Following through on G20 energy commitment to Africa (2)

The first part highlighted the difficulty that has been observed in following through on G20 member countries commitment to Africa. Intense competition among themselves for exploitation of Africa’s resources and the diverse interests of member nations serve as hindrances. However, bridging energy financing gap for Africa is critical to tackling climate change impact and protect the environment.

A recent international conference on financing for development in Africa offered global leaders the opportunity to join forces and commit to the necessary changes required to finance energy in Africa. It constituted a high level panel which made recommendations that were far reaching and can serve as a model for the G20 countries keen on financing energy in the region. They crafted the new Addis Ababa Action Agenda, a comprehensive agreement reached at the end of the Conference, which provides a foundation for innovative, scaled up financing of the global sustainable development agenda, including the energy sector.

The panel chaired by Kofi Annan stated bold actions required by African leaders, international partners like the G20 member countries and the private sector to improve energy finance in a report entitled “Power, People, Planet: Seizing Africa’s Energy and Climate Opportunities. It highlighted critical actions that could increase financing from current levels of $8billion a year to the desired rate of $55billion a year until 2030. The energy finance options include;

Increased Taxation

One of the greatest barriers to the transformation of the power sector is the low level of tax collection and the failure of some African governments to build credible tax systems the group noted. Almost half of the gap could be covered by increasing Sub-Saharan Africa’s tax-to GDP ratio by 1 per cent of GDP. A corollary to inadequate taxation is the limitation by ill-equipped tax institutions and weak fiscal regimes. African countries will be helped if they are more market-driven rather a command, control regimes.

Remove subsidies

An estimated $21 billion energy subsidy exists in Africa according to the panel. This is made up of $10 billion subsidy on kerosene and other oil based products and $11 billion to cover utility losses. One way African governments can be taken seriously by the G20 countries and other international development partners is to phase out these subsidies that encourage consumption which mostly benefits the rich. It recommends subsidizing connections for the poor in a more efficient and equitable manner to encourage universal access.

Remove tax concessions

Many countries provide foreign investors with excessively generous tax breaks in the form of tax holidays, capital-gains tax allowances and royalty exemptions. The argument is that such incentives encourage foreign direct investments. African governments would want to ensure that at least the beneficiaries of these concessions come with enough dividends for its citizens in the form of skill transfer, increased employment and rapid industrialisation as a trade-off otherwise it would be a meaningless exercise.

Reform energy utilities

It was stressed that long-term national interest must override short term political gain. Hence energy-sector governance and financial transparency will help bring light in the darkness. Energy entrepreneurs can join the reformed utilities in investing revenues and energy funds in sustainable power. Sustained regulatory reform is critical for investment. Unbundling power generation, transmission and distribution is one step towards creating more efficient and stable energy markets. Independent regulation is another. But private investors require an energy buyer such as a utility or dedicated power-purchasing agency and it is hard to build a convincing business case when the main buyer is a highly-indebted, corrupt and inefficient utility.

Seize the low carbon opportunity

African governments were encouraged to strengthen the market for low-carbon energy through predictable off-take arrangements, utility purchase arrangements, feed-in tariffs and auctions. Since the initial capital costs of renewable energy investment can be prohibitive, governments and regulators should seek to reduce risks and support the development of the market through appropriately subsidized loans. Development agencies like African Development Bank provides financing for such projects as the bank is keenly interested in actions that will reduce climate change.

Carefully manage aid

Aid can play a supportive, catalytic role if properly managed. Aid donors were urged to commit to the longstanding target of devoting 0.7 per cent of gross national income (GNI) to aid. African governments too are to mobilize around $10 billion to expand on-grid and off-grid energy access.

The international community should match this effort through $10 billion in aid and concessional finance aimed at supporting investments that deliver energy access to populations that are being left behind. President Barack Obama’s Power Africa initiative, which promises $7 billion over five years, has acted as a focal point for a range of US agencies and the private sector. Energy cooperation between the European Union and Africa is also deepening. The game-changer, though, is the emergence of China as a source of integrated project finance for large-scale energy projects which has committed $60 billion in funding energy projects.

Phase out fossil fuel subsidies in G20 countries

Governments in the major emitting countries were urged to place a stringent price on emissions of greenhouse gases by taxing them, instead of continuing effectively to subsidize them, for example by spending billions on subsidies for fossil-fuel exploration. International organisations were encouraged to put pressure through climate change conferences for a comprehensive phase-out of all fossil fuel subsidies by 2025, with appropriate support for low-income countries. Eliminating subsidies for fossil-fuel exploration and production – especially coal – should be a priority.

Redouble efforts to combat illicit financial flows, including tax evasion

G8 and G20 countries were urged to act on past commitments to strengthen tax-disclosure requirements, prevent the creation of shell companies and counteract money laundering. Implementation of the G20/OECD’s planned actions on base erosion and profit shifting should be accelerated; and the international community should support African efforts to strengthen tax and customs administration and reduce illicit financial outflows, especially through trade misinvoicing.

Other priority actions to mitigate illicit financial flows include public registries of beneficial ownership of companies and, with the assistance of the IMF, agreeing on how to define, measure and track such flows. A more efficient and equitable global tax system would decrease multinational companies’ ability to dodge their tax obligation

These actions require commitments beyond just mere declarations. While they are not novel suggestions, full implementation of them have been hampered by lack of political will by African governments and national interests of G20 member nations. African governments and their international development partners must work together to bring these plans to fruition as it is the only to bridge Africa’s energy financing gap.

ISAAC ANYAOGU