can take the form of gangs, riots and protests. Conversely, the Zimbabwean government’s campaign to clear slums in Harare – known as Operation Murambatsvina – is a clear example of civic conflict perpetrated by the state.

Jo also discussed how conflict can drive urban growth. Gulu, a provincial town in northern Uganda, was a place of refuge for people caught up in the 20-year-long civil war. In 2014, Gulu is the Uganda’s second largest city and is suffering from huge pressure on urban services. “So although the city is at peace . . . the potential for civic conflict to grow in that city is huge,” Beall posited.

The presentations were followed by a lively audience-driven discussion. Carole Rakodi, one of the book’s other contributors, pithily stated that “conflict is inherent to cities”, due to factors such as competition for resources and the mix of identities brought together within urban spaces. Deborah Potts broadly agreed with Sean’s main points but maintained that rural-urban migration is still an important driver for urban growth and is sensitive to economic factors. Questions and responses also covered ‘resource-boom towns’, burgeoning youth populations, a sense of belonging to a city and the linkages between urban policies in different countries – among much else.

Event Highlights:

Event audio in full:

Ahead of the event we sat down with Susan Parnell, who co-edited the book, to talk about the state of Africa’s cities today. Sue reflected on the legacy of urban planning, highlighted the effects of global environmental changes on cities in Africa, and offered advice to donors. She compellingly tackled the anti-urban bias in development and considers Africa’s future as “opportunely urban”.

Full interview with Susan Parnell:

Related content:

Event Summary: Africa’s Urban Revolution

Africa’s Urban Revolution: a review – by Hannah Gibson

Conflict in Cities: In conversation with Jo Beall – by Melanie Archer

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