Africa Programme Meeting Summary

Delivering Sustainable Growth in Africa: The Role for International Financial Centres

Speakers: Geoff Cook

Chief Executive Officer, Finance Speaker: Mark Pragnell

Head of Commissioned Projects, Capital Economics Discussant: Dr Iwa Salami

Senior Lecturer, School of Business and Law, University of East London Discussant: Olu Okubanjo

Managing Director, Obsidian Occident Chair: Alex Vines

Director, Area Studies and International Law; Head, Africa Programme, Chatham House

12 November 2014

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2 Delivering Sustainable Growth in Africa: The Role of International Finance Centres

Introduction

International financial centres (IFCs) play a key role in encouraging foreign direct investment and sustainable economic development across the African continent. These services can help fill the investment gap in the African market by offering a more attractive opportunity to international investors.

This event launched the Capital Economics report Jersey’s Value to Africa, which examines the scope for Africa to grow economically and addresses the issues of corruption and illicit activity in the developing world, which IFCs are often accused of perpetrating. The panel assessed the role of international financial centres such as Jersey in sustainable development and the extent to which these centres can be a catalyst for economic growth in Africa.

Geoff Cook

Cook opened the meeting with an outline of Jersey Finance’s objectives and its reasons for compiling the report. Jersey Finance is a public-private partnership between the financial services industry and the , set up to promote the island as an international financial centre. Jersey manages around £1.2 trillion in assets belonging to partners in 195 countries. Cook said that it attracts capital due to its political and fiscal stability, respect for the rule of law, independent judiciary, simple tax system, commitment to international standards including the fight against tax evasion and criminal activity, and excellent transport and communication networks.

In 2013, Jersey Finance commissioned a study to quantify the economic and fiscal benefit of Jersey’s relationship with the UK. Cook said the study suggested that Jersey supports 185,000 British jobs, provides five per cent of Britain’s FDI stocks, makes a £9 billion contribution to the UK’s GDP and generates around £2.3 billion in tax contributions to the UK exchequer. He stated that a separate report found that allegations related to illicit capital flows from Jersey were ill-founded. They are also undermined by Jersey’s high compliance ratings from supervisory bodies such as the International Monetary Fund (IMF) and the Financial Action Tax Force (FATF).

Cook said that Jersey Finance identified Africa as a high growth, high potential market in its 2020 IFC Roadmap. Jersey’s overseas aid commission is committed to giving 0.7 per cent of GDP in aid and Africa is a major recipient and partner in that work already. He said that Capital Economics were asked to compile the report to evaluate Jersey’s current business footprint in Africa and the continent’s growth potential. In addition to this, Jersey’s Value to Africa analyses whether the focus on tax and illicit capital flows affects development of policy objectives and what Africa’s sources of investment capital are. Looking forward, it evaluates how Jersey can help Africa realize its potential and how the global community can ensure that Africans achieve an enduring benefit from international investment.

Mark Pragnell

Pragnell began his analysis of the report by noting that Africa is likely to remain the world’s poorest continent for some time. It currently accounts for 15 per cent of the global population but only four per cent of its economic output. This output is highly concentrated, with five countries accounting for almost two thirds of Africa’s total GDP. In spite of this, Pragnell stated that there are reasons for optimism. Annual growth has stayed fairly constant at five per cent per annum for the last decade, while there has been improved political stability and better governance overall. Pragnell said that the continent has a huge amount of potential yet to be realized. 3 Delivering Sustainable Growth in Africa: The Role of International Finance Centres

Africa contains eight per cent of the world’s extractable oil and gas, 15 per cent of its gold, 40 per cent of its industrial diamonds and almost all of its platinum group metal reserves. Pragnell said that Africa’s wealth potential will be augmented in the coming decades by the demographic dividend. By 2040, the Democratic Republic of the Congo (DRC), Tanzania and Uganda will join Nigeria, Ethiopia and Egypt among the top 20 countries in terms of population globally. This growth is projected to increase the working age population by 640 million people by 2040, and directly impact upon Africa’s productive capacity. Pragnell said that this will be the biggest working age population increase of any continent; and is especially favourable compared with , which will see a decline of around 70 million.

He warned that an increase of this magnitude can be a double-edged sword. If a country is unable to provide enough employment for its working-age citizens it will lead to a further drain and impact on public services and welfare. However, Africa has a unique chance to capitalize on its demographics. The report found that a continued five per cent growth per year until 2040 represents a cautious estimate for the future. Pragnell said that this growth would result in a fourfold increase in GDP from its current level, from $2.3 trillion to $8.7 trillion. He said that such growth rates would have a huge effect on the lives of Africans, although Africa would still be left with rates of GDP per capita on average only 14 per cent that of the today. Growth will not be spread evenly throughout the continent. The report predicts that Niger, Uganda and Mali will have higher than average growth rates, largely because this growth has started from a relatively low base. Niger will benefit from some of the strongest demographic growth in Africa, while Uganda has begun to see the benefits of more stable administrative arrangements and solid fiscal policies.

Pragnell said that according to the World Bank, Africa accounts for 20 of the bottom 25 countries for ease of doing business, seven out of the bottom 10 for rule of law, and 23 of the bottom 40 for firms’ ability to access credit. There is therefore much policy work to be done to deliver on its potential for growth. Recent threats of ebola and Islamist fundamentalism have made implementing these changes harder. Pragnell argued that it is essential for African countries to gain investment in the basic physical assets required to deliver economic activity and growth, such as roads and power networks. Africa currently has the least capital of any continent other than Oceania, with two per cent of the global total. Its level of capital assets is just 15 per cent of the global average. In order for the fourfold increase in GDP to materialize, it must be matched by a six fold increase in capital stock across the continent. That would add up to a cumulative investment of $85 trillion, equivalent to roughly one year’s global GDP today. Pragnell said that 37 per cent of Africa’s GDP must be spent on investment projects each until 2040 to deliver this. Rates of investment presently stand at 24 per cent of GDP, and if this proportion continued to 2040 there would be an investment gap of $11.5 trillion.

Pragnell said that some of the investment to fill this gap will come from aid, domestic economy activity and local governments. However, he said that due to the scale of investment needed, the majority of funding must come from foreign investment. International trade now accounts for 32 per cent of global GDP compared to 20 per cent 30 years ago. There is also greater mobility of labour and enterprise. The percentage of people living in Organisation for Economic Cooperation and Development (OECD) member states who were born outside their country of residence has risen from 7.5 to 12 per cent in a decade. Pragnell said that in emerging markets there is a newly affluent, mobile and eager middle class who are willing to travel. In addition, multinational companies are creating a population of serial expatriates with postings around the world. IFCs are being created in a context of greater mobility in labour, capital and trade than ever before.

Explaining the purpose of IFCs and their increasing prevalence, Pragnell said that IFCs provide a service to facilitate secure cross-border financial transactions. They are jurisdictionally neutral, providing 4 Delivering Sustainable Growth in Africa: The Role of International Finance Centres

administrative convenience for people working across borders. They specialize in the regulation of such transactions, and can help mitigate the risk of certain countries by providing a safe haven. They can also be tax neutral. This is an important attraction for multinational companies as when conducting cross- border operations with onshore jurisdictions, transactions are taxed twice. Pragnell added that IFCs make it easier to bring investors together from around the world to pool investment funds.

Pragnell argued that IFCs can both facilitate foreign investment and encourage entrepreneurship in Africa. He cited the example of mining companies based in Jersey to explain how IFCs can amplify investment. Investments in the extractive industries usually come with substantial risk; extractive projects are capital intensive, the actual amount of resources might differ from predictions, and the market for natural resources is especially volatile. The scale of investment needed typically means that finance must be pooled from around the world. Jurisdictions which are tailored to these conditions are therefore attractive to partners engaging in large foreign investment projects.

Pragnell addressed allegations that IFCs are culpable in or ignore bribery and corruption in their operations. He said that there are problems around businesses using trade mispricing to move illegally acquired money out of Africa. Poor tax receipt levels in African states are compounded by corporate tax abuse. The World Bank estimates that $1 trillion is lost every year through bribes and corruption. However, Pragnell said that the accusations that IFCs enable these processes are unfounded. He said that Jersey’s legal administration is robust and effective in tackling illicit activity, and supported by reviews from the IMF and OECD. In addition, Jersey willingly exchanges information with police in other areas of the world in order to detect those profiting from bribery, money laundering, tax evasion and other criminal activity. Pragnell said that there is a strong consensus within Jersey’s business community that illegal practices are unacceptable, and undertaking illicit activities is not worth the risk.

Pragnell concluded that Africa has the potential to grow, but is currently at a crossroads. The demographic dividend is a unique opportunity, and only private investment can be of the scale needed to realize it. He said that the reality of Jersey’s relationship to Africa and its potential future value to the continent is contrary to the picture most often painted of offshore jurisdictions, and the island’s financial and legal services firms have a great deal to offer.

Olu Okubanjo

Okubanjo said that while opportunities in Africa depend on your perspective, the typical African narrative is well known. He said that the continent is perceived to be unstable, badly run, extremely corrupt and insecure, and that starvation is ubiquitous. The most prevailing narrative is that Africa is poor, and does not attract capital. There is also a misconception that Africa has one homogenous market, culture, and economy. Okubanjo said that the report does well to address these concerns as part of its analysis of the continent’s economic condition.

He argued that the need for capital is one of the greatest challenges facing Africa. Many of the problems that people identify with the continent fall back to the lack of capital and economic development. As a highly developed market in the OECD, separate from the UK but sharing its culture and laws, Jersey is uniquely positioned to support access for capital into Africa. The speaker argued that Jersey has a tough and strong regulatory environment and a robust legal system, which provide comfort for international investors looking for a soft landing spot into the African marketplace. In addition, it shares a similar to Africa as well as having good language links. 5 Delivering Sustainable Growth in Africa: The Role of International Finance Centres

One major challenge in the coming years might be that clients looking for investment support to enter the market could fall short on the amount of capital raised due to reputational concerns about Jersey. However, Okubanjo said the fact that Jersey sponsored the report indicates that there is a greater willingness to partner with ethical institutions who want to access global capital and drive it into Africa. He said that there are opportunities for incredible wealth creation and profit, and suggested that those firms who took an ethical perspective would be more likely to take the chance to help transform lives in Africa.

Iwa Salami

While commending Jersey’s high compliance record and favourable transparency rating in the FATF recommendations, Salami said that there were nonetheless various issues with IFCs that need to be addressed. She said that the criticisms that IFCs have harboured illicit funds from Africa cannot be discounted. The African Union (AU) believes that approximately $150 billion leaves the continent illegally every year, primarily as a result of corruption. Analysts estimate that between 80 and 90 per cent of this money does not return. Salami said that these figures undermine notions that IFCs should be used to fund Africa’s infrastructure development needs.

She said that corruption is endemic to the African continent, and that while the opportunity to siphon funds to offshore destinations remains, it will remain an attractive option. Most countries in Africa have weak tax administration regimes, which have limited capacity to collect tax and investigate tax evasion. Salami argued that the effectiveness of international efforts against the secret operations of financial institutions has been criticized. She said that recent initiatives such as the Global Forum on Transparency under the auspices of the OECD, Tax Information Exchange Agreements (TIEAs) and the Multilateral Competent Authority Agreement (MCAA) should be applauded, but do not provide fail-safe solutions. For example, TIEAs have been criticized for not providing for the automatic exchange of information and for the fact that countries often have very narrow interpretations of the agreements. This leads to certain countries having different approaches to the types of information that they give to foreign jurisdictions seeking to investigate the transfer of funds. Doubts have also been raised about the usefulness of the MCAA, as only 51 countries have agreed to sign up to it. Switzerland has indicated it will only be willing to share information with jurisdictions that are critical to its industry. Salami said that this suggests the country will not disclose information about high network wealthy individuals from developing nations who hold capital in Switzerland.

Salami suggested that the report should have covered the role of regional economic communities (RECs) in Africa. She said that RECs are increasingly playing a role in the movement of capital on the continent. Kenya has indicated its interest in establishing itself as an IFC. It plays an integral role in the East African Community (EAC), which has plans to introduce monetary union measures by 2016. A single is also planned to be implemented by 2024.

Last, Salami drew attention to the fact that Jersey is home to several multinational companies that engage in operations in Africa’s extractive industry. She questioned the extent to which Jersey has been involved in environmental protection policies in its relationship with these companies, noting that many African countries have experienced negative environmental effects associated with resource extraction.

Summary of Questions and Answers

Questions 6 Delivering Sustainable Growth in Africa: The Role of International Finance Centres

How can the African marketplace be developed so that investors can match their capital to small companies with innovative ideas?

Can you claim that you are committed to providing capital to African companies when there are so many roadblocks to moving money through Jersey?

How in specific terms can Africa meet this huge financial gap?

What specific advice can you give to policy practitioners outside of Africa to help the continent fulfil its potential?

Geoff Cook

Cook emphasized that Jersey was committed to investing in Africa both because of its commercial attractiveness and because investment is beneficial for Africans themselves. He said that many more countries are having free and fair democratic elections. It is now more popular for African countries to adopt initiatives such as sovereign wealth funds, locks on the approval of investments, scrutiny into the sources of funds and protections on national assets. The speaker said that these would continue to improve the continent’s economic stability. He said that trust in Jersey’s robust legal and financial infrastructure would help Africa secure investment, and that in effect Jersey was lending its infrastructure to Africa until it could develop its own.

Cook explained that since Jersey is a highly compliant jurisdiction, there are high expectations for those looking to acquire capital. These include lengthy processes to assess whether money has been laundered and to check that the capital is being sought for ethical reasons. He underlined that Africans are not discriminated against, and these are processes that apply to people from every country.

It is important for governments to put effort into developing bilateral relationships with African countries. Cook said that relationships could be built on regulatory cooperation agreements and creating the channels for business to happen. He noted that Jersey Finance has begun a dialogue with the government of Jersey to work on developing these links. Both are conscious that the whole capability of the jurisdiction must be utilized to accomplish the goals set out in the report.

Jersey has not yet reached out to RECs such as the Economic Community of West African States (ECOWAS). However, Cook said that it has formed links with the African Tax Administration Forum and with African countries through a conference held in Jersey two years ago. In all 60 African states were invited to the conference, where Jersey’s financial authorities shared their knowledge and experience. The meeting covered topics on how to react to financial crime, how to construct a financial intelligence unit and how to support a regime for reporting suspicious activity.

Mark Pragnell

Pragnell said that the figures often reported concerning illicit capital outflows from Africa are not robust, and the extent to which these numbers are inflated can put a strong bias on approaches to policy. He stated that while preventing capital outflows is important, this will not address the investment gap. He also argued that capital outflow in itself is not necessarily a bad thing. For example, it could simply be the rewards of previous investment in an economy, and changing ownership of assets reflects a healthy economic condition. Pragnell said that weak tax administrative regimes must be strengthened to address low tax receipts in Africa. He suggested that the British government could provide resources to help countries improve tax systems as a policy priority. 7 Delivering Sustainable Growth in Africa: The Role of International Finance Centres

Olu Okubanjo

Okubanjo asserted that there is currently no market for people who want to match foreign capital in Africa. However, there has recently been some progress on this issue. Three months ago, there was a conference held in Dubai that discussed the possibility of the emirate becoming an access point into Africa for capital. Okubanjo said that the principal reason that it is difficult for those who require capital to access it is because they are not positioned appropriately. Jersey’s high compliance means that it requires a high quality and breadth of information from companies who want to start a relationship with its institutions. The expectation for this information is far higher than an African business would ordinarily encounter in the domestic market. In addition, because African countries are identified as being higher risk and operating in high risk sectors, they typically need to fulfil even more requirements.

Okubanjo said that very few firms are prepared to dedicate resources to go through the due level of diligence to access global capital, and this is especially true of companies in an area that has an image deficit. Investment opportunities on the continent are hamstrung by an asymmetry of knowledge about conditions on the ground. Okubanjo said that better engagement by governments, for example through trade delegations, would be of enormous help in improving this. He argued that many approaches to Africa’s challenges confuse moral arguments with economic arguments, saying that capital flight is a bigger problem than corruption. For the purpose of directing economic development, the focus on corruption can distract from the more serious challenge of money being taken out of the domestic economy entirely.

Questions

Has Jersey attracted any agencies for partnership on agriculture projects?

How can we make the leap to African companies becoming investable propositions?

Would Jersey consider making a public beneficial ownership register?

Does Jersey work with bodies such as the World Bank for stolen asset recovery on historically stolen assets?

Do firms undermine domestic revenues by avoiding double taxation?

Olu Okubanjo

Okubanjo stated that firms are becoming more confident in investing in agriculture opportunities in Africa without financial support from international development associations. He said that 50 per cent of the world’s undeveloped arable land is in Africa, and opportunities will become ever more attractive as the global population grows and food resources reduce. More success stories of firms in Africa accessing capital will help to overcome reputational concerns. As the number of firms that approach international markets and attract capital grows, providers of finance will become more comfortable with the prospect of investing in them. Okubanjo said that the more capable firms who draw the initial investments will be likely to feature again in future investment projects.

8 Delivering Sustainable Growth in Africa: The Role of International Finance Centres

Mark Pragnell

Pragnell said that the purpose of IFCs is not to avoid domestic taxation. International companies typically pay contributions to employment taxation, profit tax, social projects and licence fees in the countries where they are operating. He said that when firms want to return profit to their investors, having pooled finance from across the globe in order to fund a project, they are more likely to do it in jurisdictions that will not tax the money again. They therefore avoid double taxation but not local taxation.

Geoff Cook

The government of Jersey is currently consulting on public beneficial ownership registers. Cook said that such registers can degrade compliance rather than improve it. He said that as cooperation is voluntary there is no means of exposing criminal behaviour, and public disclosure can help criminals by allowing them to target victims with more precision. Cook said that currently, Jersey has a thorough and effective system to determine ownership of funds and relate that information to the police.

Jersey is an active participant in the World Bank’s Stolen Asset Recovery Initiative (StAR). Cook said that Jersey repatriates more criminal proceeds than anywhere else in the world, and has been cited as an exemplar of cooperation and effectiveness in repatriation.