Why tackling illicit financial flows offers energy and climate opportunities for Africa

Thursday, July 09, 2015

African governments lose billions of dollars in revenues each year through illicit financial flows. Dishonest companies use offshore accounts, trade mispricing and tax avoidance to pump out money that should be meeting the continent’s needs - including its huge unmet need for modern energy. So tackling illicit flows offers a key opportunity to bridge Africa’s energy infrastructure gap.

Climate change adaptation and mitigation - intimately tied up with energy use - are another unmet need. Africa contributes the least to global greenhouse gas emissions, yet its farmers are suffering the most. Stemming illicit financial flows would make money available to help them cope.

A simple comparison illustrates the scale of the opportunity at hand. Africa lost US$69 billion from illicit financial flows in 2012. That’s more than the total annual financing required to meet Africa’s energy and climate adaptation needs: $66 billion, as the Africa Progress Panel calculates in its latest report, Power, People, Planet: Seizing Africa’s energy and climate opportunities.

African governments, their international partners and multinational corporations need to act urgently to stop the outflow of money that belongs by rights to Africa’s people. In its report Domestic Resource Mobilization in West Africa: Missed Opportunities, the Open Society Institute for West Africa reveals that West Africa alone could lose up to US$56 billion in government revenues between 2012 and 2018 simply due to illicit financial flows.

The need to act on energy is also urgent. Two-thirds of Africans - about 621 million people - lack access to electricity. Electricity consumption in sub-Saharan Africa, excluding South Africa (a population of 860 million) is less than that of Spain (population: 47 million). Unless current trends change, it will take Africa until 2080 to achieve universal access to electricity.

This energy deficit deepens poverty. The poorest households spend 20 times more per unit of energy than the wealthiest ones. These energy drawbacks hinder economic growth and transformation, exacerbate inequality between the haves and have nots, and reduce the opportunities to drive down poverty.

Key sectors are badly affected by the energy deficit, notably education. In Burkina Faso, Cameroon, Malawi, and Niger, more than 80 per cent of primary schools have no access to energy to light their classrooms or power computers. On the flipside of these challenges are enormous opportunities for change. Africa must reform its fiscal regimes and administration to make way for investment in energy, social protection, education, and health systems. A more robust and just tax system is one of the most sustainable sources of financing development. While aid is still an important component of development finance, taxation is a more concrete manifestation of good leadership and functioning institutions. Taxation helps ensure medium- and long-term planning, too.

Taxation can be complex to implement, but it’s vitally needed to boost provision of public goods and government accountability.

As world leaders converge in Addis Ababa in July to discuss financing for development, it is crucial that they acknowledge how increased domestic taxes and fairer tax systems can drive development forward. By capturing more domestic resources to meet growing development needs, African governments can reduce their dependence on foreign aid.

To do so, they must plug the holes of illicit financial outflows. They must rethink climate adaptation and mitigation by adopting national plans to counter the effects of climate change too.

Guest editorial: Open Society Initiative for West Africa (OSIWA).

“African governments, their international partners and multinational corporations need to act urgently to stop the outflow of money that belongs by rights to Africa’s people.”