Opinion: Curbing illegal capital flight would unlock resources for infrastructure

3rd May 2021

In this opinion article, Bongani Mankewu contrasts the strong resource mobilisaiton framework associated with President Joe Biden’s infrastructure plan with South Africa’s far less assertive handling of illicit financial flows (IFF) to help secure resources for its own plan.

South Africa’s Economic Reconstruction and Recovery Plan (ERRP) could better bring it into alignment with the United Nations Sustainable Development Goals 2030 (SDGs). The ERRP announced in October 2020 prioritises infrastructure spending to support economic growth in the short and longer term.

Of the 17 SDGs, Goal Nine aims to build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation. This goal is complemented by Aspiration One of the accented Seven Aspirations of the Africa Union 2063 Agenda, which emphasizes a prosperous Africa based on inclusive growth and sustainable development.

The ERRP sets out eight priority interventions that will ignite South Africa’s recovery and reconstruction effort with an emphasis on infrastructure as the main driver of this endeavour. The crucial enablers to restore growth acknowledged by the ERRP include the macroeconomic framework for fiscal sustainability, regulatory reforms to enable growth, building a capable state, economic diplomacy and Africa integration, and skills development. The ERRP intends to unlock over R1-trillion in new infrastructure investments through enabling the private sector, building capability in Infrastructure South Africa and the Infrastructure Fund, reviewing procurement frameworks, and providing catalytic funding through blended finance instruments. To boost infrastructure spending, the government plans to partner with the private sector, multilateral development banks, and development finance institutions to augment its skills, expertise and funding.

Several structural instruments have been advocated to enhance the financing of infrastructure across all subsectors. These include reform of the Government Employees Pension Fund and optimal utilization of public-private partnerships.

Meanwhile, at the same time, President Biden has unveiled a more than $2-trillion infrastructure and economic recovery package as an economic stimulus for the US. It aims to revive US transportation infrastructure, water systems, broadband and manufacturing, among other goals. The financing mechanism the US accentuates to fund the spending is an increase in the corporate tax rate to 28% and measures designed to prevent the offshoring of profits, according to the White House.

At the heart of South Africa’s plan is the resuscitation of the economy and job recreation through aggressive infrastructure investment, re-industrialization, localization and export promotion, reinforced through resource mobilization and the strengthening of the state’s capacity.

What is conspicuously absent by way of resource mobilization is a visible formula with numbers to leverage the financing of the ERRP. Coincident with the ERRP announcement, the United Nations Conference on Trade and Development (Unctad) released a report titled ‘Tackling Illicit Financial Flows for Sustainable Development in Africa’. The prime motive of the report is to propel an urgency in addressing financial hemorrhaging from the continent which impacts efforts towards achieving the SDGs.

Unctad highlights that Africa lost $836-billion in the period 2000 – 2015 with $88.6-billion lost annually. Unctad confirms that IFFs from Africa are equivalent to 3.7% of the continent’s gross domestic product. It further highlights that Africa has become a “Net Creditor” to the rest of the world. Unctad claims that the IFFs add up to more than what Africa receives in development aid and match the amount of development assistance and foreign direct investment.

Unctad names the channels of IFFs as corruption, tax evasion and misinvoicing of exports. The puzzling dichotomy is that the African continent requires $200-billion to achieve the UN SDGs while it is losing $88.6-billion annually on IFFs. The report accents that curbing capital flight can enable the availability of funds for the development of infrastructure, and further underscores the need for engagement by African countries with the international community on taxation reforms.

It is recognized that most African countries lack tools to challenge tax evasion by foreign enterprises, however, in a South Africa endowed with sophisticated financial expertise, tax evasion is the low-hanging fruit to extract the required financing of infrastructure.

The mind-boggling question is why the ERRP is not emphasizing IFFs as a critical variable in the formula of financing the programme.

Resource mobilization for this noble ERRP requires authentic cooperation amongst the stakeholders across industry, government, and academia underpinned by the objectives of the National Development Plan.

Bongani Mankewu is an associate of the Infrastructure Development & Engagement Unit at Nelson Mandela University.