The new year started with a host of commodity price crashes, runs on currencies and warnings about mounting debts.
Bankers' bets, based on glossy analytical reports about Africa's lion economies and a doubling of its gross domestic product by 2025, were discreetly torn up last year. In their place are downbeat prognoses about Africa's position in a much harsher global economic and political climate (AC Vol 56 No 1, HYPERLINK "http://www.africa-confidential.com/article/id/11408/New_ideas%2c_harder_times_and_a_few_surprises" New ideas, harder times and a few surprises).
For the irrepressible optimists, this year's hard times will concentrate minds. Take Nigeria, where President HYPERLINK "http://www.africa-confidential.com/whos-who-profile/id/2606/Muhammadu_Buhari" Muhammadu Buhari's government says it is determined to combat the falling oil prices with an expansionist or Keynesian programme of capital investment and to restructure the economy to end its chronic dependence on oil exports.
It would certainly help if Nigeria's top industrialist, HYPERLINK "http://www.africa-confidential.com/whos-who-profile/id/2622/Aliko_Dangote" Aliko Dangote, has as much success with his oil refining and petrochemical businesses as he has with cement production. Thanks to Dangote's astute financial calculations and political diplomacy, he has made Nigeria a net exporter of cement. He plans to do the same with petroleum products and petrochemicals, if he can hold his nerve. The value of his investments have already fallen by over 20% on the Nigerian Stock Exchange.
Business people and oppositionists chant similar mantras about restructuring in South Africa and Angola, and there is more interest in the dirigiste model of economic restructuring developed by Ethiopia, Morocco and Rwanda, and the more market-led developments in Kenya.
World Bank economists reckon that the downward trajectory started in 2014, when average GDP growth in Africa fell to 4.6% and its latest report notes a further slowing to 3.4%. For this year, the Bank offers a modicum of optimism with a forecast rise to 4.2%.*
Five developments fuel the gloomier outlook for Africa. Firstly, China's economic rebalancing and slowdown. By some measures, China is already the world's biggest economy and for Africa, it is certainly the most influential one by dint of the more than US$200 billion annual trade account with the continent's 55 economies. As agile as any Western spin doctors, Chinese officials went to great lengths at last December's Forum for China-Africa Cooperation to promote a new package of $60 bn. worth of investment and loans to Africa, as they explained some of the consequences of their country's economic restructuring. As trade between China and Africa slows in the short term, Beijing's officials made much of the prospects for cooperation on big industrial projects on the continent. That, though, is very much a medium-term prospect.
Secondly, the commodity price crash cannot all be blamed on China and it is not blighting all Africa's exports. For example, export earnings from cocoa, coffee and tea look set to hold up in both the increasingly lucrative specialist markets and in the traditional bulk purchase markets. In other areas, the commodity news is undeniably grim: the millions of extra barrels of oil on the international market seem destined to push down prices further, short of a spectacular political shock such as the collapse of the monarchy in Saudi Arabia. With United States' and European sanctions lifted against Venezuela, Iran and perhaps Russia, the prospects are for yet more and cheaper oil.
Mining companies are laying off workers across Africa: at least 50,000 people in South Africa and tens of thousands in Congo-Kinshasa and Zambia. Here, the forecast demand for copper, cobalt and iron ore is more complicated because of the long lead-time to develop a mine. More optimistic analysts argue that India – now the fastest growing big economy in Asia – could replace China as the most important metals buyer for Africa.
Again, that is more of a medium-term prospect. Just as international oil companies are cancelling exploration and production operations in Africa and elsewhere, big mining projects, such as the Simandou iron ore project in Guinea, will struggle to raise finance (AC Vol 56 No 22, HYPERLINK "http://www.africa-confidential.com/article/id/11291/Cond%c3%a9_consolidates_as_opposition_regroups" Condé consolidates as opposition regroups).
Thirdly, the Western-dominated financial sector will impose tougher terms on African borrowers and raising finance for big capital projects will get harder still. With a stronger dollar and higher domestic interest rates, more cautious financiers are returning to the US markets. Not only will African countries have to pay higher interest rates on fresh sovereign bond issues, the costs of servicing existing debts are likely to rise sharply. Already, the vulture funds of Wall Street are eagerly surveying the market for bargains.
Fourthly, the political and security climate is scaring off Africa's many short-term investors and fair-weather friends. More liquid equity and money markets such as South Africa's have lost billions in value over the past year, partly because of self-inflicted wounds but also due to growing corporate nervousness about the reality behind those Panglossian reports about Africa's fast growing middle classes.
More robust responses from governments and institutions such as the African Development Bank to counter to some of the nonsensical swings in international sentiment on Africa could help. So could much better data and statistics, as well as an African ratings agency that can evaluate political risk with inside knowledge, rather than long-range speculative assessments.
Although Africa's security crises are most serious in the Horn, the Sahel and Libya, few foreign assessments make those distinctions. Accordingly, the tourism and service industries have been heavily hit by the wave of Islamist attacks over the past couple of years and the growing sense of threat across the region. In places such as Kenya's Coast Province, this reinforces a cycle of economic and political insecurity when terror attacks close down tourist facilities, weakening local economies and exacerbating grievances.
Fifthly, the extreme weather – longer droughts and heavier flooding – associated with climate change is doing increasingly serious damage to agriculture in Africa as well as worsening social conditions more generally. Despite the celebrations around the climate change treaty in Paris in December, there were few guarantees of new money to enable African economies to adapt to global warming. However, some of the bolder sustainable energy projects in Africa – such as solar power in West Africa and the 'green energy corridor' in East Africa – point the way to new economic strategies which could give the commodity-dependent countries a much needed boost.
How are African governments likely to react to the tougher conditions?
Some politically vulnerable governments are planning more social protection schemes while others are looking for ways to pull in more foreign investment. We hear that Nigeria's new Trade and Investment Minister, Okechukwu Enelamah, wants to cut through the country's business bureaucracy (AC Vol 56 No 23, HYPERLINK "http://www.africa-confidential.com/article/id/11334/Buhari_resets_the_clock" Buhari resets the clock). Currently, Nigeria is 169th out of 189 countries surveyed by the World Bank's 'Ease of Doing Business' ratings.
Central bankers, too, will look much harder at the viability of the commercial banking sectors as bad debts grow, in some cases due to mounting payment arrears on state contracts. State treasuries will face their own problems in coping with rising foreign debt burdens, made heavier by a stronger dollar and rising interest rates. The IMF warns of a decline in the competitiveness of Africa's economies and poor performance of its manufacturers, hit by unreliable power, poor transport links and again, bureaucracy.
The IMF believes inadequate infrastructure, despite falling transport cost, high wages and over-valued exchange rates are partly to blame. It adds that most governments lack the financial buffers that they had in 2009 to weather that financial crisis. Then, substantial reserves and modest deficits allowed governments to introduce projects and programmes – counter-cyclical spending – to protect the poorest. This time, those buffers don't exist.
The IMF also reckons that oil producers such as Angola and Nigeria will have to make 'sharp fiscal adjustments' and will see growth levels sharply down (see Chart). It also predicts growth of more than 6% for several countries, such as Kenya, Ethiopia, Tanzania, Mozambique, Rwanda, Côte d'Ivoire, Congo-Kinshasa and Chad.
* Global Economic Prospects, Spillovers and Weak Growth, the World Bank, Washington, 2016.
1. Europe once branded coal ‘dirty’ but their demand for it has skyrocketed once again. What do we learn about coal from what’s happening now in Ukraine?
There are over 80 countries in the world who still rely on coal as a form of energy. These are countries that are fighting to have basic necessities like electricity, which research shows increases their quality of life substantially. Energy poverty is real in Africa, India and Asia.
The Western approach to coal cannot be universal. We must remember that developed economies relied heavily on coal during their development. Challenges being faced by developing nations are unique. Demand for coal in Europe right now is driven by sanctions on Russian gas and coal and show that Europe might well be over-exposed to “green” with no back-up at times when there is no wind, running water, endless sunshine or faced with supply shortages. Coal is back in play in Europe because of the war, and despite massive adoption of clean energy in the US not all of the US uses clean energy.
In Germany and Italy, coal-fired power plants that were once decommissioned are now being considered for a second life. In South Africa, more coal-laden ships are embarking on what’s typically a quiet route around the Cape of Good Hope toward Europe. Coal burning in the US is in the midst of its biggest revival in a decade, while China is reopening shuttered mines and planning new ones Coal remains and will remain an essential element in the energy mix. We need to make use of cleaner coal in such mix.
2. How much has been the projected demand of coal in the in the last couple of months?
Our key land export markets consist of 80-90% bound for South Africa and Namibia. In the last three months however, sea bound exports increased significantly with international traders buying to export to Europe and the West. We do not have specific numbers because the final destination overseas is determined by the international traders who buy coal from us. We remain hopeful that this demand continues.
3. How has the demand influenced Minergy exports to South Africa, Namibia and overseas?
Minergy remains committed to its local markets and continues to supply into these. A massive increase in demand from international markets, stemming from the Ukraine war and sanctions on Russia has come as a blessing to Minergy as lucrative pricing has made once uneconomical logistics feasible. This allowed Minergy to place additional product in new markets, markets historically uneconomical… We continue to look for alternative markets and supply to Namibia is one such market as well as the ability to use their ports as export routes for seaborne thermal coal.
4. Comment on the Minergy market access dynamics.
Refer to answer for question 2 and 3.
5. What would it take to fully explore the billions of tons of coal in Botswana?
Greater local and even foreign direct investment. Simplifying regulatory processes and promoting ease of doing business needs to be top agenda items. Coal has unfairly been de-campaigned in the West as a ‘dirty’ mineral which has swayed investors to look elsewhere for investment portfolios. With enough funders and investments in coal the huge deposits can change our power fortunes and energy independence. Given Botswana’s massive reserves, we are of the opinion that coal should be another diversified revenue stream for the Botswana Government. At Minergy we remain thankful for the support from Government as well as from internal development organizations that have supported our strategy and were instrumental in getting the mine to the phase that it is in at the moment. Partnership with government and open minds to managing coal is key.
6. What future do you project for Minergy in the medium and long term given what we see now in Europe?
We cannot predict how long the situation in Europe will last and we pray that it will be resolved as the loss of lives and destruction of the Ukraine is a human catastrophe. Our model is premised on fully optimizing our deposits for the benefit of Botswana and Batswana..
7. Open cast for coal is a new concept in Botswana. How has Minergy enhanced the skills base?
Opencast coal mining and the associated beneficiation of sized coal is a specialized industry. Currently there is no other similar operation in Botswana to recruit from.
The South African coal industry is well experienced with this plant operation and the requisite skill is found there. It is necessary for our operations to make use of such skills to operate the plant as we cannot find all the skill in Botswana. The skill for operating such a plant is different than diamond, tin, copper etc. processing. As such certain positions require expatriate recruitment, but all these positions are supported with understudy programmes
It is Minergy’s hope as part of its legacy, to promote and install fully qualified local opencast mining and coal beneficiation skills, currently not available in Botswana.
8. What are the projected human capital skills of the future in coal mining.
See response to question number 7.
9. Share experiences from the recent Mining Indaba. What is the future of coal?
Africa needs to be energy efficient and independent. We remain encouraged at the responsible strategy that the Botswana government has put into place to support this.
10. Kindly share in detail, infrastructural developments which were brought in place by Minergy in those communities.
We have an electronic brochure that showcases all the value add that we have contributed not to just the Medie village but Botswana as a whole. This is available at our office or electronically on our website www.minergycoal.com. Highlights include
Minergy paid for the electrification of the mine and the local Medie village benefited from the connection, allowing 500 people access to electricity through a self-funded prepaid system. As an extended part of Minergy’s social investment drive the Kgotla and the clinic have also been electrified, making day-to-day running of these essential services much easier and efficient. This is ahead of the Governments intended electrification programme, which was only planned for2024.
The quality of the road between Lentsweletau and Medie has been significantly upgraded compared to the state the road was in before mining operations commenced. Continuous road rehabilitation and dust suppression is undertaken in and around the villages to maintain road integrity. ( This is a public road, but the Group takes care of the road as it benefits the community in which the mine operates)
The dilapidated community hall has been refurbished including access to solar power and will be handed over to the community.
11. A development as huge as Masama Coal mine would usually result in the mushrooming of several other businesses to benefit from its value chain. In the case of Masama, kindly share businesses which have been created as a result of the growing value chain.
Readers are again referred to electronic brochure that showcases all the value add that we have contributed.
This phenomenon is indeed correct and there are a number of entrepreneurial businesses that have flourished including laundry services, bed & breakfast for suppliers visiting the mine or the area, housing built for rental accommodation, spaza shops and food stalls, first supermarket in Lentsweletau and additional building supply outlets established
We also make use of 12 locally owned and operated transporters, who are used by the mine to transport product, where applicable.
The partnership between Debswana and Botswana Oil Limited (BOL) which was announced a fortnight ago will create under 100 direct jobs, and scores of job opportunities for citizens in the value chain activities.
In a major milestone, Debswana and BOL jointly announced that the fuel supply to Debswana, which was in the past serviced by foreign companies, will now be reserved for citizen companies. The total value of the project is P8 billion, spanning a period of five years.
“About 88 direct jobs will be created through the partnership. These include some jobs which will be transferred from the current supplier to the new partnership,” Matida Mmipi, Head of Stakeholder Relations at Botswana Oil, told BusinessPost.
“We believe this partnership will become a blueprint for other citizen initiatives, even in other sectors of the economy. Furthermore, this partnership has succeeded in unlocking opportunities that never existed for ordinary citizens who aspire to grow and do business with big companies like Debswana.”
Mmipi said through this partnership, BOL and Debswana intend to impact citizen owned companies in the fuel supply value chain that include transportation, supply, facilities maintenance, engineering, customs clearance, trucks stops and its support activities such as workshop / maintenance, tyre services, truck wash bays among others.
“The number of companies to be on-boarded will be determined by the economics at the time of engagement,” she said. BOL will play a facilitatory role of handholding and assisting emerging citizen-owned fuel supply and fuel transportation companies to supply Debswana’s Jwaneng and Orapa Letlhakane Damtshaa (OLDM) mines with diesel and petrol for their operations.
“BOL expects to increase citizen companies’ market share in the fuel supply and transportation industries, which have over the years been dominated by foreign-owned suppliers. Consequently, the agreement will also ensure security of supply for Debswana operations, which are a mainstay of the Botswana economy,” Mmipi said.
“Furthermore, BOL will, under this agreement, transfer skills to citizen suppliers and transporters during the contract period and ensure delivery of competent and skilled citizen suppliers and transport companies upon completion of the agreement.”
Mmipi said the capacitating by BOL is limited to providing citizen companies oil industry technical capability and capacity to deliver on the requirements of the contract, when asked on helping citizen companies to access funding.
“BOL’s mandate does not include financing citizen empowerment initiatives. Securing funding will remain the responsibility of the beneficiaries. This could be through government financing entities including CEDA or through commercial banks. Further to this, there are financial institutions that have already signed up to support the Debswana Citizen Economic Empowerment Programme (CEEP),” Mmipi indicated.
While BOL is established by government as company limited by guarantee, it will not benefit financially from the partnership with Debswana, as citizen empowerment in the petroleum value chain is core to BOL’s mandate.
“BOL does not pursue citizen facilitation for financial benefit, but rather we engage in citizen facilitation as a social aspect of our mandate. Citizen facilitation comes at a cost, but it is the right thing to do for the country to develop the oil and gas industry,” she said.
Mmipi said supplying fuel to Debswana comes with commercial benefits such as supply margins. These have traditionally been made outside the country when supply was done by multi-nationals for a period spanning over 50 years. With BOL anchoring supply for Debswana, this benefit will accrue locally, and BOL will be able to pay taxes and dividends to the shareholders in Botswana.
PwC Africa has presented the eighth edition of the VAT in Africa Guide – Africa re-emerging. This backdrop of renewal informs on the re-emergence of African economies and societies which have been affected by the COVID-19 pandemic.
In this edition, which has been compiled by PwC Africa’s indirect tax experts, covers a total of 41 African countries. It is geared towards sharing insight with our clients based on the constantly changing tax environments that can have a significant impact on business operations.
Within Africa, governments continue to focus on expanding the tax net by improving revenue collection through efficient compliance systems and procedures. PwC Africa has observed that revenue authorities also continue to take a keen interest in indirect taxes as part of revenue mobilisation initiatives.
Maturing VAT system and upskilling SARS
“In South Africa, VAT is becoming more relevant as a revenue source for the government,” says Matthew Besanko, PwC South Africa’s Indirect Tax Leader. “Strides have been made to upskill South African Revenue Service (SARS) staff and identify VAT revenue leakages, particularly in respect of foreign suppliers of electronic services to people and businesses in South Africa.”
Broadening the tax base and digital economy
In the past year, South Africa, Mozambique and Zimbabwe saw updates to their VAT legislation, or introduced specific legislation targeting electronically supplied services (ESS), which is in line with the global trend of attempting to tax the digital economy. “The expectation is that Botswana will also introduce VAT legislation in due course, while the National Treasury in South Africa has also made mention of revising the rules to account for further developments in the digital economy,” Besanko says.
South Africa’s National Treasury has also drafted legislation with the intention to introduce a reverse charge on gold, which is expected to come into effect later in 2022. While in Zimbabwe, revenue authorities have introduced a tax on the export of raw medicinal cannabis ranging between 10% and 20%, which came into effect on 1 January 2021.
ESG and carbon tax
Key strides have also been made within the Environmental, Social and Governance (ESG) space. “ESG leadership, strategising and reporting is essential now for organisations that wish to flourish and remain relevant,” Kabochi says. He adds that companies need to consider how ESG and tax intersect, since tax is a significant value driver when businesses need to deliver on their ESG goals.
In South Africa, a carbon tax regime, which is being implemented in three phases, has been adopted. The second phase was scheduled to start in January 2023, however phase one was extended by three years until 31 December 2025.
Until then, taxpayers will enjoy substantial tax-free allowances which reduce their carbon tax liability. At the beginning of 2022, the South African government increased the carbon tax rate to R144 (about US$9), which is expected to increase annually to enable South Africa to uphold its COP26 commitments.
With effect from 1 January 2023, carbon tax payers in South Africa will also be required to submit carbon budgets and adhere to the provisions of the carbon budgeting system which will be governed by the Climate Change Bill. Where set carbon budgets are exceeded, the government plans to impose penalties. “At PwC, we are continuously focused on our renewed global strategy, ” The New Equation,” Kabochi says. “Through this strategy, a key focus area for PwC Africa is to support clients in adding value to their ESG ambitions and building trust through sustained outcomes.”
The New Equation is also an acknowledgement of the fundamental changes in the business environment in which PwC’s clients and other stakeholders operate. PwC continues to reinvent and adapt to these changes as a community of problem solvers, combining knowledge and human-led technology to deliver quality services and value.