Energy Transition: Why Africa must focus on Energy Aggregation and Consolidation

Historically, energy transitions have never meant one energy system completely replacing another rather one system reducing quantitatively amount of use in favour of another. The rise of coal ,the steam engine and petroleum did not end the use of traditional sources of energy such as firewood and horsepower.

By Moses Kulaba, Governance and Economic Policy Center

Delivering Charcoal in Uganda (Rod Waddington/CC BY-SA 2.0)

Globally, there is an increasing focus on climate change and energy transition. There is debate on the risks that these portend and an emerging view/ consensus that energy systems must transit gradually to achieve a net zero carbon emission   by 2050. Africa is at a dilemma, caught up in its realities and a myriad of contesting advice on which policy direction it should take.

This article attempts to deconstruct this increasing popular narrative on climate change and energy transition by arguing that it is unrealistic to achieve net zero by 2050 and a complete energy transition for Africa is impossible. Climate change may be real but achieving total decarbornisation by 2050 may be farfetched. I take this posture by looking historically at how previous changes in energy systems happened and Africa’s realities.

Chronologically, energy transitions are not new. They have happened before. Perhaps what make this possible transition quite significant is that it has been linked with the catastrophic climate change and global warming. This transition therefore is viewed as one of the remaining silver bullet to save the planet.  However, an analysis of historical trends and the manner in which the road to decarbonisation is framed and the narrative/view that energy systems must transit by 2050 is therefore problematic.

Historically, energy transitions have never meant one energy system completely replacing another but rather one system reducing quantitatively amount of use in favour of another. The rise of coal and the steam engine did not end the use of traditional sources of energy such as firewood and horsepower.

Between 1780’s to 1860’s whale sperm oil was a dominant source of energy for lighting before being replaced with the discovery of petroleum. This can be considered as the first energy transition after man discovered fire.  However, the two energy sources co-existed into the next century before petroleum became the dominant source. Whale oil did not disappear but retained value as a resource after the discovery of petroleum. In the 20th Century, Whale sperm oil was used for new purposes, including margarine, lubricants soaps, detergents, vitamins D and nitroglycerine, which is still in use today. 

According to Yale Professor, Paul Sabin, the discovery of petroleum is often cited as an example of an energy transition, where one fuel completely displaced another.  Yet this argument is totally flawed because the discovery of petroleum actually made it possible to hunt whales at a massive scale. The fossil driven ships could travel and conquer deep seas than before and stay their longer as merchant anglers trapped, caught and killed and stored whales in their thousands.[1]  There could not have been modern whaling before fossil fuels were readily available.

While the demand for whale oil declined after the discovery of petroleum, its demand continued to rise. By the 20th Century, sperm whale catch peaked in the 1960s to over 250,000 tones before declining in the 1970s and 1980s. Numerically, it took almost over 100 years between 1850 and 1980 for this gradual decline to happen.

Indeed, recognizing the pace at which the whales were fished for their sperms and other products to near extinction, in 1986, the International Whaling Commission (IWC), established in the 1940s,  banned commercial whaling because of the extreme depletion of most of the whale stocks. Even with the IWC ban in place, to date whales are still-hunted and killed for their sperms and other products, as was the practice during those mediaeval times. Japan left the IWC in 2019 and now hunts whales without any international restriction.

Moreover, historical data shows that the advent of both coal and petroleum as new energy sources  did not take animal powered energy systems out of the market. When goods carried by the coal fired steam engine train locomotive at the station, one needed horses to haul it to the final destination.  In the United States animal power increased with the number of horses and mules rising from 4.3 mln in 1840 to 27.3mln in 1920.

To date animal power continues to exist and still forms a major source of motorization in many parts of the world. Even with the advent of the advanced petroleum, based engines, in some parts of Africa, when goods arrive by bus, truck or lorry at the nearby road terminal one requires animal power (cow, horses, mules or camels to carry them the next mile to next village destination.

This suggests that different forms of energy systems are complementary to each other rather than antagonistic. One fuel has always added to another expanding both the energy supply and energy mix. The fossil-based systems will therefore continue to serve side by side with the clean energy systems.

In my Country, the two-wheeler petroleum powered motor cycle (Boda Boda) is slowly replacing the cow and donkey horsepower as major form of transportation linking the main road to the rural interior.  However, the cow, donkey and horse power are not going away too soon. In some areas the human power is still largely used with people carrying their heavy loads on their head or pulled carts.  The electric car is yet to arrive and will take long to dominate our major roads in the city and perhaps another 100 years to make it to the final mile into our villages. For Africa, therefore energy shift from animal and human-based power to fossil-based energy is just midway. It will therefore take many decades to leapfrog to a total clean energy system.

 Since the Paris Declaration, there has been an upscale in clean energy sources compared to the previous years. However, the pace at which clean energy is being deployed is too low to overtake fossil-based sources by 2050.There is evidence that not only Africa is doing badly on this front.

In its 2023 report, the IPPC experts warned that we have already reached the catastrophic point of no return (keeping global temperatures under 1.5 degrees and on a clear path to miss the net zero target by 2050. Green House gas emissions continued to increase. Policies and laws addressing mitigation have consistently expanded since  the Paris declaration but theses are yet to cause a dent in global carbon emissions . Global GHG emissions in 2030 implied by Nationally Determined Contributions (NDCs) announced by October 2021 make it likely that warming will exceed 1.5°C during the 21st century and make it harder to limit warming below 2°C. There are gaps between projected emissions from implemented policies and those from NDCs and finance flows fall short of the levels needed to meet climate goals across all sectors and regions, the IPCC report states.

Since the climate problem is defined as too much greenhouse gas emissions, rather than too little energy, this historically suggests that only a solution that actually limits carbon dioxide emissions will work. However, when the climate problem and decarbonisation is defined with targets this way, there is a serious problem.

Factually, Africa is energy poor. The IEA World Energy Outlook, however, shows that close to 600 million people remain without access to electricity in sub-Saharan Africa. Over 80% of Africa’s population depends on biomass as a source of fuel.  The electrification stands at around 40% and use of clean sources such as solar stands at a mere 4%. The net zero is barely 30 years from now and how Africa can turn these statistics around is quite impossible.

With the current statistics and demographics, decarborization (or net zero) is in many ways unprecedented as it means or suggests eliminating the use of a currently viable and profitable fuels and replacing this with another.

Globally, fossils are too dominant and producing countries are too reluctant to let them go without proper substitutes to replace them.  Yet dominant fuels have major characteristics that make them difficult to be easily replaced. These include; having large market share, economic dominance/ascendance, political dominance, established institutional structures to support and cultural influence on the users.  All these take time to be built and embedded into the energy system. Yet an energy transition reflects a change in the balance between fuels and a shift in their characteristics.  That clean energy system will take over the characteristics of the current fossil-based systems in the next 27 years is quite an uphill task.

The recent global events have shown that the world can reach a net zero emission in 2050 is over exaggerated and practically impossible to achieve. The simple disruption in petroleum supply chains by the Russia-Ukraine war in 2022 showed us this realty. Barely two months into the war, had developed countries such as German turn around on fossils to fire up their coal-based plants to generate energy.

Indeed, one EU leader remarked that all along Europe was wrong on coal as source of energy and that European economies could survive without fossil-based energy. German, Austria, France, and the Netherlands fired up their coal plants to save gas. Coal exports from Africa to Europe boomed and new coal investments in the US increased. The energy transition even in developed countries is happening but not without significant setbacks.

Since the 2015 Paris agreement, the 2050 net zero deadline has been a moving target.  India has said it would turn net zero only by 2070, while China has set a target of 2060. Russia and Saudi Arabia amongst major economies, have also set 2060 as their net zero targets. Some African governments such as Ghana have suggested 2060 as their deadline. The reality is that this net zero target, where the world is so clean and devoid of any carbon emissions may never be reached.

For Africa, therefore the answer to this conundrum of what direction the continent should take lies in energy aggregation and consolidation. This is where by new energy systems are layered on to existing systems and gradually scaled up as, they become technologically advanced, cheaply available and affordable,  to meet the continent’s sustainable energy needs. There has to be no rush for Africa to transit by 2050! Africa does not have to pay heavily to secure a net zero and a just transition by 2050.

 Africa’s future  is safe by developing hybrid energy systems that can at the same time sustain the fossil based systems, while clean energy systems are aggregated and consolidated on an incremental basis for the next long-term future.  What is required for now therefore is;

  1. Research and developing technologies that can reduce the toxic levels and carbon intensity in the petroleum based sources of energy so they can continue to be used in a clean future.
  1. Developing alternative products that could continue to be useful in support of the fossil industry, even with its diminished existence in the next 100 years. As earlier mentioned, while whale sperm oil stopped its usefulness as a dominant source for lighting, it continues as a key ingredient used to produce other high valued products.
  1. Developed countries appreciate that the journey will be a long one before our energy systems can significantly decarbonize. Even with the increased uptake in solarisation and other cleaner systems, biomass will continue to play a dominant portion as a source of energy to the bigger population in Africa.
  1. Our policies have to be pragmatic but less ambitious to avoid pitfalls in implementation and application, achievement of their intended objectives. Africa is not devoid of policies. It is a graveyard of policy implementation.
  1. Africa has to define its own energy transition pathway that is aligned to its practical realities and deficiencies. It is likely that fossils will continue driving Africa’s energy system past 2050.

In the climate justice space, perhaps Africa should be advocating for a Just Energy Aggregation and not a mere Just Energy Transition!

[1] Richard York: Why Petroleum did not save the whale; socus sociological research for a dynamic world , December 2017

 Disclaimer: This blog article is produced as part of our ongoing policy discussion series on climate change political economics and energy transition.  The discussions and briefs  therefrom are intended to share dissenting views and provoke intelligent debates ahead of major climate spaces such as COP28. The views contained herein may not necessarily fully represent those of the Governance and Economic Policy Centre (GEPC) but aired in support of intellectual democracy and geared towards securing a continental consensus.

Financing of the Green Economy and prospects for Africa-Can Green Banks offer a viable alternative?

Achieving Green Economies and a just energy transition for Africa cannot be achieved without financing. It is said there is sufficient liquidity and capital to finance climate change and green economic revolution in Africa. Unfortunately, much is not reaching the African continent. In East Africa, access to financing of clean renewable energy such as solar is limited and expensive for many rural communities and poor households. There is potential for solar energy but the existing government policy, legal and financing have gaps limiting cheap financing and solar uptake for rural communities.

The US experience show successful green and clean energy financing models through Green Banks which can be adopted and replicated in East Africa.  Large and small financial institutions on the African continent have leveraged instruments and facilities towards financing the green economy, but these are largely unknown. Governments such as Tanzania are considering carbon trading mechanisms while others look towards imposing carbon taxes to raise the necessary financing for the next green economy. What are the viable options?

The problem

African countries still face significant challenges in financing their climate transition. While investment needs resulting from NDCs are estimated at $2.8 trillion by 2030, funds invested on the continent still represent a limited share of global green finance flows, and the share covered by the private sector remains limited[1] Governments, local financial institutions and communities find it difficult to mobilise or access financing. Large private sector players are reluctant to invest due to the high cost of capital, small scale of projects and inhibiting policy terrains that make it difficult to attract capital and financing into the green economies. Much of the available financing is not yet reaching the communities and thus scantly creating lasting change.

Viable options?

Green banks have been so far lauded as one of the most innovative policy developments that can be used to support and deployment of clean energy[2]. Green banks are financial institutions established primarily to use innovative financing to accelerate the transition to clean energy and fight climate change[3]. They mix commercial, public, and philanthropic approach to capital making it cheaper to finance new clean energy projects that otherwise couldn’t be built. They are a good vehicle for leveraging finance and directing investment to areas which are needed to scale up the green economy.  They are good tools for driving or achieving public policy with a social enterprise angle[4].

An assessment by the African Development Bank and the Climate Investment Funds revealed the potential of Green Banks in six African countries, namely Benin, Ghana, Mozambique, Tunisia, Uganda, and Zambia.

“The assessment revealed that green banks have significant potential for attracting new sources of catalytic funds when supporting low-carbon, climate-resilient development through blending capital and mobilising local private investment for green investments in Africa,” the AfDB reported.

Multilateral development banks and international financial institutions had a crucial role in enabling local financial institutions to develop a green pipeline of projects and ease their access to resources. It is for this reason that the AfDB has established the Africa Green Bank Initiative (ABI).

The AfDB’s Green Bank Initiative (AGBI) is described as a powerful tool for reducing financing costs and mobilising private sector investments in climate action in Africa. The African Green Bank Initiative will be backed up next year by a $1.5 billion trust fund due to close in 2025. The initiative will bolster the capacity of local financial institutions to build a robust pipeline of bankable green projects, while de-risking investments and entrenching long-term investor confidence toward climate-resilient and low-carbon projects in Africa.  “It will do so through investing in sectors such as energy efficiency and renewable energy, climate-smart agriculture, resilient infrastructure, and nature-based solutions, AfDB states.

According to Akinwumi Adesina, the AfDB President, the establishment of a green finance ecosystem could generate $3 trillion in climate finance opportunities on the continent, while over the period 2020-2030, the financing gap to address climate change is estimated at between $100 billion and $130 billion per year.

Moreover, there are other financing options that are or can be pursued. These include green bonds, green loans, and carbon trading mechanisms.

Coincidentally, all these financing mechanisms have upsides and downsides, which  upon evaluation climate financing justice advocates such as  the CSO network, Pan African Climate Justice Association (PACJA) and government officials like Ms Isatou  Camara of the Gambia are now calling out financial institutions  for a total re-engineering and redesign  of climate financing to ensure that more is structured in the form of grants than loans and that at least 70% of this funding reaches the communities. The loans are expensive, Africa is over indebted and yet investment in renewable energy is an expensive affair for African governments to pursue alone[5]

At national level access to green finance should be relatively cheap, driven by a combination of less profit maximisation goals and more social enterprise imperatives and back by enabling legislative and regulatory framework.

Purpose of the webinar

This webinar is the second in a series of the different webinars that GEPC plans to conduct this year on the different elements on economic governance and climate economics, with anticipation that we can contribute towards expanding knowledge, public discussion, and engagement in these spaces.

But more significantly creating opportunities for business economic opportunity in country, including space for youth and women led young businesses to benefit from the emerging context.

Our distinguished speakers will dissect this subject and help us understand Financing of Green Economy in the context of climate change and transition to clean energy: Prospects for Green banks and other financing mechanisms in East Africa with a view of

Objectives

  1. Increase awareness and knowledge about the current Climate Economics and Financing the Green Economy in Africa
  2. Provide an opportunity for stakeholders to interrogate financing structures, national policy terrains, initiative potential opportunities and inhibitors to success.
  3. Influence key stakeholders such finance institutions and potentially state parties to hasten reforms for success.
  4. Generate a potential opportunity for non-state actors, communities, and small entrepreneurs to benefit from existing financing plans.

Our distinguished speakers will be:

1. Ms Isatou F. Camara, Ministry of Finance and Economic Affairs, The Gambia, Least Developed Countries Group Climate Finance coordinator:  Restructuring of the global financing architecture for green economies-what financial institutions must do.

2. Ms Audrey Cynthia Yamadjako, Africa Green Banks Cordinator, African Development Bank (AfDB)

3.Ms Grace Mdemu, Capital Markets FSD Africa, former Business Development Officer at Africa Guarantee Fund (AGF): Leveraging of capital and opportunities to finance Green Economies in East Africa

4.    Dr Elifuraha Laltaika, Senior Lecturer of Natural Resources Law, Faculty of Law, Tumaini University Makumira, Tanzania:   Leveraging financing to poor and indigenous communities in Tanzania

5. Ms Cynthia Opakas,  Senior Legal Counsel, Green Max Capital , Kenya: Practical experiences on financing the green economy in Kenya and global best practices

6. Moses Kulaba, Convenor

Date and Time:  Wednesday, June 14, 2023 12:00 PM Nairobi , 11 AM CET and 9AM ACCRA Time

Pass Code:059752

Registration Link:  https://zoom.us/j/94532314396 

[1] https://www.afdb.org/en/news-and-events/african-development-bank-launches-model-deploying-green-financing-across-continent-56903

[2] Richard Kauffman, Yale School of Management, Financing Clean Energy Technology

[3] http://coalitionforgreencapital.com/wp-content/uploads/2019/07/GreenBanksintheUS-2018AnnualIndustryReport.pdf

[4]https://gepc.or.tz/make-it-happen-how-green-banks-acceleration-can-light-up-rural-hamlets-in-uganda/

[5] Her Excellence Dr Samia Suluhu Hassan, President of United Republic of Tanzania during her address to African leaders at a side event on the Southern Africa Power Pool (SAPP) organised during the CoP27 in Egypt

AfCFTA: Dissecting the world’s largest Free Trade Area: Challenges and Opportunities for East Africa. Is AfCFTA a window of opportunity or a fallacy?

The AfCFTA entered into force on May 30, 2019. Despite the speed at which this new Africa continental trading block is unloading, there is very limited knowledge amongst ordinary citizens, particularly youth, women, and small business.  There is a fear that AfCFTA may be built on a weak ground, set itself for an uphill task and potential failure

The Africa Continental Free Trade Area (AfCFTA) is so far the world’s largest Free Trade Area bringing together the 55 countries of the African Union (AU) and eight (8) Regional Economic Communities (RECs). The overall mandate of the AfCFTA is to create a single continental market with a population of about 1.3 billion people and a combined GDP of approximately US$ 3.4 trillion. The AfCFTA is one of the flagship projects of Agenda 2063: The Africa We Want, the African Union’s long-term development strategy for transforming the continent into a global powerhouse[1].

As part of its mandate, the AfCFTA is to eliminate trade barriers and boost intra-Africa trade. It is to advance trade in value-added production across all service sectors of the African Economy. The AfCFTA is expected to contribute to establishing regional value chains in Africa, enabling investment and job creation. The practical implementation of the AfCFTA has the potential to foster industrialisation, job creation, and investment, thus enhancing the competitiveness of Africa in the medium to long term.

The AfCFTA entered into force on May 30, 2019, after 24 Member States deposited their Instruments of Ratification following a series of continuous continental engagements spanning since 2012. By end of February 2023, 54 member states had signed up and 46 already deposited their ratification instruments, paving way for effective implementation of AfCFTA.

The problem

Despite the speed at which this new Africa continental trading block is unloading, there is very limited knowledge amongst ordinary citizens, particularly youth, women, and small business.  There is a fear that AfCFTA may be built on a weak ground, set itself for an uphill task and potential failure.   AfCFTA aims to create a supra regional economic block in an environment where previous efforts to trade and economic  integration  under frameworks such as the Economic Cooperation of West Africa States (ECOWAS), Preferential Trade Area and Common Market for Eastern and Southern Africa (PTA- COMESA), Southern Africa Development Cooperation (SADC) and East Africa Community (EAC)  have struggled to survive and fully benefit member states , particularly in expanding opportunities for small businesses, jobs and free movement of labour. Trade barriers still exits and overlapping regional configurations, with multiple membership of states to more than one block have exacerbated problems in implementation and held back member states and citizens from enjoying the benefits of regional economic integration.

From an academic perspective, there is a continuous debate on the role of regional integration and commercial diplomacy as instruments of economic diplomacy on trade export flows among African states. A study by the European University in 2016 show that bilateral diplomatic exchange is a relatively more significant determinant of bilateral exports among African states compared to regional integration. The study found a nuanced interaction between these two instruments of economic diplomacy: the trade-stimulating effect of diplomatic exchange was less pronounced among African countries that shared membership of the same regional block. Generally, this could mean that there exists a trade-off between regional integration and commercial diplomacy in facilitating exports or a lack of complementarity between these two instruments of economic diplomacy[2].

AfCFTA is therefore viewed in some analytical circles as potentially counterproductive, as may potentially open the continent to stiff external competition.  Further, cynics view AfCFTA as a potentially well-orchestrated tactical move suitable for developed economies, to open up Africa as a single market. With AfCFTA in place, its alleged, it will be cheap for large RECs such as the European Union (EU) to easily access Africa’s markets with minimal hinderance, as it may now be easy for large and well-established trading blocs such as the EU to negotiate preferential trade deals with one major African block and not with independent states. This had proven problematic in the past negotiations for trade deals such as the controversial Economic Partnership Agreements (EPAs).

Window of opportunity?

None the less, the AfCFTA is here, providing potentially a land shade moment for Africa to reclaim itself, unlock its trade potential and to take its well-deserved position in the community of nations as an economic giant.

The whole existence of the AfCFTA is to create a single continental market for the free movement of goods, services and investments. The AfCFTA Agreement covers goods and services, intellectual property rights, investments, digital trade and Women and Youth in Trade among other areas. The Secretariat, therefore, works with State Parties to negotiate trade rules and frameworks for eliminating trade barriers while putting in place a Dispute Settlement Mechanism, thereby levelling the ground for increased intra-Africa trade. Could this be a reclaimed window of opportunity for Africa?.

Purpose of the webinar

The purpose of this webinar is to dissect AfCFTA create a space for sensitisation and public dialogue with key stakeholders such as Civil Society Organizations, Africa’s economic diplomats, the Private Sector, Government Officials and Agencies, Partners, and other interest groups; in a bid to create awareness about the AfCFTA Agreement and the potential opportunities it offers, thus, securing their active support in the implementation of the Agreement.

This webinar is a first in a series of the different webinars that GEPC plans to conduct on the different elements of AfCFTA, with anticipation that we can contribute towards expanding knowledge and engagement with AfCFTA in the region and propelling its effective implementation.  But more significantly creating opportunities for business economic opportunity in country, including space for youth and women led young businesses to benefit from this new continental arrangement.

This webinar will be held ahead of marking the 4th Anniversary since the AfCTA came into force on 30th May 2023. The webinar will therefore be a major point for reflection on the aspirations and progress made and in generating views and which can potentially influence its future direction.

Our distinguished panelist speakers

  1. Ms Treasure Maphanga, Chief Operating Officer (COO), Africa E-Trade Group and Former AU Director Trade and Industry
  2. Mr Deus  M. Kibamba, Lecture Tanzania Centre for Foreign Relations
  3. Mr Elibarik Shammy, Programs Manager, Trade Mark  Africa
  4. Ms Jane Nalunga, Executive Director, Southern and Eastern Africa Trade Information and Negotiations Institute (SEATINI)
  5. Mr Robert Ssuna,  Tax and Trade Expert and Consultant
  6. Mr Moses Kulaba, Tax Law expert and Economic Diplomat (Convenor)

Tentative Dates: Wednesday, 10th May 2023

Time: 12-13:30 Hrs-EAT/ 11AM CET and 9:00 am Accra Time

To participate please register via: https://zoom.us/meeting/register/tJIsc-ispjwiGdVn1y4w9Jks-h-zs5i9QEzV

Meeting ID: 96141487831. Passcode: 391843

[1] https://au-afcfta.org/

[2] Afesorgbor Sylvanus Kwaku (2016) Economic Diplomacy in Africa: The Impact of Regional Integration versus Bilateral Diplomacy on Bilateral Trade, European University Institute, EUI Working Paper MWP 2016/18

Tanzania’s Transition Minerals potential opportunities, risks, and dilemma in context of Climate Change and Energy Transition

 

While critical minerals offer potential opportunities, there are also latent risks for countries such as Tanzania. These risks range from policy gaps, supply chain governance risks, geopolitics of consumer nations, investment and revenue management risks

By Moses Kulaba, Governance Analysis Centre

Critical Minerals and Energy Transition: Tanzania’s potential

Globally, the zeal to mitigate climate change and keep global warming under 1.5 degrees Celsius by reducing net carbon emissions from fossils by 2030 and transition clean energy by 2050, has picked momentum. According to scoping study report by the Natural Resources Governance Institute (NRGI)[1] , based on data from various geological surveys and government reports show that Tanzania has a wide variety of critical or transition minerals deposits relevant to the future technological transition to clean energy.  Critical mineral deposits found in Tanzania include Graphite, Rare Earth, Cobalt, Copper, Iron, Nobium, Lead, Lithium, Manganese, Diamond, Nickel, Titanium, Uranium, Vanadium, Tungstein, Lead, Bauxite and other gaseous minerals such as helium. Over 18 million tons of graphite reserves (estimated to be the 5th largest reserve in the world) are present in mostly in Lindi, Morogoro and Tanga Regions. An estimated 1.52 million tons of nickel deposits have been discovered in Kagera region and about 138 billion cubic feet of helium is present at Lake Rukwa Basin. This is said to be the second largest helium deposit in the world.

The discussion on energy transition and its implications to the Country has not picked momentum within Tanzania. The potential contribution that these minerals could make to Tanzania’s economic development in the context of energy transition may be known in some circles but not widely discussed.

There has not yet been a specific categorisation of these minerals as critical or strategic. To date minerals in Tanzania are still largely classified as metallic minerals, industrial minerals, and energy minerals. Perhaps, this is due to the limited public understanding of the strategic and critical nature and role some of these minerals will play in defining the global future.

Energy Transition Opportunities for Critical Minerals

Globally, there is a surge in interest in critical or transitional minerals as a pathway to meeting Net zero targets The World Bank estimates that overall demand for at least some critical minerals vital for industrial energy transition will increase significantly over the next 30 years (by 2050).  For instance, copper and aluminum are cornerstone minerals for all electricity-related technologies, since electrical equipment such as motors, transformers and cables use copper to conduct electricity and heat.  Copper, nickel, lithium and cobalt are key elements for batteries used in many of the new technologies. An electric vehicle, for instance, typically contains lithium-ion batteries, which requires lithium, nickel, manganese and cobalt-bearing minerals. Solar panels and wind turbines are made with nickel, graphite and copper. Telecommunication devices we use, such as phones and laptops, require a wealth of minerals, including tantalite, wolframite, graphite, bauxite, etc.

World economic powers and foreign companies have already picked interest and acquired stakes in Tanzania’s Critical Minerals, significantly highlighting what may potentially be a race to control the supply chain into future. So far companies from Australia, China, Canada, Europe and US are known to have interests in Tanzania’s critical minerals. This provides Tanzania with a potential opportunity to leverage its extractive sector (particularly critical Minerals) to benefit from the forthcoming energy transition. With deposits of critical minerals, such as graphite and Helium, Tanzania’s critical minerals subsector could be a game changer.

Energy transition risks in critical minerals

While critical minerals offer potential opportunities, there are also latent risks for countries such as Tanzania. These risks range from policy gaps, supply chain governance risks, geopolitics of consumer nations, investment and revenue management risks

The future of Foreign Direct Investment in mining risks

The investment boom in critical minerals will affect the future of foreign direct investment in Tanzania’ s other major mineral resources such as gold and gemstones. This is already felt in the type of mineral licenses that are being granted. According to NRGI critical mineral scoping study report, 90% of the total exploration licenses in 2005 were granted for gold. By 2020, 70% of exploration licenses granted were for critical minerals. Clearly, investors’ interest for critical minerals is currently surpassing that for gold and other major minerals.

Tax and revenue risks

 Over the past years Tanzania has tried to increase its domestic revenue mobilisation efforts from the mining sector. Tanzania’s DRM efforts, among others, focused on tax reforms to curb tax evasion and maximising benefits from the minerals sector through value addition.  Currently, the mining sector contributes 547 trillion[2] to the total government revenue collections. Between 2018/19 mining companies contributed around 421 trillion TZS (183 billion U.S. dollars) to the revenue collected by the government, while oil and gas companies contributed approximately 177 trillion TZS (77 billion U.S. dollars)[3].

However, the NRGI scoping study found there are gaps in the current Tanzania Development Strategies and Mineral Policies. An independent or separate policy on critical or strategic minerals may not be necessary but aligning the current framework to tap in the energy transition opportunities is essential. Government can benefit more from encouraging/investing in processing of the critical minerals at home, thus capturing and retaining high values from the resource extraction of the value chain. Where the local volumes cannot economic viably support, Tanzania can explore partnering with other Countries in the region. The potential revenue contribution from the critical mineral’s subsector is largely unknown. Critical Minerals are just minerals. If the government doesn’t strategize, the windfall benefits from the energy transition could be missed. There are also significant governance (corruption) risks in critical minerals supply chain which could undermine government’s efforts to maximise revenues[4].

To realize the opportunities offered by this resource wealth, Tanzania needs to take a deeper look at its policy and legal frameworks to ensure proper governance of the sector and a clear identification of its position through a well-tailored strategy on critical minerals. If not well managed, the interest in controlling the critical mineral’s supply chain could benefit more the developed (user) Countries than the supplier countries such as Tanzania.  The new search for critical minerals could also mean more new marginal lands opened up for exploration and mining (large scale and artisanal), sparking off a new wave of land-based conflicts. The boom could also be short lived new alternatives to critical minerals emerge to support clean energy technologies emerge.

 

[1] NRGI: Critical Minerals and Energy Transition: Findings from Tanzania’s Scoping Study of Critical Minerals Potential and implications for Tanzania, 2021

[2] https://allafrica.com/stories/202104300627.html

[3] https://www.statista.com/statistics/1272116/contribution-of-mining-oil-and-gas-to-government-revenue-in-tanzania/

[4] https://eiti.org/events/critical-raw-materials-times-uncertainty-why-good-governance-matters-energy-security

Uganda-Tanzania East Africa Oil Pipeline: signed deal yes, but hurdles lie ahead.

Samia, Museveni witness pipeline project final actsThe East African Oil Pipeline project received significant boots in April 2021 with Uganda with a series of key oil infrastructure related agreements signed between the government of Uganda and Tanzania and the oil companies for the East Africa Crude Oil Pipeline (EACOP) project to transport crude from Uganda to the Tanzania port of Tanga.

According to the government communications, these agreements signal Final Investment Decision (FID) which could be announced soon with production, expected around 2025. There has been already significant work going on at the oil sites in Hoima and as one of the Company officials remarked, work has started. The project is very important to the East Africa region as it promises great economic benefits to the governments and their citizens in the form of jobs, revenues, and other associated economic linkages.

Despite this rekindled hope, shortly after the signing of these agreements, it was evident that multiple uncertainties still lie ahead.

The details of the signed agreements remained undisclosed and technical experts involved in the negotiations remained secret on essential information on key fiscal terms surrounding the tariffs.

The project financing arrangement remains a quagmire.  Few days after signing of the agreements, several banks in France where the lead investor Total is based announced that they were staying away from the financing of the pipeline. The French banks included, BNP Paribas, Société’ Générale and Credit Agricole, Credit Suisse of Switzerland, ANZ of Australia and New Zealand and Barclays.

According to earlier government reports, The Standard Bank of South Africa, China’s ICBC and SMBC of Japan are lead advisors of the EACOP financing. These were under immense pressure from their counterparts Bank Track, Reclaim Finance and Energy Voice for what they described as pushing responsible financing of projects worldwide. According to these banks and activists EACOP’s environmental credentials were failing.

The Uganda government announced that it was not bothered by announcement, describing it as not new. However, the announcement by the banks signalled that the project could be still facing serious negative diplomacy from environmental activists and other political interested actors regionally and globally.

President Museveni described the project and the agreement signing occasion as an act economic liberation. This followed the political liberation which in his view happened some decades ago when Tanzania helped exiled Uganda political groups to take power in Uganda and change the course of history. With the hurdles still to overcome, it was evident that perhaps the financial, environmental, and political woes were not over, and the project was yet to fully get on track.

Tanzania political transition: new era, new opportunity

In March, East Africa was gripped with shock upon the sudden death of Tanzania’s President John Pombe Magufuli. Over the past five years, President Magufuli towered like a political colossus, led with a nationalistic approach, and pursued reforms which sent zillion sentiments across many frontiers. He threw out Accacia, Barrick’s Mining subsidiary in Tanzania, for tax evasion and dubious practices that he descried as stealing against Tanzanians. Enacted new mining laws and renegotiated a 50/50 sharing deal with Barrick which has since been mirrored as a template in other Countries far away such as Papua New Guinea. However, his style was considered as a possible deterrent to potential investors and perhaps disruptive to the extractive sector.

The transition to the new President Ms Suluhu Samia Hassan was peaceful and lauded as a new era for a new opportunity. President Samia has promised to set Tanzania to a new path. Few days into office, President Samia observed that all was not very well as earlier perceived. New investments in the sector were low. The volume of Mineral exports had fallen. Despite the Mererani wall, Tanzanite, the precious gemstone from Mererani, was still being stolen. Negotiations for conclusion of the lucrative LNG project had stalled. The tax laws were impeding and the enforcement style by the Tax Authorities had seen many companies’ close shop. The President has since called a truce with the private sector and declared Tanzania is fully open to investment.

Despite her aspirations, President Samia has insurmountable hurdles to climb. The mining reforms were passed in law and therefore amending or uprooting these will require parliamentary approval. The amendments were so popular with the Tanzanian public and this could be touch political gamble to make.

Nonetheless, Tanzania still has an opportunity to excel. The Country’s extractive wealth lies in Minerals such as gold.  The Country has vast deposits of what are considered critical minerals such as rare-earth, lithium etc which are vital to industrial use during the energy transition. With a revived and careful political navigation Tanzania could still attract potential investors and comfortably reap more benefits from its extractive wealth.

SADC in Economic Meltdown; Can Tanzania be German of the Region?

On Saturday 17th August, Tanzania assumed the chair of the South African Development Cooperation (SADC), amidst disturbing economic figures indicating that the region was facing a serious economic meltdown. Can Tanzania be the ‘German’ of the region, playing the economic big daddy role by calling the other states into political order and bailing out the struggling member states?

By Moses Kulaba, Governance and Economic Analysis Center, Dar es Salaam, Tanzania

The SADC is a 16-member state regional economic block established with among others promoting sustained economic growth and sustainable development amongst its objectives. However, the recent economic data indicates that region is witnessing an economic meltdown with most of its member states, except perhaps Tanzania, positing negative or stunted economic growth over the past years.

According to the economic and social indicators data compiled and released by its secretariat the the SADC region posted an estimated average growth rate of 1.4% in 2016 compared to 2.3% in 2015. At country level Tanzania registered the highest growth of 7% among the member states followed by Botswana with a far below rate of 4.3%[i].  

In 2017 Tanzania recorded an economic growth of 7.1% followed by Seychelles (6.3%) whilst Angola registered negative growth for the second consecutive year in order of 2.5%[ii] The region’s growth was increasing at a decreasing rate since the post global period in 2009.

The region’s economic giant South Africa has witnessed rapid economic slowdown, bring along its small neighbors and trading partners under its weight.  Countries such as Zimbabwe were collapsing under the weight of economic sanctions, Namibia and Angola recorded negative annual real GDP (at market price) of 10.8% and -2.5% respectively in 2017 due to the slump in commodity prices and other related risks. Botswana at 2.4% did not perform well either. The region posted an overall trade deficit with rest of the world of USD6.7bln. 

The AfDB report for 2018 warned that the economic outlook for Southern Africa region was cautious[iii]. Broad based economic activity was expected to recover at slow pace, but the outlook remained modest given the diverging growth patterns for the region’s economies. Upper middle income countries turned in low and declining rates of growth meanwhile lower income transitioning economies recorded moderate and improved growth, albeit at reduced rates.

Despite the improvement, economic performance remained subdued as the region’s economic outlook continued to face major headwinds. High unemployment, weak commodity prices, fiscal strain, increasing debt and high inflation.

Real GDP was estimated to have grown at an average of 1.6% in 2017 before increasing to a projected 2.0% in 2018 and 2.4% in 2019.

The future regional growth was expected to be bolstered with primary expectations of increased investment in non-oil sectors such as electricity, construction and technology in large infrastructure projects, mining as well as continued recovery in commodity prices.

However, the latest figures show that the region was not well on that front either.  The decline in commodity prices in recent years reaching the lowest point in 2015 translated into significant income loses for the economies, implying a negative impact on public and private sector spending and therefore growth in employment.

Before the 2008-2009 global recession, the region experienced moderate growth, though individual countries contributed differently. For example, Angola, Mozambique and Namibia exhibited robust growth that collectively outpaced the regional group.

Thereafter, Angola, the region’s foremost oil producer and former raising economic star received the worst bashing with its economy experiencing adverse economic growth effects due to weak oil prices.

Overall the region experienced negative GDP growth with Swaziland (-10.08%), Zimbabwe (-8.38%),  and Angola (-6.31%)  being among the worst hit[iv]  Other Countries such as Zambia, Namibia , Mozambique and Malawi were not performing better either. South Africa reported the highest public debt soaring in billions dollars followed by Angola.

South African Institute of International Affairs observed that intra-regional investment and trade levels had declined markedly since the commodity slump in 2013. Moreover, the trade and economic growth in the region remained imbalanced, exacerbating political strains among member states. Non-tariff barriers and other factors had adversely affected intra-regional trade and investment in recent years.

Assuming the mantle, at the end of its 39th Summit held in Dar es Salaam, Tanzania’ President John Pombe Magufuli was furious with against the Secretariat for having not provided adequate and alert to the political leadership that the region was experiencing an economic meltdown with reduced or stunted growth and an expanding trade deficit.

Speaking at the SADC People’s forum on the sidelines of the main summit in Dar es Salaam, the South African Professor, Patrick Bond, described the situation as alarming, catastrophic and turbulent and yet no one was bold enough to speak about it.

He was perhaps communist in view and radical in approach, blaming what he described as the capitalistic enterprise and its puppeteers for under mining economic justice, risking lives of by putting profit before the people and causing climate change whose effects were ravaging SADC but remained quite revolutionary in suggesting that the ordinary people perhaps needed to send a clear signal to its political leadership that all was not okay. The economic fundamentals were tattered and the regional leaders needed to wake, Prof. Bond lectured.

Can Tanzania emerge and become the ‘German’ of the region?

With this state of the Union, the question therefore arose can Tanzania emerge and become the ‘German’ of the region, playing the economic messiah role by providing both political leadership and economic bail out to its neighbors. 

In 2013 up to 2015 when the European Union experienced economic turbulence, Brussels turned to German to liberate it from the gigantic economic Dracula which was tearing down its economic block and leaving some of its small states indebted and facing bankruptcy. German wrote cheques in financial bailouts, provided guarantees and political prop up for economically struggling states such as Greece, Portugal and Italy.

German relied on its economic prowess and its political might as the industrial central pillar of the European Union. The charismatic leadership of its Chancellor, Ms Angela Merkel, was a distinct asset. Even at the risk of her own political career and constant onslaught from the German far right, Merkel could not tolerate any nonsense and was not ready to allow Europe to fall back.

In the face of the similar economic doldrums which seems now to face SADC, can Tanzania afford such muscle or a German equivalent?

Tanzania has done it before. In the 1960’s until 1990’s when the region was facing serious political, Tanzania pulled up its resources and committed it to the liberation struggle. It hosted training camps and provided pupilage to thousands of liberation fighters. Dar es Salaam became to the political headquarters of Frontline States where the idea of SADC in its current form was initiated and a spring for independence for many of the current South African states.  For some, therefore SADC at 39 years, just came back home.

In assuming the SADC Chairmanship, President Magufuli warned the Secretariat that it will not be business as usual as of now and for the next one year his interest would be to see that resources placed at the disposal of the Secretariat were not spent on conferences but on meaningful tangible projects which benefited the people. Could this be the kind of approach that region needs to take in order to deal with its increasing economic challenges.

An agile kind of leadership which places the people at the heart of politics and fights with cunning shrewdness against corruption, public waste, nepotism and personal drive to accumulate wealth by those in power.

Over the years these have been some of the vices which have dogged the region and bringing the much needed progress to stagnation and ultimate halt in some member states. Comparatively, perhaps the SADC is the largest economic group in Sub-Saharan Africa. With over an estimated population of 337.1 million people in 2017, is larger than its western equivalent, the Economic Community of West African States (ECOWAS) and obviously bigger than the European Union has a just a fraction of the SADC population yet somehow progress has been considerably steady in the other regions.

According to experts the region was faced by multiple non trade barriers and low intra region trade which still at around 20%.  Technically, speaking, the members are happy to do business with other countries outside the region rather than their economic neighbors partners in SADC. The member states are living alongside each other but not fully economically and trade integrated.

Political uncertainties which has dogged the former economic giants of the region such as South Africa, Zimbabwe, Mozambique and Angola created fertile conditions negative to investment and economic growth.  The governments lost grip on the economic mantle and directed attention towards managing internal politics and mechanics for political survival.  

Xenophobic attacks in South Africa could have also created a sense of fear and caused disarray in a fragile informal sector which was quietly the driving factor or fulcrum on which the South African economy relied. Crushing cost of electricity, turmoil in the extractive sector and stalemate in the platinum industry in 2016 perhaps were also a contributory factor to South Africa’s political woes. 

Overall, according, to Professor bond, the region was just poorly governed and a new leadership impetus led by the people was necessary to bring back the declining glories

For many years SADC was so much preoccupied on political stability. With good success, it has managed to tackle conflicts and bring peace amongst its member states. Overall, political conflict in the form of civil wars in the region has been declining with all except the DRC reporting any semblance of a conventional Civil war in recent years. 

Even, this has significantly been downgraded in recent years. Currently, there is no severe risk of any threat from any member state to destabilize any other through an arms insurrection. The ongoing conflict in the Eastern DRC is largely a war of survival for the remaining tribal and ethnic elements rather than a fully-fledged military configuration to overall and capture power in the DRC. If it can be dealt with, then perhaps the war in the DRC will be over or significantly reduced to minimal levels in many decades.

The future wars of the SADC will therefore be largely economic and perhaps resource based on key issues such as land, water and control of the real means of production and profit. Acute poverty could be the other driver of the masses towards insurrection. For Tanzania therefore, to take up the German challenge will be a touch endeavor.

Tanzania’s economic benefit or contribution to the region is too minimal. According to trade statistics, Tanzania is among the least exporters to SADC and its overall trade balance with its SADC neighbors was still low. It therefore lacks the economic might of German stature.

Over the past three years Tanzania’s political leadership has commitment itself to building its economy first before looking outside. Cutting back on public waste and flogging its population into line to start paying up taxes to finance its public service and infrastructure ambitions, Tanzania is building its economy from within.

Throughout the 1960s to the 1990s Tanzania sacrificed a lot in order to politically liberate virtually all the SADC member states and yet gained very minimal in return.  Political historians have even have even argued with some level of confidence that Tanzania under developed itself in sacrifice for others to develop. Tanzania would be therefore quite cautious in economic diplomatic terms and perhaps uncomfortable at this moment in giving out too much of what it has acquired over the years to salvage its economic neighbors.

The conditions in the region appear to have turned so bad in the past few years with persistent drought raving across the region only to be replaced by wrecking floods leaving behind famine and death in communities along its way.  Approximately over 1000 people dies in the last floods in Mozambique and Malawi caused by cyclone Idai and Keneth. Millions at a risk of starvation.  Essential infrastructure such as road and bridges connecting rural areas to urban centers and across countries such as the port of Beira are badly battered and incapable of supporting economic productivity.

The region has not been able to attract in Foreign Investment into its natural resource wealth and flagship infrastructure projects such as the Mighty Inga dam electro power project in the DRC which would have brought life into the SADC power master plan have remained incomplete for many years now. The region is badly in need of both reconstruction and reconfiguration to sustain itself and its ambitions.

At the end of the summit Tanzania’s former President Benjamin Mkapa advised that SADC member states should stop relying heavily on foreign donors for aid to support or finance their development agenda. Building internal capacity through a reliable market for products from the block, investment in education, technology, domestic revenue collection and unlocking the potential amongst its budging population to drive the economies forward would be a better option. Perhaps the SADC leadership should fine tune an ear to the wisdom of its elders.

The meeting concluded with signing off of three development cooperation programs worth 47 Million Euro deal with the European Union under its European Development Fund (EDF) 11 financing round. According to official statement, the funds will be used over the next five-year period to support improvement in the Investment and Business Environment (SIBE), Trade Facilitation Program (TFP) and Support to Industrial Productive Sectors (SIPS) three programs to be implemented by the SADC over the next five-year period

The SIBE program aims at achieving sustainable and inclusive growth and job creation by transforming the region into an investment zone, promoting intra-regional investments, foreign Direct Investment and a focus on Small and Medium Enterprises. The TFP will contribute to enhance inclusive economic development in the region through deepened economic integration while the SIPs aimed at contributing to the SADC industrialization agenda, improving performance and growth of selected value chains. How this EU injection translates into lifting the region from its economic downward spiral will yet to be found out at the next summit when SADC turns 40. What is clear is that something has to be done.

[i] SADC: Selected economic and social indicators, 2016

[ii] SADC: Selected economic and social indicators, 2017

[iii] AfDB: Southern Africa Economic Outlook, 2018

[iv] https://countryeconomy.com/countries/groups/southern-african-development-community

Elation as Kenya exports Oil; what does it mean for Oil rush in East African region

On 1st of August 2019, President Uhuru Kenyatta announced that Kenya had joined the list of world oil exporting Countries by selling its first crude oil at a cost of 12 Million United States dollars.

While the news reverberated across the Country and the region with elation, it is also possible that Kenya’s announcement could trigger a contagious rush to the bottom with East African Countries jostling to outcompete each other by signing off deals and agreements locking off future markets with potential buyers. Some of these deals may not be necessarily good.

By Moses Kulaba; Governance and Economic Analysis Center

Addressing the cabinet and media in Nairobi, President Kenyatta said Kenya had sold its barrels of crude oil to a buyer whose identity still remained a secret.

“We are now an Oil exporter. Our first deal was concluded this afternoon with 200,000 barrels at a price of USD 12 Million.  So I think we have started the journey and it is up to us to ensure that those resources are put to the best use to make our Country and to ensure we eliminate poverty, said Kenyatta.

The news reverberated in the region and globally with a new player on the market. Obviously there was more excitement and elation in the Lokichar Oil fields where Tullow Oil and its joint partners continue to explore more blocks with more vigour and determination.

Kenya discovered its first Oil in 2012 and since then, explorations have continued in the Lake Turkana basin region with deposits being reported and more projections made to increase. In its previous reports Tullow estimated some 560 Mln Barrels in possible reserves and these are now projected to increase as prospects for more discoveries are higher than before.

This would translate into 60,000 to 10,000 barrels per day of gross production, which is said to be insufficient to warrant the construction of a refinery locally hence the export plans

The sold consignment was delivered by truckers at the Kenya Petroleum Refineries facilities in Changamwe, Mombasa since July last year, under what the government described under the early oil project

What does this mean for Kenya and the East African region?

The deal concludes that Kenya once ruled off as an oil novice in the region, with the lowest volumes of discovered oil is running a head of its East African neighbors in reaching exporting oil country status many months before any of its East African neighbors can sell a drop of oil.

For Kenya, this is game changer in regional geopolitics as not only does the oil revenue bring a new line of foreign exchange earnings into its economy and thus consolidating its position as the regional economic superpower.

Galvanizing on its early market entry status, Kenya could tap the available markets and seal off any available contracts beating off any potential competition from its neighboring countries.

The oil revenues could also breathe some life into its Lamu Port South Sudan Ethiopia Transport (LAPSSET) Corridor development plan which has stalled for among others lack of partners. With oil revenues flowing, Kenya can go alone developing the ambitious infrastructure projects along the corridor all the way to the Ethiopian boarder.

Contrary to nay Sayers, the oil export could be a window to emboldened security in the Turkana area as the government seeks to protect vital oil installations and export routes to the coast.  For many years, Lake Turkana basin has been one of the most volatile and insecure areas in Kenya as marauding armed warriors move from one village to another raiding for cattle. Civilians and military installations have been attacked and people killed.

In June, 2018 Turkana residents stopped five trucks from ferrying crude oil to Mombasa over rising insecurity along the border with Baringo. The resident complained of insecurity in the area but also complained of what they call consider unresolved issues on oil sharing benefits between the National governments, County governments and local communities over the 5% share which they wanted channeled to their bank accounts rather than for development as rallied by a section of leaders.

There is no way we can be a security threat to the oil we have protected and guarded for years. So the specialized and additional security personnel (protecting oil) should head to Kapedo and secure people.

Kenya’s oil export announcement could trigger a contagious rush for oil in the East African region, with each country racing to drill to bottom in search for oil. In an effort to outcompete each other, those already with oil discoveries such as Uganda and South Sudan could race to the market sealing off deals and contracts with potential buyers and agreements for future markets. Some of these deals maybe bad.

 Uganda was the first to strike oil around its Albertine graben in 2005. According to Uganda’s Ministry of energy the petroleum deposit discovered so far were estimated at 6.5barrels of which 1.5bln are considered as recoverable.

The Ugandan oil is supposed to be exported to the global market through a 1,443 electric heated East African Oil Pipeline (EACOP) via Tanzania. The East African Crude oil pipeline is expected to unlock East Africa Oil potential by attracting invest and companies to explore the potential in the region.

According to the project schedule available on the EACOP website the detailed engineering and procurement and early works were supposed to have been made in 2018 and construction started in 2019. The first oil exports were expected in 2020. But it appears all these are behind schedule.

According to Ministry of Uganda expected to conclude its financial deal for its joint pipeline with Tanzania by June, 2019, opening for the way for its construction. According to the information provided by then, Stanbic Bank Uganda, was supposed to be the lead arranger for USD2.5billion funding for the 1,455 km (EACOP) project. The deal was expected to have been concluded in June, 2019.

Kampala was also expecting that the Final Investment Decisions (FID) between the government and the oil partners to determine when funds for the project will be made available, the terms of the financing and when the project execution will commence with a projected timeline between 20 and 36 months

The pipeline was expected to jointly develop the USD 3.5 billion pipeline, described as the longest electrically heated crude oil pipeline in the world. The balance of USD 1billion is expected to come from shareholders in equity

However, by the time Kenya announced its export deal in July, the earth breaking ceremony commencing the start of the EACOP pipeline construction had not started. Negotiations were reported as ongoing. In June 2017, the Daily Business Newspaper carried an article with a headline ‘Uganda’s Oil may not flow by 2020’ as the required infrastructure may not be complete  by then[i]

What this means for Uganda is that time is of essence and the sooner the EACOP project construction takes off the better for its potential oil market.

Figure 3: The Government of Tanzania and Uganda sign the Inter-Governmental Agreement (IGA) for the East African Crude Oil Pipeline (EACOP)  in May, 2017

 

So why do some oil projects like take long to materialize?

Lack of astute leadership, effective institutions and canning ambition to drive the projects to fruition. In some countries the political leadership and responsible institutions can be weak, whereby the essential operational process surrounding the oil projects can be clogged in political rhetoric and undertones which make decision making quite cumbersome, inefficiently slow and less assuring to the investors

Technical aspects such as Quality of crude oil discovered

High Sulphur crude oil can such as the Ugandan and Kenyan crude oil can be waxy and costly to transport via pipeline as it requires constant heating along the route.  This explains why the 1,433 km EACOP is described as the longest electric heated pipeline in the world. This adds to complexity in technology and costs on heating required to operationalize the project. Investors may

Oil reservoir behaviors and recoverable volumes – The discovered oil reserves are not always the same as the recoverable volumes. In some projects the reserves can be large yet due to geological and technological factors the recoverable volumes are low.  The behavior of the oil reservoirs is therefore a significant factor in determining whether the recoverable volumes will be consistent with the early projections and economic models over the plateau period. A change in the recoverable volumes can trigger massive losses and may lead to complete closure of the oil project. Investors are happy to rush projects where recoverable volumes will be sustained

Financing aspects such as financing structure -Lack of financing for some reasons or high interests on the investment loans secured from investment-lending institutions can be a delaying factor.  The decision to invest may therefore take long as the investors or partners to the oil project juggle and weigh the available financial options viz a vis the current and future costs of the project on the country and the investors

Economic metric considerations such as the Net Present Value (NPV), Rate of Return (RoR) and Internal Rate of Return (IRR) of the project.

These are calculations undertaken to determine the economic and financial viability of the project. They are used to determine how much return and how long it will take to recoup the initial investment and starting generating profit.

According to online sources such as Investopedia, the Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.

The Rate of Return (RoR) is the net gain or loss on an investment over a specified time period, expressed as a percentage of the investment’s initial cost. This simple rate of return is sometimes called the basic growth rate, or alternatively, return on investment, or ROI. If you also consider the effect of the time value of money and inflation, the real rate of return can also be defined as the net amount of discounted cash flows received on an investment after adjusting for inflation.

The rate of return is used to measure growth between two periods, rather than over several periods. The RoR can be used for many purposes, from evaluating investment growth to year-over-year changes in company revenues. Its calculation does not consider the effects of inflation.

The internal rate of return (IRR) is a measure used in capital budgeting to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the Net Present Value (NPV) that makes the Net Present Value (NPV) of all cash flows from a particular project equal to zero.  It is mathematically calculated as IRR=NPV=t=1∑T (1+r)t −C0 =0)

IRR is the rate of growth a project is expected to generate. The IRR is used in capital budgeting to decide which projects or investments to undertake and which to forgo.

Generally speaking, the higher a project’s internal rate of return, the more desirable it is to undertake. Assuming the costs of investment are equal among the various projects, the project with the highest IRR would probably be considered the best and be undertaken first. IRR is sometimes referred to as “economic rate of return” or “discounted cash flow rate of return.”

Social factors such as land acquisition and due diligence for compensation– The nebulous and intricate balancing act between the local laws and the international standards as guided by the International Finance Corporation can be a hindrance. Quite often the local standards for compensation can be law, corrupt unfair yet the IFC standards requires fair and equity

Negative diplomacy: The oil projects could delay or fail to take off all together due to negative diplomacy. Whereby disgruntled actors such as activists, companies, politicians who may not be excited or about the project may quietly lobby, urge, convince or cajole the financing institutions not to finance the project.

Security Risk:  Oil projects cost lots of money in investment and thus require assurances that financial investments and their installations will be guaranteed.  Oil projects can stall as investors and their partners gauge the security risks

Some or all of these factors could be now at play in the East African region and could be explanatory factors as to why some petroleum projects are progressing at a snail’s pace or stalled all together. Perhaps Kenya’s early oil export could be trigger for its neighbors to start thinking ahead.

 

 

 

[i] https://www.businessdailyafrica.com/economy/Uganda—oil—2020-Standard–Poors-Tanzania/3946234-3982464-j7rbsq/index.html

What Does this year’s budget have for you?  How Tanzania, Kenya and Uganda prepare and manage their budgets differently to minimise perpetual deficit

 

As East Africans continue to dissect and internalise what impacts this year’s national budgets will have on the economy and standards of ordinary citizens, the questions remain whether these budget targets can be achieved. But what are national budgets and how have these coveted statements and speeches resonated with citizens interests over time? The trend and results from previous budgets show mixed feelings and perhaps, it is time to reflect on how national budgets are made. 

By Moses Kulaba; Governance and economic analysis centre

What are national budgets?

A national budget is a statement of how government plans to raise and spend revenue or public money collected from various domestic and external sources. Domestically, the government largely raises revenues through taxation.

The legendary Economist and tax theorist Adam Smith stated that states as sovereign entities have the right to impose taxes and to spend these proceeds from taxation to meet the public financial needs of its citizens. 

The tradition of taxation is rooted in ancient empires which required that every able citizen makes a mandatory contribution to the state and in return the state provides protection and social services.

Taxes in ancient Egypt, Greece and Rome were charged to finance war but the idea of sales taxes, income taxes, property taxes, inheritance taxes, estate taxes, gift taxes are said to be a modern invention. The concepts of taxation that evolved and developed were transported to other empires and cultures where tax ideas took root. This pattern continues through today as nations are influenced by tax practices from other Countries

There is no art which one government sooner learns than that of draining money from the pockets of people-Adam Smith

In commonwealth traditions, proposed government collections and expenditures are articulated in a national budget statement and speech always presented before the state parliament or legislature on the budget day. In Tanzania, this is presented on every second Thursday of June of every year.

What are the key priority areas for this year’s national budgets?

The budgets from the three East African states appears to have been informed by the regional consensus on theme of promoting industrialisation. Driven to achieve this objectives governments have reshuffled its priorities towards agenda with Tanzania and Uganda pushing this through the five-year development plans while Kenya pushes its big four agenda.

Country

2018/19

2019/20

Tanzania
  1. Industrialisation
  2. Agriculture
  3. Social Services
  4. Infrastructure
  1. Industrialisation
  2. Infrastructure development and power generation
  3. Aviation sector

Kenya
  1. Infrastructure
  2. Education
  3. Information, Communication and Technology
  4. Poverty reduction and social protection
  5. Security for investment, growth & employment
  1. Education
  2. Energy, infrastructure, information, communication and Technology
  3. Public Administration
  4. Governance, justice, law and order
  5. National Security

Uganda
  1. Commercialisation of agriculture
  2. Industrialisation and productivity enhancement
  3. Financing private sector investment
  4. Minerals development
  1. Works and Infrastructure investment
  2. Debt repayment
  3. Security
  4. Education
  5. Mineral development

Who are the winners and losers?

Across the East African region, the major beneficiaries were the manufactures. The major beneficiaries in Tanzania are horticulturalists, manufacturers of packing materials and baby diapers. VAT has been exempted on imported refrigeration boxes used for horticultural farming while all imported horticultural products will be charged 35% instead of 25%.  Zanzibaris have a reason to celebrate as supply of electricity services from mainland Tanzania to Zanzibar will be zero rated. The tourist sector has also won big with reductions in taxes on some specific packages such as game hunting. While airline operators will have a sigh of relief airline tickets, flyers, staff uniforms and aircraft lubricants are VAT exempted.

Motorists and women will obviously take a brunt of the budget as the tax man has increased taxes on driving licence fees from Tsh 40,000 to Tsh 70,000 and registration card fees for all forms of motor cycles from Tsh 10,000 to Tsh20,000. The tax man has targeted women imposing 10% duty on locally produced synthetic hair whereas imported artificial hair will be charged at 25%. VAT on sanitary pads has been abolished.

In Kenya the manufactures are winners with a withholding VAT rate reduced from 6% to 2% and introduction of a refund formula which expedites VAT refunds and ensures a full refund of input tax credit rating to zero rated.  Agriculturalists have reason to celebrate with Ksh 1.0bln diversification and revitalisation of Miraa and Ksh 3.0bln for setting up the Coffee Cherry Revolving Fund, aimed at implementing prioritised reforms in the coffee subsector.  Digital employees have a reason to celebrate as they will enjoy an exempted tax on income earned under the Ajira Program. The measure is aimed at enabling over 1million youth to be engaged as a digital freelance worker. The health sector has some reasons for joy as an additional to Ksh47.8ln is allocated to expand access to Universal Health Coverage from 4 pilot counties to other counties.

Meanwhile drunkards and gamblers will continue to leak their wounds as they ache out an additional 10% in taxes is slapped on betting and 15% on tobacco and alcoholic drinks. Boda Boda and Tuk-Tuk riders will face an uphill task with amendments to the Insurance (Motor Vehicle third party risks certificate of insurance) rules to require all passenger carrying riders to have an insurance cover for passengers and pedestrians.

In Uganda, the works and infrastructure continue to enjoy a good share of the budget with Ush6.4trillion of the budget allocated to it.  The industrialists are perhaps the biggest winners with generous tax exemptions allocated for industrial parks expanded to 10 years for letting, leasing or expanding existing developers with capital of at least USD50Mln and operators with at least USD10 Mln capital.  There has been an introduction of income tax exemption on interest paid on infrastructure bonds such as listed bonds and securities. Removal of withdrawing on agriculture supplies and listing and other similar goods. Exemptions on aircraft insurance services, supply of services.  A beneficial owner and citizen have also been redefined to be in line with the East African Community Court ruling in the case of BAT Vs URA.   The importers of fresh or chilled or cooked potatoes, honey, granite, marble and ceramics are net losers with increased customs duties.

Amidst of all these changes in estimates, significant to note is that new creatives sources of tax revenues were presented.

Governments have perpetually faced narrow taxes bases with potentially same traditional sources facing the tax man. In recent years the government have developed affinity to indirect taxes, despite their regressive nature and inequitably targeting of the poor

What have been the trends?

Country

2017/18

2018/19

2019/20

Kenya

Ksh 2.3bln

Ksh 2.5bln

Ksh3 trln

Tanzania

Tsh 31.7trln

Tsh32.4trln

Tsh 33.11trln

Uganda

Ush 29 trln

Ush 32.7 trln

Ush 40.487trln

The trend shows that budgets estimates have been increasing over the years with this year’s budgets touted as the highest since independence. However, the actual budget out turns have fallen short of projections. Kenya, which is the biggest economy in the region has missed targets for the past seven years

In 2018/19 Tanzania recorded a shortfall in budget outturn only achieving 88% of its targeted revenue collection. This was attributed to a number of factors

  • Decline in domestic revenue
  • Tighter global conditions
  • Decline and delayed disbursement in government

The trends from previous budgets show that the government has been largely a net borrower and net spender. Governments rely heavily on domestic and external borrowing to fill its budget deficits. Very little is saved.

Generally, Government debt as a percent of GDP is used by investors to measure a country ability to make future payments on its debt, thus affecting the country borrowing costs and government bond yields.

Over the years the governments debt to GDP ratios have spiralled reaching record highs.  According to government statistics in Tanzania the debt to GDP ratio hit 34.2 % by end of 2017. The Bank of Tanzania reported that the external debt stock comprising of public and private sector debt amounted to USD 21,529mln at end of March 2019. Uganda’s debt to equity ratio was 41.2%.  Kenya’s debt to GDP ration was at a record 57.5% in 2017 and around 55 % in 2018.

Governments have constantly argued that their debt obligations are manageable and the current borrowing appetite is aimed at achieving a favourable debt mix of short term and long-term loans. The down side of appetite is that as government piles new debts, the maturity period of old debts is too short and puts a lot of pressure on government revenues to pay. In Uganda for example 11% of this year’s budget will be spent on debt repayment.

The debt burden is worsened by the near stagnant revenue growth, the Ugandan Planning Minister acknowledged in 2018. “Our tax base is not growing at the same rate,” he added, putting the tax to Gross Domestic Product (GDP) ratio at 14.3 per cent.

The government spends most of its money on recurrent expenditures such as salaries and its development budget on mega infrastructure such as roads, power generation and aviation have not been quick in generating commensurate revenues, leaving governments with perpetual financing gaps every budget year.

The question then which emerges is why increase budgets when the revenue targets for the previous years have not been met?

Do governments need to adopt a saving culture-amidst all.

As meeting domestic revenue targets becomes doggy and external aid and borrowing stringent, how can governments manage their budgets to ensure that some of the revenues collected are saved and used to cushion future deficits. The governments have options that can be considered.

Adopting a cost cutting

Cutting of nugatory public expenditures spent on running public administration can save governments massive recurrent expenditures on salaries and allowances. While Kenya has adopted a heavy devolution structure costing government billions of shillings to run Uganda has the largest cabinet in the East African region. The Ugandan government has rapidly created economically unviable local government districts, who rely heavily on central government subsidies to survive.

Adopting revenue saving culture

The government can adopt a revenue saving culture. Revenue management is largely a tax policy concern which hinges on economics that revenues from various sources should be spent in a sustainable manner to avoid long-term shortfalls and economic instabilities that might affect the overall economic tax base.

These views are reflected in Hugh Dalton’s ‘principles of maximum social advantage (Marginal Social Sacrifice theory) and  Arthur Pigou’s ‘principle of maximum social welfare benefits’ (Marginal Social Benefit)  theories of taxation and public expenditure which suggest that taxation (government revenue) and government expenditure as two key tools of public finance have to be balanced to achieve maximum social benefits. Neither excess is good for the society.

Sustainable economic growth can therefore be achieved when government balances its short term and long-term public revenue and expenditure needs.  The government does not need to exclusively spend on infrastructure or welfare benefits but it also needs to save and spend on strategic investment to safe guard its future revenue sources.

This saving culture should be embedded in a country’s budget policy and revenue expenditure management system and fiscal regimes governing expenditures of its revenue.

Investing in foreign government financial instruments

The governments can take the Japanese and Chinese approach of investing in foreign government financial instruments.  Globally, the Japanese and Chinese are among the highest investors in the United States government securities. Controversial as it may look, but by investing its wealth in secure foreign government bonds, the government can ensure that the dividends realised are ploughed back into the Country to support its economy.

This type of foreign investment has made it possible for the Japanese able to finance their domestic debt which is almost above 233% of GDP.  The other difference between Japan and other countries is that its debt is held by its Citizens.

Many other countries, including Greece, owe mostly to foreign creditors. However, most of Japan’s debt (including government bond liabilities) are held by its own citizen, so the risk of defaulting is much lower. Japan is still well-off because it can adjust interest rates at low levels so that repayment values stay low relative to the overall debt level.-Forbes

Introducing effective currency management

The governments can adopt the Egyptian model of devaluing its currency to ensure that the country exports more and attracts more foreign currency into the country than it spends in payment and servicing external debt. The attracted foreign income is invested into production to boost economic growth.  As an economy grows to higher level, it becomes able to generate enough revenues to pay off or reduce its debt burden.

Helpful Further Readings and references

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