BRICS Bank now operational

The New Development Bank BRICS (NDB BRICS), formerly referred to as the BRICS Development Bank is now operational. The Bank is a multilateral development bank founded by the BRICS states (Brazil, Russia, India, China and South Africa) as an alternative to the existing US-dominated World Bank and International Monetary Fund. The Bank is set up to foster greater financial and development cooperation among the five emerging markets. Unlike the World Bank, which assigns votes based on capital share, in the New Development Bank each participant country will be assigned one vote, and none of the countries will have veto power.

The five big emerging market economies (BRICS) have strengthened co-operation with a constant goal in mind: to challenge the West’s grip on the Bretton Woods institutions by creating their own monetary fund and development bank.

They chafe at their under-representation at the IMF; the voting rights of China, the world’s second-largest economy, are not even a quarter of those of the US. An IMF reform that would slightly correct the imbalance has been languishing for three years. A battle seems to have a foregone conclusion because of the composition of the IMF executive board, which names the managing director. It is dominated by Europeans and Americans.

The BRICS Bank shall in its role mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, complementing the existing efforts of multilateral and regional financial institutions for global growth and development.

To fulfill its purpose, the Bank shall support public or private projects through loans, guarantees, equity participation and other financial instruments. It shall also cooperate with international organizations and other financial entities, and provide technical assistance for projects to be supported by the Bank.

Even though the bank has 5 founding members, the Bank shall be open to members of the United Nations, in accordance with the provisions of the Articles of Agreement of the New Development Bank and shall be open to borrowing and non-borrowing members.

To fulfill its purpose, the Bank is authorized to exercise the following functions:

(i) to utilize resources at its disposal to support infrastructure and sustainable development projects, public or private, in the BRICS and other emerging market economies and developing countries, through the provision of loans, guarantees, equity participation and other financial instruments;

(ii) to cooperate as the Bank may deem appropriate, within its mandate, with international organizations, as well as national entities whether public or private, in particular with international financial institutions and national development banks; 

(iii) to provide technical assistance for the preparation and implementation of infrastructure and sustainable development projects to be supported by the Bank; 

(iv) to support infrastructure and sustainable development projects involving more than one country; 

(v) to establish, or be entrusted with the administration, of Special Funds which are designed to serve its purpose. 

The Bank has its headquarters in Shanghai.China and the Bank may establish offices necessary for the performance of its functions and as such the first regional office is in Johannesburg, SA.

The Bank shall have a Board of Governors, a Board of Directors, a President, Vice-Presidents as decided by the Board of Governors, and such other officers and staff as may be considered necessary. With India providing the bank’s president, the bank’s four vice-president’s come from each of the other Brics member countries (Brazil, Russia China and SA). SA’s vice-president is Leslie Maasdorp, who, as chief financial officer, will be responsible for treasury and portfolio management as well as the finance, budgeting and accounting functions.

The Bank in its operations may provide financing in the local currency of the country in which the operation takes place. 

The Bank shall possess full international personality and enjoy wide immunities.

Can Africa Feed Africa?

A new World Bank report Africa Can Help Feed Africa: Removing barriers to regional trade in food staples ―says that Africa’s farmers can potentially grow enough food to feed the continent and avert future food crises if countries remove cross-border restrictions on the food trade within the region. According to the Bank, the continent would also generate an extra US$20 billion in yearly earnings if African leaders can agree to dismantle trade barriers that blunt more regional dynamism. The report was released on the eve of an African Union (AU) ministerial summit in Addis Ababa on agriculture and trade.

According to the report “Africa has the ability to grow and deliver good quality food to put on the dinner tables of the continent’s families, however, this potential is not being realized because farmers face more trade barriers in getting their food to market than anywhere else in the world. Too often borders get in the way of getting food to homes and communities which are struggling with too little to eat.”

With many African farmers effectively cut off from the high-yield seeds, and the affordable fertilizers and pesticides needed to expand their crop production, including unpredictable weather patterns, the continent has turned to foreign imports to meet its growing needs in staple foods.

See full report here for some policy considerations.

Linking Trade Policy to Supply Chain Constraints

Since the birth of the GATT in 1947, multilateral negotiations have focused primarily on reducing barriers to trade for specific products and sectors: tariffs, subsidies, and different types of nontariff barriers. A recent report by the World Economic Forum, in collaboration with Bain & Company and the World Bank (WEF 2013), Enabling Trade: Valuing Growth Opportunities (World Economic Forum, Bain & Co. and World Bank 2013) concludes that improving border management and transport and communications infrastructure services could increase global GDP by up to six times more than removing all import tariffs.

Reducing supply-chain barriers to attain 50% of the global best practice level – as observed in Singapore – could increase global GDP by some 4.7% and global trade by 14.5%. By contrast, the global GDP and trade gains available from complete worldwide tariff elimination amount to some 0.7% and 10.1%, respectively. The gains from reducing supply-chain barriers would also be more evenly distributed across countries than those associated with tariff elimination. A less ambitious set of reforms that moves countries halfway to regional best practice (e.g. Chile in Latin America) could increase global GDP by 2.6% and world trade by 9.4%.

A pilot project implemented by eBay shows that helping small and medium-sized enterprises navigate the regulatory regimes of importing countries could expand their volume of international sales by 60 to 80%. Given that small and medium-sized enterprises account for a large share of total economic activity, this type of targeted trade facilitation could have significant positive spillover effects on employment.

Such large increases in GDP would be associated with positive effects on unemployment, potentially adding millions of jobs to the global workforce.

What could be done to realise the large potential welfare gains from an approach to policy focussed on supply chain barriers? The World Economic Forum report makes five specific recommendations:

1. Create a national mechanism to set policy priorities for improving supply-chain efficiency based on objective performance data and feedback loops between government and firms;

Governments must work with businesses and analysts to determine the policies and procedures that will help reach key tipping points. A central component of this effort should be the creation of mechanisms to collect data on factors affecting supply-chain operations. These data can then be used to identify ‘clusters’ of policies that jointly determine key supply chain barriers, identify priorities for action, and assess progress.

2. Create a focal point within government with a mandate to coordinate and oversee all regulation that directly affects supply chain efficiency;

Given the importance of tipping points, governments need to design policy with an economy-wide vision and recognition that industry-specific supply chains are affected by different clusters of policies. Improving supply-chain performance requires coherence and coordination across many government agencies and collaboration with industry.

3. Ensure that small and medium-sized enterprises’ interests are represented in the policy prioritisation process and that solutions are designed to address specific constraints that impact disproportionately on these businesses;

Because small and medium-sized enterprises’ ability to overcome supply-chain barriers is proportionally more difficult, governments should pay special attention to the needs of smaller businesses. For example, one relatively straightforward policy identified in the report is to raise levels for customs-duty collection that are too trivial to merit serious consideration in order to facilitate small-business engagement in international markets; another is to ensure that initiatives to reduce regulatory compliance costs such as ‘trusted trader’ programmes are complemented by programs that are accessible to small and medium-sized enterprises.

4. Pursue a ‘whole of the supply chain’ approach in international trade negotiations;

Greater coherence of domestic policies is important, but a key insight derived from the case studies is that coordination across countries matters as well. Joint action will increase the overall gains from lower supply-chain barriers. International trade negotiations usually take a silo approach, addressing policy areas in isolation. Lowering supply-chain barriers requires a more comprehensive and integrated approach that spans key sectors that impact on trade logistics, including services such as transport and distribution, as well as policy areas that jointly determine supply-chain performance – in particular those related to border protection and management, product health and safety, foreign investment, and the movement of business people and service providers.

Such a ‘whole of the supply chain’ approach can be pursued both at the multilateral (i.e. WTO) level and in regional trade agreements. Doing so would greatly enhance the relevance of international trade cooperation for businesses and help generate the engagement that is needed for trade agreements to obtain the political support needed to be adopted by national legislatures and to be implemented by governments. As has been argued by many observers, one lesson of the failure to conclude the Doha Round is that what is on the table is not seen to make enough of a difference from an operational business perspective. A supply-chain approach has great potential to address this failure and in the process provide a low-cost economic stimulus for the world economy in the medium term.

5. Launch a global effort to pursue conversion of manual and paper-based documentation to electronic systems, using globally agreed data formats.

Many of the inefficiencies in the operation of supply chains reflect a lack of reliability due to delays and uncertainty stemming from manual paper-based documentation, redundancy in data requirements and the absence of pre-arrival clearance and risk management-based implementation of policy. A global effort to adopt common documentary and electronic data/information standards would reduce administrative costs, errors, and time associated with moving goods across borders.

To address some these challenges, it is hoped that the WTO negotiations on trade facilitation will be succesfully concluded in Bali at the end of this year, 2013.

China and EAC Sign Trade and Investment Framework Agreement

The Framework Agreement between EAC and China focuses on the promotion of commodity trade, exchange of visits by business people from EAC and China, co-operation in investment, infrastructure development, human resource development and training. The two sides also created a Joint Committee on Economy, Trade, Investment and Technical Cooperation (JCET) as the implementation framework for the Agreement. 

This is a different type agreement from the EPAs. It focuses on market enabling assistance in areas such as infrastructure development, skills development and private sector engagement. In fact, China has indicated she will provide funding for feasibility studies on roads and infrastructure. The focus on commodity trade also signals willingness to expand agricultural production and processing of agricultural commodities and thereby enhancement of the value chain.

BRICS- SA's Role

Interesting analysis below from the business day. Should note that SA's BRICS membership also adds another dimension to the tripartite  FTA consisting of COMESA-EAC-SADC Member States.

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There is wide consensus that SA’s place in the emerging-market bloc that groups Brazil, Russia, India and China together, is only justified by SA’s strategic importance on the continent.

That means the country needs to tread a careful path between touting its own interests and facilitating links to the rest of Africa.

"It would be in SA’s interest to see this as a bargaining opportunity for the continent rather than just being expedient," said Standard Bank ’s group chief economist, Goolam Ballim. "Otherwise this could be harmful in the longer term for inter- African relationships."

It is a delicate task as SA does not have a mandate at this point to speak for any other African country. Jim O’Neill, the banker from Goldman Sachs who invented the acronym for the first four Bric countries, has said that Nigeria is in a better position to join the grouping.

SA’s economy is only a quarter the size of Russia’s, the next-smallest Brics member, and its share of world trade has been stagnant at 0,5% over the past decade. Its pace of growth also lags well behind the bloc’s other members.

But SA has a lot to offer the group, which analysts say could evolve into a political force rivalling the Group of Seven developed nations, campaigning for the interests of emerging economies. SA has one of the strongest financial sectors in the world, and receives about 95% of Africa’s portfolio inflows — foreign buying of local shares and bonds.

It could provide capital for companies looking to expand into the continent and is rated as the easiest place to open a business among all the other BRICS countries.

That would make it the logical choice for firms to establish their headquarters in SA.

The country is already the services hub for the continent and has significant corporate clout in the global arena.

Where it falls short is on transport infrastructure, both within the country and linked to its African neighbours.

Nonetheless, SA’s place on the continent is seen as key to its debut in the Brics club this week at the meeting at a Chinese resort.

"We are not individually important enough but if we can fill the role of an entry point to Africa, it will be an enormous opportunity," says Absa Capital economist Jeff Gable.

Sub-Saharan Africa has become the second-fastest growing region in the world after Asia and has been more resilient to the global financial crisis then Asia, Latin America and Eastern Europe. It offers an untapped market of hundreds of millions of people.

Standard Chartered’s regional research head for Africa, Razia Khan, thinks that the summit is unlikely to come up with concrete measures that will immediately affect the Brics economies.

But some analysts are expecting preferential trade agreements and developmental finance deals, given the participation of state-owned financial institutions.

Iraj Abedian, chief economist for Pan African Capital Holdings, hopes that the Brics summit will establish a "credible institution" to underpin its political clout. If that does not happen, it will remain a political multilateral rather than an economic leadership forum, he says.

For another piece on BRICS see here.

Kenya: Safaricom’s M-Pesa goes global with Western Union

Safaricom, Kenya’s biggest mobile operator, has announced a deal with Western Union, the international money transfer company, to enable its M-Pesa mobile money service subscribers to receive direct cash transfers from Western Union agents worldwide.

Consumers can now send money directly to the mobile ‘wallets’ of Safaricom M-PESA subscribers in Kenya from 45 countries and territories,” explains Karen Jordaan, East and Southern Africa Director at Western Union.

The service taps into Africa’s huge remittances flows, which the World Bank estimates to have totalled $40bn in 2010. 

See full piece here and related posts here.

Innovation for Growth in Africa

...there are a number of areas where Africa must quickly focus its energy to improve its productivity and accelerate growth; agriculture, health, information technology and the arts. 

Access the full speech by Dr. Ngozi Okonjo-Iweala, Managing Director, World Bank here

Agency Banking- Reaching the Unbanked

The agent bank offers the same services as a real bank —cash deposits and withdrawal, disbursement and repayment of loans, payment of salaries, pension, transfer of funds, and issuance of mini-bank statements, among others.

The agent also facilitates new account opening, credit and debit card application, cheque book request and collection and is linked to Equity Bank’s systems electronically, eliminating the need for the commercial bank to have a branch in Ruaka to do business.

This is being replicated across the country, especially in rural areas, with Equity Bank saying that already 1,000 banking agents have started operating.

The Central Bank has licensed four banks, including Equity, to carry out agent banking business and approved 8,809 specific agents since last year.

Should the remaining over 7,000 agents roll out their services as expected early in the year, then this would deeply boost penetration of banking services in the country even as banks eliminate costs on physical branch expansion in areas with low volumes.

Agents may be able to play a role in a broad range of services, including account opening, cash-in and cash-out services (including cash disbursement of bank-approved loans and repayment collection), payment and transfer services (including international remittances and person-to-person domestic transfers), and perhaps even credit underwriting.

A major obstacle to financial inclusion is cost—not only the cost incurred by banks in servicing low value accounts and extending banking infrastructure to un-derserved, low-income areas, but also the cost incurred by poor customers (in terms of time and expense) in reaching bank branches. Achieving financial inclusion therefore requires innovative business models that dramatically reduce costs for everyone and thus pave the way to profitable extension of financial services to the world’s poor.

Structural Changes in the SA Aviation Industry

A new airline is reportedly seeking a certificate and air service licence issued by the Air Service Licensing Council in SA in order to gain admittance into the local South African airspace. This should be good news for consumers.

The Business Day carries the following excerpt:

"A NEW airline flying between Cape Town, Durban and Johannesburg may grace SA’s skies this year, adding to competition in a sector traded by at least three budget airlines and South African Airways.  Very little is known about the backers of Durban-based Velvet Sky, and a source who did not wish to be named said yesterday that it would be premature to comment on plans.....

SA’s airline industry is in a state of structural change, with premium national airlines such as South African Airways losing market share against no-frills competitors such as JSE-listed 1time and kulula.com.

Last month, low-cost airline Mango took over all the Durban-to-Cape Town flights from its parent, South African Airways. The move has been interpreted as part of a strategy by the national carrier to exit short-haul routes where it has lost market share."

Fragility of African Stock Exchanges

Reuters Africa

One of the biggest obstacles to investing in African stock markets is the paucity of listed companies and the limited number of shares traded on them. So the prospect of two fairly major delistings is not a particularly comfortable one for African exchanges at a time they are trying to encourage more companies to list and to capitalise on the growing investor appetite for Africa.

Bharti Airtel is delisting its Lusaka-listed Celtel Zambia unit – the second biggest company by market capitalization on the Zambian stock exchange – following a mandatory offer to buy out minority shareholders.

Meanwhile, Greek Coke bottler Coca-Cola Hellenic – the world’s second biggest Coke bottler – plans to buy out the Nigerian Bottling Company and turn it into a wholly-owned subsidiary in a $126 million deal. It already owned two-thirds of the shares.

In neither case is there a suggestion the parent company will not be planning to pump in more investment – quite the opposite in fact as Africa is increasingly seen as a place to get above average returns and with excellent growth prospects.  But taking the companies off the stock exchanges removes the chance for other investors to get that direct exposure to the African opportunities.

There was a chance South African retailer Massmart could disappear from the bourse too after WalMart announced a buyout plan, but the U.S. giant now intends to keep the Johannesburg listing – so Massmart investors can keep their participation in the expected growth it sees in Africa.

Overall it hasn’t been a bad year for African stock exchange listings given that we’ve seen Nigeria’s Dangote Cement – the biggest firm in sub-Saharan Africa outside South Africa – float its shares in a listing which valued it at $14 billion at the time (now nearer $12 billion).  That said, the free float – the proportion of shares held by investors likely to trade – is only just over 5 percent.

African stock exchanges certainly have their work cut out to encourage more companies to see them as the best place for raising finance. Questions have long been raised over whether Africa needs so many small national exchanges and whether it might not be to everyone’s advantage to have listings on fewer, bigger markets.

See previous post here.

Kenya's MPESA to Spearhead Seamless Mobile Financial Transfers in the Continent

Michael Joseph, the immediate former CEO of Safaricom, has been tapped to spearhead the expansion of M-Pesa to other African countries as part of a plan to have a seamless mobile money transfer service on the continent.  M-Pesa is already successful in Kenya, and is now also available in Tanzania, Afghanistan, South Africa, while a pilot service is on in India.

But Vodafone is looking at spreading the services to other African countries such as DR Congo, Lesotho, and Mozambique with the aim of linking the market.  This will see mobile phone consumers send and receive money across borders in a move that will pile pressure on traditional money transfer service operators such as Western Union and Money Gram who have lost market share in the local market.

“M-Pesa is the most successful mobile money transfer service in the world and with Michael is a sure bet to drive its regional expansion having been behind its growth in Kenya,” said a senior executive at Safaricom who sought anonymity because he is not the firm’s spokesperson. “The rollout of the service in the new territories will not automatically enable registered Kenyan subscribers to send or receive money.

“But there is a plan to link them to these markets in coming years,” said the source. At present, Safaricom subscribers can receive money from the UK directly to their mobile phones in transactions carried out in partnership with Western Union and Vodafone. Mr Joseph retired from Safaricom in November after serving for 11 years and passed the leadership mantle to Bob Collymore.  He sits on the board of Safaricom and Johannesburg-based Vodacom, which is owned 65 per cent by the Vodafone Group — which has operations in five countries including South Africa, Tanzania, DR Congo, Lesotho and Mozambique.

It was under him that Safaricom rose to become East Africa’s largest and most successful firm in terms of earnings, and a market leader in Kenya’s mobile telephony market with a 76 per cent stake.  By 2005, Safaricom’s grip on the Kenyan mobile market had been cemented and in 2007 the company launched its mobile money transfer service M-Pesa — an innovation whose implementation was credited to Mr Joseph’s courage and which paid off handsomely winning over more than 13.5 million subscribers by September 2010.

Transactions worth Sh596.8 billion have gone through M-Pesa since its inception.  The service accounted for 11 per cent of Safaricom’s revenues or Sh5.2 billion in the six months to September this year up from Sh930 million in the same period in 2008.  Safaricom has used M-Pesa as a value added service, successfully using it to defend and attract subscribers from rival networks.

The service has driven a revolution of sorts in Kenya’s financial services where it is being used for payment of utility bills, dividend, goods at retail shops and banking services such as ATM withdrawals, deposits and cash transfers.  It is this market position that Vodafone seeks to replicate in five African countries served by Vodacom, especially DR Congo, Lesotho and Mozambique. Mr Joseph’s brief will be to shepherd the rollout of the product in the three countries and to shore up its performance in Tanzania and South Africa where the mobile money transfer service is yet to penetrate the market.

Low cost

The service was launched in South Africa in September and Tanzania in April 2008.  Nearly half (47 per cent) of all money transfers in Kenya now take place through the mobile phone, according to a survey by Financial Sector Deepening, a research firm that conducted the survey for the Central Bank of Kenya.

This has seen traditional money transfer service operators lose their grip on the market as more Kenyans turn to mobile phone-based platforms.  Popularity of the service is mainly hinged on the low cost of transaction, safety, and speed. Mr Joseph succeeded Mr Grieves-Cook who had served as the KTB chairman for two consecutive terms since his first appointment in November 2004.  Under his chairmanship, KTB managed to put up aggressive marketing campaigns targeting domestic and international tourists.

In addition, the organisation partnered with international travel and leisure groups as well as the media and airlines to build a strong image for Kenya as a niche tourist destination.

Nation Media

Solar Lighting Boom in Africa?

Nairobi — As many as 120 million households in Africa will be living off-grid by 2015, creating one of the world's largest markets for portable solar lighting in the next five years. This is according to a report, 'Solar Lighting for the Base of the Pyramid - Overview of an Emerging Market' which is published by Lighting Africa, a joint International Finance Corporation (IFC) and the World Bank initiative that is developing continent-wide programmes for solar lighting.

The report projects an up to 65 per cent growth rate in sales of portable solar lights, comparable to the recent explosion in mobile phone sales on the continent. Currently, only 0.5 per cent of some 140 million African people living without regular or reliable access to electricity have such lights.  The growth will be fueled by entrepreneurs using the latest technologies and designing products to suit consumers' tastes, the report says. But the market could grow even faster if distribution and financing were scaled up, it says.

Arthur Itotia, Lighting Africa programme manager, told SciDev.Net that the initiative does not just aim to light households but also to save people money and reduce the health risks associated with fuel lamps.  "By converting from kerosene to clean energy millions of consumers can improve their health, reduce their spending on expensive fuels and, ultimately, benefit from better illumination and more productive time in their homes, schools and businesses."  

The report also found that an average African household could spend US$225 less a year on kerosene by using solar lighting. Lighting Africa is helping to build the market for off-grid lighting across Sub-Saharan Africa by investing in consumer education, improving access to financing and looking at new ways to distribute the lighting.

Dana Rysankova, senior energy specialist in the Africa Energy Unit at the World Bank, said that Africa's high population growth and low levels of access to the grid mean that it will soon surpass Asia in the number of people without electricity.  The lessons learned from Africa, she said, are being used to give advice to other areas.  "For example, Lighting Africa advised another World Bank project in Haiti that was disseminating solar lanterns after the devastating earthquake there," said Rysankova.

But other experts warn that such noble ideas risk being overridden by market forces - especially if left solely in the hands of private sector players.  "Much as the idea is great and tenable, the implementers need to shape the market to allow poor households to buy the lights," said Simon Mugambi, an independent energy market consultant.

Dan Okoth All Africa 22nd December

SA Services Firms Making Inroads into the Kenyan Market

South African firms have in the last 2 years increased investments into Kenya, hoping to be second time lucky in a market that previously proved difficult to penetrate and effectively buried a number of corporate SA giants.  The major difference this time round is that SA investors have changed their strategy, in favour of mergers and acquisitions while doing away with the setting up of new establishments. 

Previously South African firms appeared to concentrate their investments in the retail distribution services sector- mostly consumer goods through home grown giants such as MetroCash and Carry, Shoprite, Wool Worths etc. Recently however, investments have cut across nearly all sectors including banking, capital markets and ICT.

In the ICT sector, SA service providers entering the Kenyan market include MTN Business, which acquired UUNet Kenya (to become MTN Business Kenya) and Telkom South Africa (with a SA Government shareholding of 39.8%) and which has gained a strong local presence through a series of direct and indirect acquisitions of local firms such as a local satellite data transmission services company, Afsat Communications and Internet Service Provider Africa Online in a series of complex transactions that also involved other companies.

In financial services, Nedbank one of South Africa’s largest banks, entered Kenya through the Eco bank-Ned bank alliance where their customers can use any or both of the banks’ services without any changes in shareholding structure. The alliance is the largest banking network in Africa, with more than 1000 branches in 33 countries since Ecobank, has a presence in more African countries than any other bank in the world.  The alliance offers clients a 'One Bank' experience across Africa and the arrangement enables Nedbank, which had operations in only five African countries, to extend its footprint to the 29 countries where Ecobank has operations without moving in directly. ingenious.

Interestingly Ecobank Transnational International (ETI), is a public limited liability company which was established as a bank holding company in 1985 under a private sector initiative spearheaded by the Federation of West African Chambers of Commerce and Industry with the support of ECOWAS. In the early 1980’s the banking industry in West Africa was dominated by foreign and state-owned banks as there were hardly any commercial banks in West Africa owned and managed by the African private sector. Ecobank was founded with the objective of filling this vacuum and today its the leading African bank with offices in 29 countries and consisting of 746 branches. 

Economics and Politics of Electricity- The Case of SA

Today, 25 African countries face an energy crisis and the World Bank has recently stated that only 26 per cent of the Sub-Saharan Africa population has access to electricity, in spite of various interventions by international agencies to address the continents' energy power crisis. In fact the number of African households without electricity access is projected to rise from 590 million in 2008 to 700 million in 2030, following the growing population in the continent against the background of inefficient power systems.

The irony is that the African continent is well endowed with energy resources but most remain untapped. To combat the energy crisis, many countries have had to contract expensive diesel-fuelled emergency generation plants – in some cases, the estimated annual costs are equivalent to more than one percentage point of growth domestic product (GDP). 


Some solutions to this problem include: boosting cross-border power trade, improving existing utility companies, improving access to electricity on a large scale, while helping countries chart low-carbon growth paths. A major portion of the challenges require massive infrastructure investments, however there are some opportunities for distribution and supply companies.  However for the private sector to participate, the economics and politics of electricity need to be understood- as shown in this piece on South Africa. 

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World Bank decision is crucial for South Africa's economic future

ENERGY FORECAST 2010

The World Bank’s decision, due on Thursday this week, whether to give Eskom a $3.75-billion loan - the bulk of which will be used to complete its 4 800MW Medupi coal-fired power station in Limpopo, with the balance to be invested in wind and concentrated solar power projects - could have a telling influence on the country’s economic development in the immediate years to come. If activist environmental groups have their way, disputed global long-term environmental benefits will get preference over domestic short- to medium-term economic necessity.

The background facts are that the present-day South African economy is two-thirds larger than it was a decade and a half ago on the back of substantially increased electricity needs, to which supply has not kept up. To achieve the growth rates going forward, which are required to ensure social stability, sustained job creation and poverty alleviation, increased generating capacity is needed urgently.

With the development of alternative renewable electricity still some years away from affordability and sustainability, coal seems to be South Africa’s only hope to keep the economy going during the bridging period until alternatives come on stream in any meaningful way. Fact is that for now, coal remains South Africa’s most abundant and affordable energy source.

The Medupi plant is a first of its kind which will be using the most efficient and lowest emission coal-fired technology available.

Minister of Finance Pravin Gordhan, in a recent article, wrote: “If there were any other way to meet our power needs as quickly or as affordably as our present circumstances demand, or on the required scale, we would prefer technologies that leave little or no carbon footprint. But we do not have that luxury if we are to meet our obligations to our people and to our broader region. South Africa generates more than 60% of electricity produced in sub-Saharan Africa.”

Activists still say “no”

To the environmental lobby groups, these arguments are not good enough. Staging a protest in front of the World Bank’s Pretoria offices 10 days ago, environmental watchdog Earthlife said the loan would be unhealthy for people in the vicinity of the proposed Medupi power station. It also would impact negatively on the country’s carbon footprint.

Earthlife organiser Makoma Lekalakala said that for environmental and social reasons, the World Bank must not grant the loan to Eskom.

“If the World Bank grants the loan, that means greenhouse [gas] emissions are going to increase and at the moment, South Africa is the highest greenhouse emitter in Africa. In that way, we will be doubling our emissions,” said Lekalakala.

Coal is not the future of generating energy in South Africa, which has abundant renewable power resources. Demonstrators also sarcastically awarded Eskom the Fossil Fool Award for even having considered the loan.

The narrow focus of activist groups, however, does not always achieve the most desired results in the long run. In the Untied States, today the world’s largest economy, still relies for more than 50% of its power needs on coal-generated electricity, with a massive negative impact on the global environment.

This picture, however, could have been dramatically different if it were not for the 'successes' of the activist lobby against nuclear power in the 1970s, which stunted the development to its full potential of that much 'cleaner' electricity option.

The fact that South Africa has plans in place to reduce the expansion of its carbon footprint over time and start reducing it before the middle of this century, again brings to the fore the question of why it should be expected now of developing countries effectively to pick up the tab of the past carbon overindulgence of the developed world.

Political complications

In the interim, Eskom’s loan application further is politically complicated by the involvement of the ANC as a player in the electricity sector.

Opposition leader Helen Zille of the Democratic Alliance (DA) has chosen the fact that the ANC’s investment arm has a 25% stake in Hitachi Power Africa - a main supplier to the Medupi power station - as a front to do political battle with the government.

She has written to the World Bank, asking whether a finding by the public protector, that former Eskom chairperson Vallie Moosa acted improperly in awarding a R38.5-billion Medupi contract to the Hitachi consortium, would influence the loan application.

Referring to calculations that the ANC is set to gain at least R1bn from the contract, she wrote in her weekly newsletter to supporters that “it is no exaggeration to say that if the loan is granted and the deal goes through, no opposition party may ever be in a postion to compete fairly with the ANC again. The ANC will entrench its single-party dominance and, in doing so, gravely weaken our democracy."

She also indicated that the DA would be meeting with the World Bank’s local chief Ruth Kagia and would lobby board members ahead of Thursday’s decision. She wanted Eskom to get the loan, but only on condition: that Chancellor House (the ANC’s investment arm) pulls out of the consortium which is building the power station.

Growth in the African Skies

With air traffic between the United States and Africa growing at more than 5 percent annually, the US based carrier Delta Airlines has increased flights to the continent in response to strong customer demand. Africa is home to 12% of the world’s people, but it accounts for less than 1% of the global air service market. Part of the reason for Africa’s under-served status, according to a just-published World Bank study, Open Skies for Africa – Implementing the Yamoussoukro Decision, is that many African countries restrict their air services markets to protect the share held by state-owned air carriers. 

According to Delta Airlines as well, there has been an underserved U.S.-Africa demand for many years that historically did not have many options for service other than circuitous routings through Europe. Delta began to fill that void in 2006 by introducing the  service to Johannesburg from Atlanta via Dakar- a flight that operates nonstop and has been very successful. Since then Delta has been expanding its footprint in the region.

In the EAC Region, players in the aviation sector have also witnessed growing business opportunities especially with the coming into force of the East African Common Market. The East African region initiated an open skies agreement in 2006 when the EAC Partner States undertook the implementation of Yamoussoukro Decision on the liberalization of air transport in the region. The framework for liberalization is progressing, however, despite slow liberalization of the regional airspace, airlines have been pushing their governments to negotiate for landing rights. Meanwhile, the region has discussed and passed the Civil Aviation Safety Standards Oversight Agency (CASSOA) Bill, which will harmonize aviation safety and training standards- thereby seeing to safer EAC skies.

For local cargo carriers operating in the region, Tanzania has been a major destination mainly driven by the mining industry since a substantial amount of mining cargo is moved by air from the country.  With commodity prices on the rise, demand for minerals has increased leading to more demand for air services. In addition, the boom in tourism has seen a rise in business on the Zanzibar route and to Juba which relies heavily on imports, thus creating an opportunity for cargo services. Additionally, as the capital city of Southern Sudan emerges from 21 years of civil unrest, it has become an attractive investment destination, making it new ground for business in the region. 

Delta Airlines has also attributed the growth in Africa's aviation industry to three key factors: strong economic growth across the African continent, the large number of African-born American citizens who are now traveling back and forth to Africa on personal and business travel, and increased investment in the continent’s oil and natural resource industries. Despite restrictions in Africa's aviation market, in July 2007, Delta had 97 departures to Africa from the U.S but by July 2010, they had 320 flights, hence they tripled in size in three years. 

The Yamoussoukro Decision of 1999, named after the Ivorian city in which it was agreed, commits its 44 signatory African countries to deregulate air services, and promote regional air markets open to transnational competition. In 2000, the Decision was endorsed by head of states and governments at the Organization of African Unity, and became fully binding in 2002.  In general terms, the Yamoussoukro Decision calls for:

• Full liberalization of intra-African air transport services in terms of access, capacity, frequency, and tariffs
• Free exercise of first, second, third, fourth and fifth freedom rights for passenger and freight air services by eligible airlines (These rights, granted by most international air service agreements, enable, among others, non-national carriers to land in a state and take on traffic coming from or destined for a third state.)
• Liberalized tariffs and fair competition
• Compliance with established ICAO safety standards and recommended practices

Open Skies for Africa’s recommendation is for African states to implement the Yamoussoukro Decision which applies to all its signatories, but especially mentions those that have not signed or properly ratified it, namely: Djibouti, Equatorial Guinea, Eritrea, Gabon, Madagascar, Mauritania, Morocco, Somalia, South Africa, and Swaziland.

Meanwhile at the WTO level, the General Agreement on Trade in Services (GATS) Annex on Air Transport Services, excludes the liberalization of traffic rights and services directly related to the exercise of traffic rights. However the GATS addresses measures affecting aircraft repair and maintenance services; selling and marketing of air services and computer reservation services. 

The EC EPA Text (2009 version) includes the later elements as well however the EPA Text also extends the scope of air services covered by the Agreement, to include: other ancillary services that facilitate operation of air carriers such as ground handling services, rental services of aircrafts with crew and airport management services.