At the G20 Summit in Hamburg, the Compact with Africa was announced. What is in store for African countries signing up to this new G20 initiative?
Direct links to in-depth information on the Compact with Africa:
This year’s G20 summit was contentious. As Germany held the 2017 G20 presidency, the heads of 19 powerful states and the EU met in Hamburg in July to discuss the organization’s agenda. Numerous civil society organizations called for different forms of protest to express dissent with the G20’s set up and policies. As some of the protest turned violent, media coverage focused on the nightly riots on July 7th.
However, in the shadows of apocalyptic pictures of burning barricades, the G20 summit endorsed the Compact with Africa (CwA). The CwA is a long term policy framework likely to help shape the G20’s relationship with African countries long after the last alleged rioters are tried. First reactions lauded the CwA as emphasizing country ownership and facilitating individual solutions for African countries on their path to development. It is hoped that such results would diminish the flows of migrants to Europe.
The new G20 initiative originates against the backdrop of continuous challenges to developmental success on the African continent. GDP growth in Sub-Saharan Africa reached only 1.6% in 2016 and 41% of the population lives in poverty. Since Africa’s population is expected to double to 2.4 billion people by 2050, creating employment is crucial. Already, unemployment rates in the region are more than 10% with an additional 70% of workers in vulnerable employment. The International Labor Organization defines vulnerable employment to include people working under worse conditions than those in formal employment, for example those who are self-employed or contribute to small family businesses. Finally, youth unemployment is peaking at 29.3% in Northern Africa. Hence, there is a need to bring the continent on a path of development to improve the economic situation and therefore lives of people.
Will the G20 Compact with Africa address these economic needs? This short analysis assesses whether the G20 is taking the appropriate steps to help African countries get on track towards sustainable development. First, it explains the nature of the CwA. Second, the Compact’s focus on infrastructure development in the context of current development initiatives will be examined. The CwA ties in with other initiatives by Western countries and International Financial Institutions (IFIs), most prominently the International Monetary Fund (IMF) and the World Bank. These institutions are also involved in the CwA as it works through agreements between African countries and IFIs or G20 countries. Therefore, the CwA must be analyzed in this broader context. Finally, three main consequences of the development framework exemplified by the CwA will be discussed.
Infrastructure development is only one, albeit very important, aspect of the CwA, but the topic illustrates the key issues underlying the new initiative. Ultimately, the CwA perpetuates the dangers in the current set-up of massive infrastructure projects, including those financed by public private partnerships (PPPs). According to the World Bank, a PPP is “a long-term contract between a private party and a government entity, for providing a public asset or service” in which the private party is supposed to bear substantial risk and management responsibility. Yet, there is no universal definition.
A typical PPP project would be the construction of a road (which is a public asset) by a private party which, in turn, collects a toll from users of the road and receives part or all of the revenue. Private investments and PPPs can yield positive results. However, as this overview shows, the provisions put forward in the CwA are dangerous as they are likely to stifle legislation for social and environmental protection, aggravate risks to countries’ fiscal and debt sustainability, and avoid addressing the most pressing current needs of many African economies.
The CwA: a brief overview
The CwA is part of the G20’s Africa Partnership and originated in the G20 Finance Track, a forum in which the G20 finance ministers, central bank governors and representatives of IFIs meet. Prior to the summit in July 2017, these officials met in Baden-Baden, Germany to agree on the cornerstones of the Compact. The event was accompanied by a meeting of influential businesses constituting the Business20, whose recommendations to the G20 were considered in the CwA’s design.
While the CwA is part of a G20 initiative, only Germany, France, the UK, the US, Japan, Canada, Spain and the Netherlands are participating so far. Apart from Spain and the Netherlands, these countries are all represented in the G7, therefore the CwA resembles a G7 rather than a G20 initiative. As laid out in a report to the G20 produced by the African Development Bank (AfDB), the IMF and the World Bank, the CwA was designed in order to create a “framework for boosting private investment and increasing the provision of infrastructure in Africa.” African countries that join the CwA will negotiate bilateral agreements with G20 countries, as well as multilateral agreements with the IMF, AfDB, and World Bank.
At the time of writing, 10 African countries have joined the initiative: Morocco, Tunisia, Senegal, Cote d’Ivoire, Ghana, Ethiopia, Rwanda, Egypt, Benin, and Guinea. By joining, these countries agree to develop policy changes in their macroeconomic, financing, and business frameworks in collaboration with IFIs and G20 member countries according to the rules laid out in the report. However, for the latter three countries no detailed policy proposals are available yet. Each of the other CwA countries has submitted an investment prospectus – basically a “wish list” of projects -for which financing is sought. Most of the projects envisioned by the CwA do not have a price tag: those that do might cost approximately $388 bn over the medium term. Yet, the data in the prospectuses is far from complete and it remains uncertain how these projects will be realized.
Nonetheless, the amount provides a useful indication of the total volume of investments. To put this amount into perspective, consider the extent of Chinese engagement in the region. The numbers indicate that Chinese influence in Africa, the most resource rich part of the world, is higher than that of traditionally powerful international players such as the US. China is estimated to make foreign direct investments (FDI) of $27bn in Africa in 2017 alone. It also owns approximately 60% of African countries’ debt according to IMF officials, which makes it the biggest lender to the region.
In relation to this, the investment volumes of the CwA may turn out to be relatively small. Still, they represent the model of investment promoted by the G20 and the international financial institutions on a much wider scale. Hence, the CwA can serve as a vehicle for industrial countries to ensure influence and access to markets and resources on the participating countries. In other words, even though the investment volumes of the CwA may turn out to be relatively small, the initiative is indicative of the current trends in the way the “developed world” deals with Africa.
The CwA’s take on infrastructure
Infrastructure development is the new fad in development policy. Infrastructure projects can include (toll) roads, ports, hydroelectric dams, decentralized grid development, social housing, or hospitals and schools. Since 2014, infrastructure investment has been a priority of the G20’s Finance Track and will maintain its high priority during the 2018 Argentine G20. The G20’s infrastructure agenda directs and reinforces the activities of international organizations. The IMF and World Bank made private sector investment in infrastructure the focus of their 2015 “Billions to Trillions” plan, which has since been relabeled “Maximizing Finance for Development.” Moreover, most multilateral development banks as well as the EU’s External Investment Plan set similar priorities.
The crucial change common to these initiatives, departing from former development models, is that public money will only rarely be used directly for investments in infrastructure. Rather, this money shall primarily leverage private investment. This can be done, for example, by credit guarantees offered to private investors by the World Bank Group. In sum, this new financing approach intends to mobilize large scale private investment on the African continent by multiple actors.
In accordance with this turn in overall policy, the countries in the CwA have agreed to mobilize private finance or “crowd in the private sector” for development projects which have traditionally been funded with public resources. CwA countries pledge to create a business friendly framework (e.g., tax regime) to attract foreign investment, including in PPPs. This framework often includes business arbitration courts and Systemic Investor Response Mechanisms, which endow private investors with more leverage vis-à-vis national and local governments, for example by enforcing contractual obligations.
At first glance, using PPPs is appealing because they provide countries with a financing option that does not appear on their balance sheets and hence does not appear as public debt. The commitment to PPPs is part of all the investment plans of countries participating in the CwA. Importantly, facilitating PPPs is realized through legislative changes (PPP laws) and adoption of the World Bank’s “Guidance on PPP Contractual Provisions” (or similar provisions) in individual PPP contracts. A contract between the government and a private firm describes the terms and conditions of each PPP. It defines the risk allocation between parties and enshrines certain investor rights by naming what actions governments can and cannot take in relationship to private investors. It is therefore crucial to understand the nature of contracts based on the World Bank’s Guidance. This Guidance will shape the financing framework for infrastructure projects in the African compact countries such as a large scale social housing project in Rwanda.
What are the consequences?
1) Investor vs. Public Interest
The 2017 version of the”Guidance on PPP contractual provisions ”would protect investor interests over public interests” in many respects. For example, governments are encouraged to:
- Compensate private parties for losses incurred by “force majeure events.” These are unforeseen events, such as hurricanes, floods, and droughts, that can make it impossible to fulfill the parties’ obligations to provide infrastructure services.
- Compensate private firms for changes in the law (or regulations) during the time of the partnership, such as changes in environmental or social legislation that negatively affect the company’s revenue stream.
- Choose international arbitration mechanisms over domestic courts in the event that there are disputes between a private firm and the host government. Hence, governments could be brought to an international tribunal to settle such a dispute.
Adopting the World Bank’s Guidance will thus have grave implications on the sovereignty of the countries entering into the CwA. It is likely to inhibit legislative changes in favor of social and environmental standards (e.g., climate goals), as these regulations could force governments to provide high and/or long-term compensation .
2) Growing Indebtedness
PPP contracts often entail hidden risks for governments. Upon conclusion of the contract, they may not add any debt to the governmental balance sheets. However, the financing is done by private parties. If the risks of the PPP project materialize, excessive costs are converted into private debt of the contracting party. Yet, it is far from guaranteed that the debt will remain private. Contract conditions may lead to the conversion of private debt into government debt when projects are unsuccessful.
This is what happened in Portugal, where roads financed by PPPs did not yield the envisioned revenue from tolls. Eventually, liabilities arising from PPPs contributed to the country’s debt crisis in 2011. Even without the CwA in place, the debt levels of low-income countries are rising. From 2015 – 2017 the number of countries facing a high risk of default, most of them located in Africa, increased from 15 to 21. In 2016, $71 bn of private finance were mobilized for projects of multilateral development banks in low and middle income countries. . This money could translate into public debt, adding to already increasing debt and thereby torpedoing the very same sustainable debt levels that the CwA’s macroeconomic framework demands.
3) Decent Jobs
Finally, even if the massive investments in infrastructure financed by PPPs do not turn out to be ticking time bombs, the infrastructure projects the CwA aims to facilitate an inflow of Foreign Direct Investment (FDI) from corporations often based in G20 countries. Empirical evidence shows that between 2003 and 2014, FDI created 600,000 jobs in Africa, but these were mainly in low-skilled sectors, such as construction.
Given widespread illiteracy in Africa, low-skilled jobs are presently needed. For future development, however, it is imperative to transition to more high skilled jobs. For this, technology transfer, i.e., training and education for the workers, is important. With regards to technology transfer, recent experience with FDI yielded mixed results, and there is no systematic trend towards this positive effect. Thus, FDI is unlikely to be the silver bullet to facilitate development to the benefit of African people as it does not lay the foundation for a transition towards high-skilled jobs in the future. Traditional development aid often focused on education to enable the transition towards higher skilled jobs, but the CwA does not entail a commitment to education. Hence, it is unlikely to address the deficiencies of FDI.
In conclusion, infrastructure development is urgently needed in Africa. But, praising the CwA as emphasizing country ownership and facilitating individual solutions for development on the African continent appears misleading. This was exemplified by scrutinizing the negative implications of countries’ adopting the World Bank’s Guidance into PPP contracts, the hidden risks of PPPs and the CwA’s failure to address some of the most pressing needs of African countries. Signing onto the CwA comes at high costs. Countries may give up sovereign rights and face risks of rising debt levels. In return, they might get some positive results, but the benefits fall short of providing the countries with the systematic changes needed. As has been the case since the start of decolonization, the terms and conditions of powerful countries still apply. The choices of African countries are limited to accepting them or not. Country ownership should mean more than that.
In-depth information about the proposed about the projects envisioned in the Compact with Africa as well as the policy changes in each country signing up to the CwA was assembled in the following documents: