African private equity funds to help in fight against capital flight
Carlos Lopes, Executive Secretary of the Economic Commission for Africa, also called for the promotion of Regional Stock Exchanges to provide avenues for money generated in Africa. (Image: UN)
The African continent must develop private equity funds in order to prevent flight of capital from the emerging continent.
This consensus emerged from discussions at a seminar on Capital Flight and Tax havens in Addis Ababa, Ethiopia, on April 9, 2014, jointly organized by the African Economic Research Consortium (AERC), and the United Nation’s Economic Commission for Africa.
“The value chain of illicit flow of funds often involves money being spirited out of a country through third countries, usually tax havens and financial secrecy jurisdictions, before it gets to its final destination,” said Carlos Lopes, Executive Secretary of the Economic Commission for Africa.
Capital flight has an impact on a country’s policy concerning investment and it represents a direct loss of domestic capital.
Africa has lost about $607 billion due to illicit capital flight since 1975, and in excess of $1.3 trillion due to capital flight, more broadly defined, according to the AERC.
And, as per estimates released last December by Ibrahim Aidara of the Open Society Initiative of West Africa, the amount of money going out of the African continent, whether legally or illegally, is equal to Africa’s current total gross domestic product.
Lopes requested all countries to remedy this situation urgently by increasing Africa-owned private equity funds and other financial services that can persuade capital to remain in Africa.
Lopes noted that the factors that fuel private equity funds, such as real exchange rate overvaluation, must be central to the discussion.
Lopes proposed an African Credit Guarantee Facility (ACGF) which will support African companies by guaranteeing the bonds they issue and thus create confidence in investors to fund the activities of these companies.
Also, in order to facilitate development financing on the African continent, Lopes called for the promotion of Regional Stock Exchanges to provide avenues for money generated in Africa.
Private equity industry in Africa is valued at approximately $30 billion and more than 38 private equity funds invest in African infrastructure covering toll roads, dams, and airports.
Lopes highlighted that private equity funds have outperformed listed stocks over the past four years. Also, as from 2006 to 2008, which were the boom years for the world economy before the global financial recession in 2009, the private equity sector in Africa amounted to approximately US$6.4 billion
“Nevertheless, while FDI through private equity has been rising in Africa, the continent still only attracts a small share of global equity funds,” he noted.
While their presence across the continent continues to be relatively low, private equity funds are strongly entrenched in certain African economies, such as South Africa at 53%, Egypt, Mauritius and Morocco at 8%, Nigeria at 5%, and that too in a few sectors such as business services, information technology, industrial products and telecom, media and communications.
Lopes went on to note that extractive industries covering metals and mineral mining and oil exploration, among others, continue to account for nearly 46% of all cross-border mergers & acquisitions in Africa by private equity firms over the last 4 years.
Further, according to Lopes, Infrastructure Bonds issues in Ethiopia, Kenya, Nigeria, South Africa and Zambia were recently oversubscribed by up to 15 times and with superior returns, low borrowing costs, appropriate fiscal incentives and credit guarantee facilities to protect against default, these bonds could achieve better.
Studies show that Africa provides higher returns to investment than most other regions. Lopes proposed that new Public-Private financing models must be explored to attract private investors towards viable high return projects with trans-boundary coordination at a continental and global level.