Tackle climate change and illicit financial flows together.


    As the droughts in the Horn of Africa in 2011 and the Sahel in 2012 starkly exhibited, climate change is not just an abstract issue or future risk for Africa. The continent is feeling the effects now and urgently needs financing to help it adapt, going forwards.

    This is well established. According to the UN Environmental Programme’s Africa Adaptation Gap Report 2013, the continent already requires adaptation funds in the range of $7-15bn per year by 2020. After that point, the costs are predicted to rise even further, by around 7% per year, due to increased damage from higher warming effects. That means Africa would need $35bn/year by 2050 and $200bn/year by the 2070s. However, it should be pointed out that such figures are based on the premise that the world warms less than 2°C by 2100. If temperatures in fact rose 3.5-4°C, adaptation costs would be closer to $50bn/year by 2050 and $350bn/year by the 2070s.

    The gaping hole

    The international community has attempted to get some financial assistance to meet these costs from developed countries. But there is a huge discrepancy between the amounts required and what has been secured so far.

    For example, under the 2009 Copenhagen Accord, developed countries agreed to provide a “new and additional” $30bn of Fast Start Finance over three years, from 2010-2012. But by the end of 2012, an analysis of the funding provided revealed that only 33% of it appeared to be new money, only 24% was additional to existing aid promises, and only 21% went to support adaptation.

    Under the same accord, developed countries also committed to pay $100bn a year by 2020 into the Green Climate Fund (GCF) to help developing countries implement adaptation and mitigation practices. But even after the 2014 UN Climate Summit, the fund had collected just $2.3bn, made up of pledges from 10 countries. Many developed countries haven’t made any pledges.

    Adaptation finance is urgently needed for a range of measures such as helping poor farmers access faster-maturing or drought-tolerant seeds, installing small-scale irrigation systems, or accessing reliable weather and climatic forecasts. But it seems clear that relying on external aid is a risky strategy. Africa also needs to look within.

    stacle in this is illicit financial flows (IFFs), which are a significant drain on Africa’s tax base. As the 2014 Africa Progress Panel (APP) report, Grain, Fish, Money: Financing Africa’s Green and Blue Revolutions shows, Africa loses $50 billion every year through IFFs. This is equivalent to 5.7% of Africa’s GDP and exceeds regional public spending on health. A joint report from the African Development Bank and Global Finance Integrity meanwhile estimated that Africa lost $1.2-1.3trn between 1980 and 2009 through IFFs. That is about four times Africa’s total external debt and is almost equivalent to Africa’s current GDP.

    Startlingly, illegal outflows from Africa to developed countries considerably outweigh assistance inflow to Africa. About 60% of IFFs are believed to leave through tax evasion and profit-shifts by corporates, followed by corruption and criminal activities, which account for around a third of the total. If retained within the continent, these funds could be substantial resources for urgent development issues such as climate adaptation.

    African problem, global solution

    How can this be done? IFFs have been referred to as “an African problem with a global solution”. International co-operation will be crucial in combating the problem and efforts will need to be made from both source and destination countries.

    Developed countries can play a vital role in restricting the absorption of IFFs by increasing transparency in the global finance system, enacting automatic exchange of tax information across borders, eliminating anonymous shell companies, establishing solid legal and institutional frameworks for stolen asset recovery, and sharing best management practices for tax administration. However, although the countries of the G8, G20 and Organisation of Economic Cooperation and Development (OECD) all made commitments to combat IFFs, the overall performance has been modest and uneven at best. For example, no OECD country fully complies with the beneficial ownership recommendations for legal arrangements, which makes it extremely difficult to track company owners and trace IFFs. In addition, repatriation of stolen assets has been slow. African countries have been limited by juridical capacity and financial resources, while most developed countries tend to be reactive rather than proactive.

    When it comes to the actions of African countries, it is important that overseas aid be used to build the capacity necessary to enact effective policies and support institutions dealing in tax administration and the curbing of IFFs. After all, many African countries suffer from IFFs, in part due to deficient regulatory oversight in tax administration and limited negotiation capacities with multinational companies. According to the OECD, financial aid spent on improving tax administration could substantially increase tax revenue for African countries.  For instance, a project assisting Kenya’s tax administrators returned a massive $1,650 for every $1 extra invested. Meanwhile, a programme in Mozambique was able to increase short-term revenues by 350%. The potential is huge, yet currently just 0.07% of OECD assistance to least developed fragile states is used to improve tax systems.

    As the world looks towards COP21, to be held in Paris in 2015, many will be hoping a legally-binding climate change deal will be reached. At the same time, many African countries are trying to come up with innovative solutions and turning to low-cost adaptation strategies to use existing resources effectively.

    However, one potentially significant source of funding for adaptation could come from curbing IFFs. Such resources could be essential in helping to develop pilot projects, improving capacity building, stimulating more innovative mechanisms, such as mobilising private finances, and be used as targeted fiscal stimuli and catalysts in climate change adaptation. Africa urgently needs funding for climate change adaptation. Plugging the illicit flow of money out of the continent would be a good place to start.

     (Dr Richard Munang is UNEP’s Africa Regional Climate Change Programme Co-ordinator. Ms. Zhen Han is a Doctoral Student at Cornell University. The views expressed here are those of the authors and do not necessarily represent those of the institutions with which they are affiliated.)

    First published in 2014.


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